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The Valuation Email Chronicles: Fall 2016


The emails for this class will be collected on this page, arranged chronologically. Have fun with them!

Email content

I restrained myself from sending you emails all summer but the respite is over... the torture begins again (http://www.youtube.com/watch?v=7edeOEuXdMU) I am sure that you are finding that break is passing by way too fast, but the semester is almost upon us and I want to welcome you to the Valuation class. One of the best things about teaching this class is that valuation is always timely (and always fun...) Just as examples: Is Uber worth $51 billion and what about Airbnb? Is the market in a bubble, as Robert Shiller claims it is, or can even Nobel prize winners be lazy when it comes to using market short cuts? Is the unraveling of the Chinese market complete and why should we care, if we don’t invest in Chinese stocks? If you have not visited my blog, I have or will be putting my thoughts down on these and other questions:

1. What is this class about? If you are new to valuation and did not take corporate finance with me, you are probably wondering (and perhaps having nightmares about what this class is about). To put your fears at rest, I have put together a very short YouTube video on the class to come. If you have a few minutes, please take a look at it since it may clear up some misconceptions about valuation and give you a sense at least of what this class is about:

2. Preclass work: I know that some of you are worried about the class but relax! If you can add, subtract, divide and multiply, you are pretty much home free... If you want to get a jump on the class, you can go to the class web site
The syllabus for the class is here: https://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/eqsyllfall16.pdf

3. Syllabus & Calendar: The syllabus for the class is available and there is a google calendar for the class that you can get to by clicking on
Note that we have no class on October 3 &12 and thatwe have class on the Monday of Thanksgiving week. For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due. The final exam is scheduled for December 16 from 1-3, which is late in the semester, but it is the price we pay for missing 3 days of class. So, you can make your plane reservations to go home right after!

4. Lecture notes: The first set of lecture notes for the class should be available in the bookstore by the start of next week. If you want to save some money, they can also be printed off online (if you want to save some paper, you can print two slides per page and double sided). To get to the lecture notes, you can try
Please download and print at least the first packet on discounted cashflow valuation. If you have trouble printing the pdf file, try the powerpoint file instead If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...

5. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store. As an alternative, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. As a third choice, you can try The Dark Side of Valuation, again the second edition, if you are interested in hard to value companies.. Or if you are budget and time constrained, try "The Little Book of Valuation". Of course, if you have money to throw around, you can buy all four and do a compare and contrast. If you don’t have any money, you can get by without any of them.

6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) in developing a valuation app for the iPad or iPhone that you can download on the iTunes store:
It comes with a money back guarantee... Sorry, no Android version yet... As for Blackberry, fuggedaboutit... Dead technology walking!!!!!!!! I am looking forward to seeing you in a few days.. I think we are going to have a lot of fun (at least, I am...

7. Online reach: As you probably know (if you were in my corporate finance class), I have tried over the last few years to provide multiple ways to access the class. So, you will shortly be getting another email about other online resources and offering you a way to also add this class on to your Apple devices on iTunes U. I know that this may be over kill, since you will be physically in the class, but I think you will find it useful.


One of the themes of this class will be that while your valuation looks like a collection of numbers, the story that holds these numbers together is the glue. Consequently, to get a handle on valuation, you have to learn to navigate that space between stories and numbers and your skills have to be broad. I know that you are still on break and that the last thing you want to do is reading, but if you do get a chance, please read this post that I have on my blog:
The post was triggered by the awe I felt, looking up at Brunelleschi’s Duomo in Firenze this summer, but the thoughts are all investing/valuation thoughts.

Another theme is that you should not be shy about challenging conventional wisdom, even when it comes with impeccable logic and backing. In this post, I take on the notion that CAPE, a market metric that was developed by Robert Shiller (Nobel Prize winner and bubble forecaster extraordinaire), is an indicator of market pricing.
If you find talk of Superman’s cape and kryptonite distracting, ignore it.

Just a few quick notes leading into class two weeks from now
1. Please make sure that you got my email from last week. If you joined the class this week or just don't read class related emails during your break, you can find the entire email by going to
2. Visit the website for the class and check out the Google calendar to make sure that you don't have any quiz conflicts:
3. If you have an Apple device, please download iTunes U (a free app from the app store). Once you have it installed,click to plus to add a class and when prompted, enter the enroll code FER-SFJ-AKA. The Fall 2016 version of the valuation class should pop up. All of the lectures will then show up on your iPhone or iPad as webcasts that you can watch. If you have an Android, you will need another app to watch iTunes U. One app that seems to work is Tunesviewer. (http://tunesviewer.sourceforge.net)
4. If the previous step exhausts you technologically, you can try a different route. You can use YouTube, where I have started playlist for this class:
The lectures will show up on this playlist as well.

Lots to think about before class two weeks from today.


The clock ticks on and summer is drawing to a close. Hey, hey… I am just the messenger, not Father Time. Anyway, a few last notes before class starts next week.
Blog post update: I did post a follow up to my post on CAPE, with a spreadsheet that you can use to see if you can come up with a way to use CAPE to time the market. You can find it here: http://aswathdamodaran.blogspot.com/2016/08/mean-reversion-gravitational-super.html
Valuations during the summer: I know that some of you worked at jobs this summer at investment banks, hedge funds and corporations that required you to either do valuation or read other people’s valuations. If you managed to save one of those valuation, hold on to it, to take a closer look at, during the course of the class. It will be a great place to start exploring the mechanics of valuation.
Lecture Note packets: The first lecture note packet is definitely in the bookstore, if you plan to buy it. If not, you can download it at the link: https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqfall16.htm
Finally, Professor Kim Schoenholtz has asked me to let you know about the upcoming Stern Economic Outlook Forum with three distinguished (his words, not mine) market economists. The event will take place on Wednesday, September 7 from 5:00pm to 6:30pm in Paulson Auditorium. This event is scheduled at the start of each semester to help students who wish to hear about the big-picture issues that might pop up in class or in interviews for jobs and internships. If you are interested, you can register at this weblink: http://nyustern.az1.qualtrics.com/SE/?SID=SV_9EIigGTnJHBCOpv

I look forward to seeing you in class a week from today in Paulson at 10.30 am. Have a great Labor Day weekend and enjoy your last few days of summer!


claim), different forums (for acquisitions, value enhancement, investing) and across different types of businesses (private & public, small and large, developed & emerging market). After spending some time laying out the script for the class (quizzes, exams, weekly tortures), I started on the intro to valuation by giving you my reasons for doing valuation (to fight looming lemmingitis) and starting on the discussion of widely held misconceptions about valuations. With that out of the way, have you classified yourself yet? Are you a proud lemming, a "Yogi bear" lemming or a lemming with a life-vest? While you are pondering that life-changing question, I do have some points to make:
• Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, or feel alone, I have created a Google shared spreadsheet (an Orphan list, so to speak) that you use to find others like you in the class:
• Once you pick a company, collect information on the company. I would start off on the company's own website and download the annual report for the most recent year (probably 2014) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings. (You can pick any publicly traded company anywhere in the world to value. The non-US company that you value can have ADRs (but does not have to have ADRs) listed in the US but you still have to value it in the local currency and local market. You can even analyze a private company, if you can take responsibility for collecting the information.)
• The web cast for the first class are up and running (or at least the streaming version). You can access it by going to:
The links to iTunes U and YouTube will also be up shortly, if not already.
• Post class test: To review what we did in class today, I prepared a very simple post-class test. I have attached it, with the solution. Give it your best shot.
If you did not get the syllabus, project description and the valuation intro in class this morning, they are all available to print off from this site. I will also be sending out a post class test and solution after each session that should take you no more than 5-10 minutes to do. It is a good way to review the class and I hope that you find it useful. Sorry about the length of this email, but there will be more to come (I promise!).

Attachments: Post-class test and solution.


It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
Find a group: The groups are yours to create and you should try to have at least 4 people in a group and not more than 8 (that limit is for your own projection)> If you have trouble finding one, try the orphan spreadsheet for the class.(https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1317_XV7qcbRgXHALFDZ8Am2EKS1XSN8ISn6pY6RGS9g/edit?usp=sharing )
Pick a company: This will require some coordination across the group to make sure that you meet the minimum criteria (at least one money loser, high growth, emerging market, service company). In making this choice, remember that you can value any business you want, public or private, small or large, listed in any market. There are at least a couple of entrepreneurs in the class who are valuing their own businesses and quite a few valuing privately owned family businesses.
Find the most recent annual report for your company. If you are valuing a private business, just ask for income statements and balance sheets for as long as you can get them (I will assume that you know the owner or better still, you are the owner).
If your company has quarterly reports or filings pull them up as well.
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. I usually get an email specifying how you do this but I think that this semester, it will be based upon the class that you are enrolled in. So, since you are in this class, you should already qualify and you will have access until the end of the semester. (If you cannot get into S&P Capital IQ, try again later this week.)

On a different note, I violated one of my writing rules, which is to never blog when you are outraged, after I read the Tesla prospected for Solar City. The post is below:
If I sound harsh, it is because not only are Lazard and Evercore violating basic valuation principles, they don’t seem to care.

Finally, this is one of the few forums where you get much of the second year MBA class in one room. If you have announcements to make, there is a sign-up page on Google:

9/9/16 I know that many of you still pondering your company choices and group dynamics, but if and when you pick a company, the first step is to get the raw material you need for your valuation. These include data on the company (annual reports, regulatory filings like the 10K/10Q), sector wide data (numbers for other companies in your sector) and macro economic data. I know that many of you already know exactly how to do this. However, if you feel uncertain, you can try this webcast out.
Incidentally, I do talk about using Capital IQ to get sector wide information in this webcast. If you are an exchange student, please find out your Stern email address, since you will need it to tap into Capital IQ.

I did not mention this in the opening session but at the start of every class for most of the semester (other than the three quiz days), there will be a start of the class test, where we will look at questions that preview the material that is coming in the rest of the class. (I know… I know.. This sounds backward, but trust me on this one).We will start class tomorrow with a series of scenarios, where you have to decide whether you will be biased to push your values up or push them down. To give you chance to look at the scenarios before you get hit with them, I am attaching the start of the class test for tomorrow. With each one, think of the direction of the bias and also think about the mechanism that you will use to bring that bias into your numbers. (As an owner, you may inflate the market potential for your product..)

Attachment: Valuation bias: A test


Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. Since I mentioned Carl Icahn and Bill Ackman as hostile acquirers (catalysts), you may want to look at Herbalife, the company that Ackman has targeted as being over valued and Icahn did for being under valued. See if you can get a list going of how each is trying to be the catalyst for the correction... and think about the dark side of this process.

We then started our discussion of intrinsic valuation, with a simple experiment on valuation, which led to three propositions about valuation. In the course of that discussion, I mentioned the weapons of mass distraction that people throw at us, as work through the numbers. If you get a chance, take a look at this post I have on the topic:
Finally, I have attached the post class test and solution for this class. Please give it a shot!

Attachments: Post class test and solution.

9/13/16 It is time for the first valuation of the week. Before you freak out and have conniptions, let me remind you of what I said in the first session. Valuation is learned by doing. So, give this valuation is your best shot and work with what you feel comfortable doing right now (which may be very small and incremental). To make this process a little more fun, I picked a company that you have all (I am sure) read about and have some prior views on, Tesla. My suggestion is that you start with this blog post from a couple of months ago:
Then, follow up by downloading the excel spreadsheet with my valuation of Tesla, (where I estimated its value to be $151.85, which would have made it about 44% over priced on July 14, when Tesla was trading at $221).
The stock is now down to about $195 and there have been no new financial statements since this valuation. If you do want an updated set of accounting numbers for Tesla, here is my Capital IQ download for Tesla.
Give the valuation your best shot, even if all you do is open my spreadsheet and change only one number. Once you have a value for your company, go into this Google shared spreadsheet and enter your value and the current price.

Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
I hope that the discussion of riskfree rates a left you fairly clear about what to do next. In case, you are still confused, this is the next step in the process:
1. Pick a company (in case you have not already).
2. Determine a currency that you will value the company in. Once you have decided on the currency, find a riskfree rate in that currency. If your company is a US or European company, you just got lucky. Either take the easy way out and use the US T.Bond rate as the dollar riskfree rate and the German 10-year bond rate as the Euro riskfree rate, or adjust them for the default risk you see in each sovereign.
If you are valuing a company in an emerging market in the local currency (be brave), your job is a little more complicated.
2a. Get the longest term government bond rate you can get in the local currency. You can check out the Economist (look at the tables towards the end of the publication and at the long term interest rate). You can also try this site for long term local currency government bond rates:
2b. Get the local currency rating for the country by going to the moody's web site: http://www.moodys.com (Look under sovereign ratings). Estimate the default spread given the rating by downloading the country default spread spreadsheet that you can find at the link below
2c. If you prefer to get CDS spreads, use the current CDS spreads that I have as an attachment (I will post both this and the latest Moody ratings under the webcast page as well)
2d. Riskless Rate = Government bond rate - Default Spread given rating

I have a paper on riskfree rates that elaborates on the discussion in class today. It is really not a painful read, if you can spare the time. You can get to it by going to:
I also have a follow-up paper on the "What if" series.. what if nothing is riskfree
I have attached the September 2016 CDS spreads and Moody’s ratings for countries, if you want updated values.
I have several more posts on the topic on my blog, if you are interested, including the most recent one which is on the Fed. The topic seems to have acquired some followers among appraisers/analysts. The post class test and solution are also attached. The weekly challenge will follow in another email. I have to run (actually take the subway) to the airport right now and you may not be able to get the downloadable versions of the lecture until tomorrow, when I arrive in Santiago. Post class test & solution attached.

Attachments: CDS Spreads: September 2016, Sovereign Ratings: September 2016, Post-class test and solution


In class today, we started with the claimholder consistency principle, arguing that there are two ways to value equity: discount cash flows to equity at the cost of equity or discount cash flows to the firm at the cost of capital and then subtracting out debt. Done right, I argued that you should get the same answer. I hope that you had a chance to try the first weekly challenge. It starts simple but it will test you on your implicit assumptions about valuation. Until next time!

Attachment: Weekly challenge #1


I know that it is early in the semester but this once-a-week sessions for the first four weeks can lull us into a false sense of complacency. So, please find a group and company to value. If you have already, here is the first order of business:
1. Incorporation and trading locations: Find out where your company is incorporated and where it trades (it could trade in multiple markets).
2. Currency: What currency are its financials denominated in? While the currency is usually the currency of the country in which the company is incorporated, it does not have to be, especially for commodity companies.
3. Financial statements: Get the annual report and financial filings. If your company is a non-US company but has an ADR listed in the US, see if you can download a 20-F (the equivalent of an annual report) from the SEC website or the company’s own website. It will not only give you US dollar values for your financials, but it will use US GAAP to estimate earnings.
4 Bloomberg: If you can get to a Bloomberg terminal, try to find your company’s primary listing (it is not always easy and may require some searching). Once you have, try to print off the following:
HDS: Just print off the first page (should list the top 17 stockholders in your company)
BETA: A weekly regression beta, usually against a local index.
DES: A short description of your company
FA: Historical data on your company (Print off the income statement, balance sheet and cash flow statements. If you still have the terminal, print off the geographical and business segment breakdown for your company as well).

On a different note, you should have got the weekly challenge in your email yesterday. If you have no idea what to do next, here is what I would suggest. Give it your best shot but don’t send your answers to me. On Sunday, at about 6 pm, I will post my solution to the weekly challenge. You can check your answer against it. There is no grade attached to this process and I will not force you to do it, but it will help understand valuation better and perhaps get a start on getting prepared for the first quiz. Until next time!

9/17/16 Just two quick notes. The first is that I did put up an in-practice webcast yesterday (but did not get a chance to let you know). It is a very basic webcast on how to read a 10K, using P&G as my example. The links are below:
Downloadable video: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4
YouTube Video: https://youtu.be/UzUJzdn7c2w?list=PLUkh9m2BorqmRAGzJb5OIvTAKZZu9HWF-
P&G 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf
P&G Valuation (excel spreadsheet): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls
Second, I have attached the first newsletter for this class. Not much to report but think of it as a roadmap of where we are and where we plan to go.

First things first. This week, we will be delving into the mechanics of discount rates, starting with the risk free rate and then moving on to the equity risk premium. They are both central to valuation and we live in unusual times, where the former, in particular, is doing strange things. Additionally. I hope that you had a chance to try the first weekly challenge. If you did, you can check your solution against mine. Even if you did not, you can try the challenge now (or in the near future) and check out the solution.

Attachment: Solution to weekly challenge #1


We started the class by completing the discussion of risk free rates, exploring why risk free rates vary across currencies and what to do about really low or negative risk free rates. The blog post below captures my thoughts on negative risk free rates:
We are about halfway through the discussion of equity risk premiums but the contours of the discussion should be clear.
a. Historical equity risk premiums are not only backward looking but are noisy (have high standard errors). You can the historical return data for the US on my website by going to
Click on current data, and look to the top of the table of downloadable data items.
b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads for country bonds on my site under updated data. If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.4 to get a rough measure of the country risk premium. If you want my estimates of country risk premiums, check under updated data on my website. The direct link is below:
The post class test and solution are attached.

Attached: Post-class test and solution.

9/20/16 This week’s valuation of the week is of a company that is a familiar one, for most of you. It is Netflix. The valuation itself is a bit dated, from February of this year, right after they filed their 10K for last year. The blog post that I posted at the time is at the link below, and I take a look at what I called the disruptive duo, Amazon and Netflix:
I will give away the ending. I valued Netflix at $61.44, about 30% below the stock price then of $87.40. You can find the valuation at this link:
Since then, Netflix has had two quarterly earnings reports and I have attached both the last 10K and the most recent 10Q below:
Last 10K: https://www.stern.nyu.edu/~adamodar/pc/blog/Netflix10K.pdf
Most recent 10Q: https://www.stern.nyu.edu/~adamodar/pc/blog/Netflix10Q.pdf
The stock is currently trading at $98. You can easily update my valuation to reflect the updated data and perhaps update the risk free rate as well and get your own value. If you do, the Google shared spreadsheet awaits you:
Give it a shot and see you in class tomorrow!

In the session today, we started by looking at the implied equity risk premium as of September 21 and I am attaching the implied premium spreadsheet for you to experiment with. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. Post class test and solution attached.

Attachments: Post class test and solution, Implied Equity Risk Premiums


There is a lot of mythology about equity risk premiums and the best way to separate the truth from fiction is to look at the data. That is what we do in this week’s challenge. The attached dataset contains my estimates of implied ERP each year, with the T.Bond rate, the T.Bill and the Baa bond default spread each year. Your mission, if you accept it, is to play Moneyball with the data and to try and answer a few questions:
1. What, if any, relationship is there between the ERP and interest rates (T.Bond and T.Bill)?
2. What, if any, relationship is there between the ERP and bond default spreads?
3. Given interest rates today and the default spread today, what would you expect the ERP to be today?
4. Given the actual ERP, what does this tell you about stocks being cheap or expensive?
Have fun with the numbers. Pull out your statistical tools, rusty though they might be, and use them.

Attachment: Implied premium challenge, data


I had emailed you yesterday with the news that the audio for the last 20 minutes of class were not on the webcast. Since those 20 minutes are irretrievably lost to history, I decided that my best ploy was to actually recreate them in my office. So, I did a recording of the missing minutes in my office, with slides 72-78 (the no-audio slides). I then attached this video to the webcast from yesterday’s class (after chopping off the last 20 minutes) and reposted it to YouTube and to iTunes U. If you missed class yesterday or just want to review a portion of it, the “fixed” video can be found here:
Again, I am sorry and I will try to work on not having it happen again.

On a different note, I want to check on where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I hope that you have estimated a risk free rat in the currency of your choice. Once you have that, please try the following:
Get a geographical breakdown of the countries/regions of the world that your company operates in. It should be in your annual report or financial disclosure forms somewhere. If you cannot, them's the breaks...
Get the total equity risk premium and country risk premium for the countries/regions: If you want to do this yourself, the weekly challenge will give you a template. If you want to take a short cut and use my estimates of country risk premiums, that is fine too.
Get a weighted average of the country risk premiums: You can use revenue weights of the country/region to compute the weighted average.
Finally, I hope you have had a chance to look at the implied equity risk premium spreadsheet that I sent you with yesterday's email and update it to today’s numbers. All you have to do is update the S&P 500 and the US treasury bond rate and use the goal seek (instructions on spreadsheet).

9/23/16 Two tools webcasts are up this week. The first one is on risk free rates and the second on implied equity risk premiums.
Risk free Rates
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
Additional material:
Moody’s ratings (3/13): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/Moodys.pdf
Sovereign CDS spreads (3/13): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/CDSfeb13.pdf
Implied Equity Risk Premiums
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4
The supporting materials are below:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/ImpliedERP.ppt
Implied ERP spreadsheet (from February 2013): https://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb13.xls
S&P on buybacks (from earlier this year): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500buyback.pdf
S&P 500 Earnings: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500eps.xls
I hope that you get a chance to watch one or both!

I hope that you are enjoying the weekend, with hints of Fall in the air (with the depressing reality that winter follows). This is perhaps your last weekend of relatively little to do before the &$%% hits the fan. So, if you have not found a group and picked a company yet, this is a good time to do that. Even better if you can pull up the financials and think about risk free rates and equity risk premiums. I have attached the newsletter for the week.

Attachment: Weekly Newsletter #2


First things first. The solution to this week’s challenge is attached. I hope that you got a chance to do it. If not, I hope that you get a chance to look at it. Looking forward to this week, we will start tomorrow’s class with the last piece of the cost of equity puzzle by looking at how best to measure the relative risk of an investment. We will look at the conventional measure, a regression beta, and why so many people find it problematic and solutions to those problems. We will them move on to cost of debt, which should take us a lot less time, and finally to cost of capital. On Wednesday, we will start on the key first step in cash flows, accounting earnings and the many fixes and updates that we have to make to the numbers we see in financial statements.

Attachments: Weekly Challenge #2a solution


Today's class represented a continuation of the discount rate discount rate. We started by reviewing the pitfalls of regression betas and went on to talk about bottom up betas, focusing on defining comparable firms and expanding the sample. I did make a big deal about bottom up betas, but may have still not convinced you or left you hazy about some of the details. If so, I thought it might be simpler to just send you a document that I put together on the top ten questions that you may have or get asked about bottom up betas. I think it covers pretty much all of the mechanics of the estimation process, but I am sure that I have missed a few things.
We then started on the cost of debt, starting with a definition of the cost of debt as a long term, current cost of borrowing and laying out a procedure for estimating this cost. Next session, we will complete the cost of capital discussion and move on to cash flows. I am attaching the post class test and solution for today's class.

Attached: Post class test and solution

9/27/16 In this week’s valuation, I revisit a company that I am biased towards and have valued multiple times in the last few years, Apple. The valuation that I have for Apple in May 2016 is at the link below:
The valuation reflects my assumptions about revenue growth, margins and cost of capital, all of which are estimates and subject to error. Rather than wave my hands or give you useless ranges (useless because they are so wide), I am going to draw on a statistical tool, Monte Carlo simulations, and add it to the valuation. I describe the process by which I did the simulation in this blog post:
To do this on your own, you will need to download the spreadsheet on a PC version of Excel (either on a PC or a Mac, running a PC front end) and then download Crystal Ball (you can download a trial version from Oracle). As you use Crystal Ball, you will probably find, like me, that most of the distribution choices look foreign to you (Quick quiz: What does the Bernoulli distribution look like?) and I have created a primer on distributions that I hope that you find useful:
If you do get a chance to try the simulation out, with your own assumptions, please go into the Google shared spreadsheet and enter your final numbers:

In today’s class, we started with computing costs of debt for companies without the usual crutches (traded bonds and ratings) and talked about synthetic ratings and default spreads. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis:
These are spreads on indices created by rating, updated daily. Neat, right?

We then moved on to getting the base year's earnings right and explored several issues:
1. To get updated numbers, you should be using either trailing 12 month numbers or complete the current year with forecasted numbers. In either case, your objective should be to get the most updated numbers you can for each input rather than be consistent about timing.
2. To clean up earnings, you have to correct accounting two biggest problems: the treatment of operating leases as operating (instead of financial) expenses and the categorization of R&D as operating (instead of capital) expenses. The biggest reason for making these corrections is to get a better sense of how much capital has been invested in the business and how much return this capital is generating.
Post class test and solution attached. (I know a couple of the questions are about tax rates and normalizing income, but I think you can handle them).

Attachments: Post class test and solution


I know that today’s discussion on leases and R&D, while intuitively simple, can be technically complicated. The best way to understand them is by doing them. So, with no further ado, here is this week’s challenge, entirely built around these adjustments. Hope that you get a chance to try it, since it may be good practice for the first quiz on October 10.

Attachment: Weekly challenge #3


We are done with the cost of capital portion of the class and while I know that this is probably unrealistic, it is a good time for you to compute the cost of capital for your firm. If you have not started and are intimidated, try this paper that I have on estimating and using cost of capital
Once you have finished with that, if you want to see what the costs of capital look like across different sectors in the US, try this link.
If you want to see the global or emerging market numbers, try the data portion of my website:

Two more quick notes. First, there is no class on Monday (10/3). So, have a long weekend, enjoy yourself and start on your work for the first quiz, which will be a week from Monday (10/10). The past quizzes for this class are at the link below. Stick with quiz 1 and use the most recent quizzes (perhaps the last 5-6 years) as indicators, since some of the earlier quiz 1s covered more material. The quiz will cover what we do through next Wednesday but it will cover everything through cash flows and perhaps the rudiments of historical and analyst estimates of growth (but no terminal value and fundamental growth questions). Second, I am not sure whether there was a snafu on the review session. I know that the class got moved to 2-65, but it looks like might have been other logistical issues. Let me know if there is an issue and I will try to resolve it.


On this weekend, when it looks like Fall has arrived, a couple of quick notes.
1. Valuation Tools Webcasts: kAs the discussion shifts from discount rates to cash flows next week, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, In the webcast for this week, I look at how to compute trailing 12 month earnings from a 10K and a 10Q:
https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
The most productive use of the webcast is to print off the most recent annual and quarterly report for your company and work with your company’s numbers.
I have also posted a second webcast on converting leases to debt which takes you through the process of which numbers to use in this conversion and how to deal with loose ends (like the lump sum that is often given for past 5 years).

2. Newsletter for the week: This week, we finished our discussion of cost of capital and moved on to earnings and cash flows. The newsletter lays out that path and looks at the (shortened) week to come.

Attachments: Newsletter # 3 (October 1)


I hope that you are enjoying the long weekend, gray and cold thought it is. We have no class tomorrow and I have attached the weekly challenge solution. Give it a shot when you get a chance. It is good preparation for the first quiz, which is a week from tomorrow (October 10). For those who might have missed this, there are no make up quizzes. If you have to miss the first quiz for good reason (and I will cut a wide swath for good reasons), the 10% on the quiz will be moved to the remaining two quizzes and the final exam. So, it is not the end of the world!

Attachments: Solution & Synthetic rating


Today's class covered a lot of topics, some related to cash flows and some related to growth. Let's start with the cash flow part first. I argued that capital expenditures should be defined broadly to include R&D and acquisitions, for consistency reasons. If you want to count the good stuff (growth) that comes from these investments, you have to also count the cost. To get from cash flow to the firm to cash flow to equity requires us to bring in cash flows to and from debt. While borrowing more can make your cash flows to equity higher, they also make your equity riskier, raising the cost of equity. The net effect of leverage on the value of equity can be positive, negative or neutral, depending on the firm and where it is in its borrowing cycle. On growth, we started with historic growth and quickly dispensed with the notion that it is a fact. Depending on how it is estimated (arithmetic vs geometric) and over what period, you can get different numbers. It is also thrown off when a company's earnings go from negative to positive and generally becomes lower as companies get larger.

I also mentioned forensic accounting in the context of accounting game playing. While truly extraordinary items are easy to deal with, accounting ploys to move expenses into the extraordinary column may require some detective work. For those interested in forensic accounting, here are a couple of references:
http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=pd_sim_b_8 <http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=pd_sim_b_8>
http://www.amazon.com/Creative-Cash-Flow-Reporting-Sustainable/dp/0471469181/ref=pd_sim_b_2 <http://www.amazon.com/Creative-Cash-Flow-Reporting-Sustainable/dp/0471469181/ref=pd_sim_b_2>

Finally, my long delayed valuation of Deutsche Bank is online. I know that this is a busy week and you probably won’t get time to get to it, but if you do, it is a fun valuation. Start with my story about Deutsche Bank and then review my valuation. I am planning to make a blog post tomorrow on the company. So, I would be much obliged if you can let me know anything that I could be doing differently:
My story: https://www.stern.nyu.edu/~adamodar/New_Home_Page/Valuationofweek/DBkStory.html
Deutsche Bank Valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/DeutscheBank2016.xls
Google Shared Spreadsheet: https://docs.google.com/spreadsheets/d/1GAlQaitgYqm5Qf4sFbt8l-y23AmvX1SR9fhIbGZQzjk/edit?usp=sharing
The post class test and solution for today are attached.

Attachments: Post class test and solution

10/7/16 Just a quick note, since I know that you are busy preparing for the quiz. I just put up a valuation tools webcast on how to convert R&D expenses to capital expenses. The links are below:
How to capitalize R&D: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4
Microsoft 10K 2011: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoftlastyear10K.docx
Microsoft 10K 2012: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoft10K.docx
Hope you get a chance to try it out.

Very quick note. The newsletter for the week is attached. Hope you get a chance to browse it, in the midst of preparing for the quiz.

Attachment: Issue 4 (October 8)


The good news is that the first quiz is over and I will let you know as soon as it is ready to be picked up. If you were able to hang in there mentally and physically, we continued our discussion of growth by first looking at the limitations of analyst estimates of growth and then examining the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering two questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? In the next session, we will continue this discussion. Incidentally, there is no class on Wednesday. The post class test and solution today is a little ahead of the notes, but I think you can handle it. See you next Monday!

Attachment: Post class test and solution


The quizzes are done and can be picked up on the ninth floor of KMEC. As you come off the elevator, head towards the door to the reception but look to your right before you get to the door. The quizzes should be in two alphabetical piles. Please don’t mess them up or browse. I have attached the solutions to the quizzes with the distribution.

Attachment: Solution (a or b) as well as the distribution of grades

10/11/16 This week, I decided to revisit one of my favorite haunts, Twitter, since it seems to be in the news yet again. Like everything else that this company tries, they seem to have mangled even being the target of an acquisition. You can start with this post that I had on Twitter at the start of the year:
That post contains my valuation from February 2016, when I estimated a value of $17.58 and the stock was at $14.31.
The stock price since has gone up, as high as $25 a week ago, but it is now back to $17.56 (No victory dances for me.. Pure coincidence). I revalued Twitter based upon trailing 12 month data and updated risk free rates at $19.77:
If you want to get the updated 10K and 10Q, you can get it at this link:
If you try your hand at the valuation and want to change my inputs, feel free and then enter your values in the shared Google spreadsheet:
As I mentioned in email yesterday, there is no class tomorrow. So have fun the rest of the week and don’t forget to pick up your quizzes.
10/13/16 I know that the project is not even on your mind this week, as you get ready for the first quiz. However, they are not mutually exclusive. To the extent that your firm has operating leases or R&D, you should try capitalizing them and view it as prep for the final. If you can estimate the free cash flow to the firm and free cash flow to equity last year, you are well on your way.
Now that we are on to growth, you can try a couple of exercises with your company:
1. Compute historical growth, across different time periods, in different measures, and using arithmetic and geometric averages.
2. See if you can find analyst estimates of growth for your company and whether you can decipher what measure (revenues, operating income, net income or earning per share) the estimate is for.
Next week, we turn to the fundamentals that drive growth.
10/14/16 Accounting returns can be messy and misleading but they are a key input into estimating growth and the value of growth. In this webcast (that some of you may remember from the corporate finance class), I look at the process of estimating accounting returns, using Walmart as my example:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4
Walmart 10K (2013): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf
Walmart 10K (2012): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klastyear.pdf
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmartreturncalculator.xls

Its a beautiful weekend out there and I hope that you are not checking emails or reading newsletters. But if that is what rings your bell, the newsletter for this week is attached.

Attachment: Issue 5 (October 15)

10/16/16 I am sorry that the last two weeks were so disjointed with one session a week and a quiz in the second session. We are now back on a twice a week schedule for the rest of the semester and I am glad since there is much to be done. This week, we will spend tomorrow’s session completing the discussion of growth rates and get into the discussion of the elephant in the DCF room, terminal value. In Wednesday’s session, we will finish the terminal value discussion, talk about how to pick the right model to use in valuation and then start on the loose ends in valuation. I hate to be a nag but if you have put your DCF valuation for the project on the back burner, please move it up your priority list. I know that it is daunting if you have never valued a company, but my suggestion is that you getting started on a base case valuation is the best way to conquer your fears.

We started today’s class by talking about estimating sustainable growth in all its forms, from per share equity to operating income and closed the growth section by looking at the most general way of estimating cash flows, starting with revenue growth, moving to operating margins and ending with reinvestment. The heart of today's class, though, was the discussion of terminal value. We began by ruling out using multiples to get terminal values, at least in the context of intrinsic value. To keep terminal values in check, you have to follow four basic rules/principles:
1. Constrain your terminal growth rate to be less than or equal to your riskfree rate (which is a proxy for long term growth in the economy)
2. Don't wait too long to put your company into stable growth (and try not to push past 10 years)
3. The key input in your terminal value computation is your return on capital (and excess return assumption). If your return on capital = cost of capital, your terminal growth rate does not add any value.
4. Give your company the characteristics of a stable growth company in terms of excess returns and cost of capital. I have attached the post class test & solution for today's class.

Attachments: Post class test and solution

10/18/16 As some of you might have read in the financial news overnight, Netflix had a monster quarter in terms of adding subscribers and the stock is up almost 20% today. It is a good time for me to revisit my valuation of the company that I laid forth in a blog post earlier this year:
In that blog post, I had valued the company at about $61 but the updated valuation reflects not only the new numbers since but a signal that my story for the company may not capture its growth potential. You can get my valuation of Netflix as of today:
If you want to check out the latest 10K, you can get it here:
The most recent earnings report (which came out yesterday, October 17) is at the link below:
Finally, if you want to change the numbers in my spreadsheet and make it yours, go ahead and then go to the Google shared spreadsheet:

In today’s class we started with a discussion of which model to use in valuing a company and then moved on to the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. I have attached the post class test and solution. On a different note, please do get a jump on the DCF valuation of your firm. The valuation is due on November 4 but only for feedback, not grading. So, don't feel the pressure to get it right. Just get it done. I have also attached two weekly challenge for this week, if you feel the urge to try them. If not...

Attachments: Post class test and solution, Weekly challenge #4, Weekly challenge #4a

10/20/16 Please do get a jump on the DCF valuation of your firm. The valuation is due on November 4 but only for feedback, not grading. We have covered everything you need to do this in class from estimating the inputs to picking the right model. So, no reason to put it off any more.
10/21/16 In this week’s webcast, I look at the terminal value and how to run diagnostic checks on it to make sure that you have been internally consistent and grounded while estimating this number.
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/terminalvalue.mp4
Sample DCF: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvalueDCF.xls
Diagnostic Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvaluecheck.xls

I have attached the solutions to this week’s challenges and the newsletter for this week. I meant to send it out yesterday but was traveling back from Asia much of the day. This week, we will actually value companies (since we have not valued a single one this semester all the way through) but tomorrow will be for tying up loose ends and actually setting up the story telling process. On Wednesday, we will start with easy valuations and pick up steam with more difficult companies. Should be fun!

Attachments: Solution to weekly challenge #4, Solution to weekly challenge #4a


Today, we put the last three loose ends to rest. First, well looked at complex businesses and how to incorporate our concerns into value. The, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:

We then started on the discussion of numbers and narratives, i.e., the process of connecting stories to valuations and used Uber as an example. If you are interested in reading more about this process, try this blog post:
I am attaching the post class test and solution for today.

Attachments: Post class test and solution

10/25/16 I decided to value a stolid (another name for boring) company this week, a German company called Henkel. You can find out more about them here at this Wikipedia page:
You can also get their financial statements for an extended period by clicking on the link below:
The reason that I picked Henkel was because I wanted to do a valuation in Euros, with the German Euro bond rate at 0.03%. There is a lot of mythology about how DCFs become impossible to do or impractical, when the risk free rate is zero or negative. So, here is my valuation of Henkel:
To see the effect of changing the risk free rate, please read this piece I put together on Henkel:
Finally, if you do feel the urge to play with the numbers and do your own valuation (perhaps at a negative risk free rate), enter your numbers into the Google shared spreadsheet:

In today's class, we started with a quick review of narrative changes, shifts and breaks and how earnings reports, in particular, can alter your narrative for a company. Since many of you will be dealing with earnings reports in the next couple of weeks, I thought you may find these two posts of interest in how narratives shift, and with them, values:
Reacting to Earnings Reports: http://aswathdamodaran.blogspot.com/2014/08/reacting-to-earnings-reports-lets-get.html
Narrative Resets: http://aswathdamodaran.blogspot.com/2015/08/narrative-resets-revisiting-tech-trio.html
We started with three conventional valuations, one of Con Ed, another of 3M and the third of the S&P 500. Next week, things get interesting!

Attachments: Post class test and solution

10/27/16 So, where are you in the DCF process? I hope that you have picked a company, collected the financials and actually tried to do a base case. A piece of advice. Get a base case valuation going with just minimal information (last annual report or 10K) and come back to it with more details. I have reattached the valuation checklist I sent you a couple of weeks ago, since you may find it more useful now. In case, you have forgotten which spreadsheets work best if you want to start with one of mine, you should stick with the ginzu versions:
a. fcffginzu.xls: For a firm with stable operating income and return on capital: https://www.stern.nyu.edu/~adamodar/pc/fcffginzu2016.xls
b. fcffsimpleginzu.xls: For a money losing firm or a high growth firm or want to allow your margins to change over time (This is the most general model and you can use it for almost any non-financial service firm): https://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2016.xls
c. fcfeginzu.xls: For valuing a firm using the FCFE approach: https://www.stern.nyu.edu/~adamodar/pc/fcfeginzu2016.xls
d. divginzu.xls: for financial service firms and perhaps REITs/MLPs: https://www.stern.nyu.edu/~adamodar/pc/divginzu2016.xls
The valuations are due for feedback by November 4 (and I apologize for the mixed messages on the date of submission) and I want to reemphasize it is not for a grade. You are not obligated to make changes based on my feedback and view them just as suggestions. When you do turn in your DCF for feedback, please use “My Perfect DCF” in the subject so that I can put it into the right mailbox.
10/28/16 As you work on your perfect DCF valuations, employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why last week's weekly challenge was built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Employeeoptions.mp4
Cisco 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/cisco10K.pdf
Spreadsheet for options: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/ciscooptions.xls
I hope you get a chance to watch the webcast and that you find it useful.

I know that you are busy preparing for quizzes and perhaps even working on your valuation. If you do get a chance, check out the latest newsletter.

Attachment: Issue 7 (October 29)


In today’s class, we started on the dark side of valuation, where we value difficult-to-value companies. We started the valuaton of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. I argued that to to value a young company, you have to visualize what you see as success for it and work backwards to get the numbers by year, and adjust this valuation for the likelihood that the company will not make it. We then moved on to companies in transition and how you can arrive at two values for these companies: a status quo value and a changed-management value and how you have to take an expected value. We will continue on the dark side on Wednesday, starting with declining companies and moving through companies in different sectors.

Attachments: Post class test and solution

11/1/16 No valuation of the week this week, since you have one you should be working on right now. The DCF is due by late Friday (try to get it in by 5 pm, but if not, 6 pm or 7pm..). A few notes on the submission:
1. Individual, not group: This portion of the submission can be done individually and should be done individually rather than as a group, The feedback is specifically for you.
2. Submission content: An Excel spreadsheet will do, with notes embedded on your story and any specific assumptions
3. Submission subject: Use “My Perfect DCF” in your subject
Remember that this DCF is for feedback, not a grade, but work on it as if were your final valuation. That way, the feedback will be more focused and perhaps more useful.

In today’s session, we continued our travels on the dark side, starting by valuing financial service companies (where loss of trust has driven us from dividend discount models), moving on to emerging market companies (with corporate governance, cross holdings and country risk all playing starring roles) and then looking at companies with intangible assets (where capitalizing R&D-like expenses can increase or decrease value) and to commodity and cyclical companies. I suggested that you use Monte Carlo simulations to bring in uncertainty into your valuations. I hope that something that we did today helps you on your DCF valuations, which are still due on Friday.

Attachments: Post class test and solution


About a fifth of the class has sent their DCFs to me and I will try to get those back by the end of today. If you are still working on your DCF, the window remains open and you can submit them through tomorrow. To put a bow on this part of the class, I have a blog post that you may find enjoyable about dysfunctional DCFs.
I hope that none of your DCFs fall on this list.

On a different note, I have put the review session for quiz 2 (scheduled for November 9) up online (on the webcast page for the class) with the presentation. The links are below:
Presentation: https://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/valquiz2review.pdf
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz2review.mp4
You can also find all past quizzes with the solutions in the following links:
All past quiz 2s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2.pdf
Quiz 2 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2sol.xls
You will see relative valuation problems (multiples) popping up in the pre-2008 quizzes. You can ignore them!


I am piling on now, and I am sorry. However, the clock is running and we do have stuff to get done. Two quick notes. First, next week, we will be starting on pricing and using multiples. One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
Then watch the webcast:
You can download the presentation:
And the spreadsheet that goes through the calculations:

Now, on to the other important note. As promised (or threatened), I will be getting your mystery project to you on Monday. It is a group project, due on November 21, just before you take off for Thanksgiving break. I know that I am asking a great deal of you, with the DCF due today (I see about 200 waiting for me, in my inbox), the quiz week and the mystery project a week and half after that. I thank you, in advance, for the work that you will be putting into it.


am about two-thirds of the way through the DCFs for feedback and you should get yours back sometime today or tomorrow, if you sent it. The latest newsletter is attached, if you are sick and tired of election news.

Attachment: Issue 8 (November 5)


By now, many of you (about 220, by my count) should have received back your DCF valuation back. If you have not received yours back, resend it since you may have just mangled the subject (My Perfect DCF). Rather than make myself into an all-knowing oracle (which I am not), t thought I would take you through the process I used to diagnose your DCF valuations.

Narrative checks
In class, I have made a fetish about connecting stories to numbers and I am going to stick with that fetish. As I looked at your valuations, I always stopped and asked what the underlying story you were telling about your company. While some of you may have no specific story in mind, your numbers told a story that you may or may not agree with. Thus, if you were valuing Amazon and your revenues in year 10 are 500 billion and your operating margin is 4%, the story that you are telling about Amazon is that it is going to continue to go for more revenue growth, sacrificing margins and that it will pulverize the rest of the retail business. In some of your valuations, the story seems at war with itself. Thus, if you have your company’s revenues tripling in a mature market and your margins also going to well above industry averages, your story is quickly becoming implausible. I would strongly encourage you to take a look at your valuation (look at your year 10 numbers specifically) and think about the story that you are telling. Otherwise, it is just a spreadsheet with a bunch of numbers.

Input page checks
Step 1: Currency check: What currency is this company being valued in and is the riskfree rate consistent with that currency?
Right now, if you are valuing a company in US dollars, I would expect to see a riskfree rate of about 2% here.. though some of you used 30-year bonds rates which would give you a slightly higher value). if you are valuing your company in pesos or rubles, I would expect to see a higher riskfree rate, (Watch out for the tricky ones.. a Mexican company being valued in US dollars or a Russian company in Euros.. Your riskfree rates should revert back to 0.1%, if this is the case)
Step 2: ERP check: Is the equity risk premium being used consistent with where the market is right now and where this company has its operations?
If you are analyzing a company with operations only in developed markets, I would expect to see a number of about 5.5-6% here... That is because the current implied premium in the US is about 6% (Nov 2016). If you are using a premium of 4%, you will over value your company. If your company is exposed to emerging market risk, I would expect to see something added to the mature market premium. While I begin with the presumption that where your company is incorporated is a significant factor in this decision, it should not be the only one in this decision. Coca Cola and Nestle should have some emerging market risk built into them.
Step 3: Units check: Are the inputs in consistent units?
Scan the input page. All inputs should be in the same units - thousands, millions, billions whatever... What you are looking are units with far too many digits to make sense. (Check the number of shares. It is the input that is most often at variance with the rest, usually because you use a different source for it than the financial statements)
Step 4: Normalization check: If earnings are being normalized, what is the normalized value relative to the current value? If reinvestment numbers are off, should they have been normalized as well?
In some cases, we normalize earnings by looking at historical average earnings or industry average margins. While this is perfectly defensible, you want to make sure that the normalization is working properly. Thus, if earnings of $ 3 million are being replaced with earnings of $ 3 billion, you want to make sure that this company has generated earnings like these in the past. You may also want to consider an alternative which is to allow margins to change gradually over time rather than replace current with normalized earnings.
As a follow up, check the reinvestment rate for the firm. If it a weird number (900%, -100% etc.), it may be because something strange happened in the base year (a huge acquisition, a dramatic drop in working capital). A better choice may be to average over time.

Output page checks:
a. High Growth Period.
Start by checking the length of the growth period and the cash flows during the growth period. In particular,
- Compare the FCFF (or FCFE) to the EBIT (1-t) (or Net Income). Especially if you are forecasting cap ex, working capital and depreciation independently, compute an implied reinvestment rate
Implied Reinvestment Rate = 1 - FCFF/ (EBIT (1-t) or 1 - FCFE/ Net Income
Thus, if you have after-tax operating income of 100 and FCFF of 95, your implied reinvestment rate is 5%.
- Look at the expected growth rate over the period. Does it jive with your reinvestment rate? (If you see a high growth rate with a low reinvestment rate, the only way you can justify it is by calling on efficiency growth. For that argument to make sense, your current return on capital has to be a low number... See the attached excel spreadsheet that computes efficiency growth.

- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
Imputed Return on Capital = Expected EBIT (1-t)/ (Base Year Capital Invested + Sum of all reinvestment through year t-1)
If you see this number taking off through the roof or dropping towards zero by the time you get to year 10, your reinvestment assumptions are unreasonable.
b. Terminal value
Start by checking to make sure your growth rate forever does not exceed your riskfree rate. Then follow up by
- Examining your reinvestment rate in your terminal year, using the same formula we used in high growth
- Backing out your implied return on capital (ROC = g/ Reinvestment Rate)
- Checking against your cost of capital in stable growth (you don't want to get more than 5% higher than the cost of capital and you do not want to set it lower than the cost of capital forever)
I have a spreadsheet that can help in this diagnostic (and there is a webcast that you can use as well from a few weeks ago.

One common error to watch out for is estimates of terminal value that use the cash flow in the final year, grow it out at the stable growth rate. That locks in your reinvestment rate from your last high growth year forever.
c. Cost of capital
As a general rule, your cost of capital should be consistent with your growth assumptions. Thus, you should expect to see betas move towards the stable range (0.8-1.2) and your debt ratios to rise towards industry average. Thus, your cost of capital in stable growth should be different from the cost of capital in high growth.
d. Final value of equity
Check for danger signs, including
- Cash and cross holdings becoming a huge percentage of value
- Options either being ignored or being a huge number

Market Price
As a final sanity check, look at the current market price. If your value is not even in the ballpark, go back and repeat all of the earlier steps...

Try it out with your own DCF valuation and then offer to do it for a friend... Then, take your toolkit on the road. Pick up a valuation done by an investment bank or equity research analyst and see if you can diagnose any problems in them. You are well on your way to being a valuation guru. I have also attached a full set of diagnostic questions that you can consider in the context of valuation to this email.

Attachment: Change in growth, Terminal value checker, Valuation Post Mortem


In today’s class, we started by looking at why the value and pricing processes can diverge and the difference between investing and trading. Value is driven by cash flows, growth and risk and price is driven by momentum, liquidity and herd behavior. A trader makes money playing the pricing game (buy low and sell high) and an investor from playing the value game (buy something when its price is less than your assessed value and then wait for the gap to close). Each side has its own weaknesses, but it is important that you decide which game you are playing and choose the right tools for that game. We then looked at the process of relative valuation (pricing) by examining what goes into a multiple. Starting on the process of deconstructing the multiple, starting by defining the multiple and checking to see if it is consistently defined and uniformly estimated. We closed the class by looking at the distributions of multiples (left peak, right tail and skewed) and how these distributions show up in the numbers.
We have a quiz on Wednesday and the review session for the quiz is on the webcast page for the class
The quiz will cover lecture note packet 1, through page 340 and will cover the rest of DCF not covered by the first quiz (everything from growth on). The seating arrangement for the quiz is below
If your last name begins with Go to
A - O Paulson Auditorium
P - Z KMEC 2-60
The quiz will be in the first 30 minutes of class and there will be class afterwards. Finally, if you are going to be missing the quiz, please let me know before 10.30 am on Wednesday.

Attachments: Post class test and solution


I am piling on but I cannot help myself. I know that you are busy studying for tomorrow’s quiz but I had promised you a mystery project and I am delivering. The mystery project is a pricing project, not a valuation one. If you don’t get the distinction, rewatch yesterday’s lecture. The description of the project and the dataset that you will need to do it are both attached. This is a group project and the project report is due on November 21, 2016 by 5 pm. Until next time!

Attachments: Mystery Project Description, Mystery Project Data

11/9/16 I am sorry for the room confusion this morning. I would love to blame someone else but this one was entirely on me. After the quiz, we continued with our discussion of multiples by looking at an analytical device that can be used to find the drivers of multiples. With equity multiples, you go back to a simple equity DCF model (a DDM or FCFE stable growth model) and with some algebra make the equation an intrinsic one for a multiple. With enterprise value multiples, you go back to a firm valuation models and do the algebra. We even expanded the model to consider high growth companies and saw how changing the growth rate and risk can affect PE. We closed by looking at the perfectly mismatched stock, one with a low PE, high growth, low risk and high ROE. No post-class test or solution for this week!

The quizzes are done and can be picked up at the usual spot (ninth floor of KMEC. look to your right as you come off the elevator). The solutions are attached and the grade distribution is also attached.

Attached: Solution (a or b) ande distribution of grades for the class.


I just wanted to draw your attention to the mystery project which is now posted on the webcast page on the class and that I emailed to you day before yesterday.
On a different note, one of the most fascinating aspects of valuation is that it shows up in the most unexpected places. I get missives to people valuing all kinds of assets, but this one that I got this morning from someone in South Africa makes the top ten list. As you read through the email and see the focus on discount rates, I would like to draw your attention to a series of posts that I had on my blog on the myths about discount rates.

Dear mr Damodaram, (One of hundreds of possible misspellings of my name.. Does not bother me in the least..)

I hope this email finds you well.

I am currently researching the value of a rhinoceros for a private game reserve in South Africa. In doing so I am collecting all different cost factors and income streams and linking those to a small rhino population. The answer is already obvious that it is becoming a liability, even in this early stage of my research. But it will be valuable for future research that there is a clear answer to the fact that rhinos are a liability for private game reserves in South Africa and therefor are opting out of rhino conservation if the current situation does not change.

Next step in my research is discounting cash-flows. For me, this is by far the hardest number to calculate, but I am trying to justify my assumptions.

I want to do three different discount factors:
- Risk free rate (like warren buffet, risk will be mitigated in the cash flows already)
- IRR (average rate of return of the game breeding industry in SA, as investors in game choose the species to breed with based on their return)
- Probability of rhino horn becoming legal ( and adding the costs of harvesting the horn and the income of selling the horn in the cash flows)

1. My question to you is, what risk free rate would you advise for the first discount factor?
2. Would you agree on these three methods?

11/11/16 If you have opened up the mystery project, you probably also are recognizing that this is an exercise in working with data sets. I have put up a webcast that is more statistics than finance about how to look at data and try to evaluate relationships between variables. I use the banking sector to illustrate my case but I hope that you find it useful for both your mystery project as well as for your overall project. If you are solid on your statistics, you can skip this webcast, since you already know everything that I am saying. If you need a quick review of the process, I think it will be useful.
Start with the webcast:
Download the slides:
Here is the raw data:
And the descriptive statistics:
Until next time!

The weeks are ticking by and I am reminded of this as I see that this is the ninth newsletter (and there are only twelve all together). I hope that you have had a chance to take a look at the mystery project and at the data that goes with it. Since it is due a week from Monday, I think it would be a good idea. Just in case your response is “what mystery project?”, I have attached both the project the data again to this email.

Attachments: Mystery Project Description, Mystery Project Data

I was so fixated on sending you the mystery project attachments that I forgot to attach the newsletter which is attached now. On a different note, my blog post on the investing, pricing and value effects of the election are now up on my blog:

If you have time on your hands, please read this post from way back in my blog archives on what I thought about Facebook buying Whatsapp. It is dated but it crystallizes why I think bringing a value tool to a pricing game can leave you bemused and frustrated:

Attachments: Issue 9 (November 12)


In this session, we extended the discussion of the analysis of multiples by looking at PEG ratios, EV multiples and book value multiples. Each multiple, we argued, has a driver and companion variable.We then moved on to application and how best to find comparable firms and control for differences. At this point, you have the tools you need to price just about any stock (or asset). Remember that you are paying to heed to the market, controlling for differences as much as you can and hoping that pricing divergences disappear over time.

Attachments: Post class test and solution

11/15/16 I first valued Valeant on my blog in November 2015, when they were in the throes of a meltdown. My blog post is here:
Things went from bad to worse and the stock dropped to $27 in May 2016, when I revalued them again in this post:
I then bought the stock at $27 and needless to say, it is not one of my winners yet, dropping as low as $14 after its most recent earnings report. I did a valuation with the updated numbes from that report:
I decided to top the process off by doing a pricing of the company, relative to its peer group. You can read about what I did here:
If you want to play with the pharmaceutical company raw data, the spreadsheet that has the data is here:

Finally, if you want to go into the Google shared spreadsheet and enter your pricing judgment, go here:

In today's class, we closed the book on relative valuation by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this link recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
And the site below has valuation spreadsheets as well as a valuation blog.

We then moved on to asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and we will continue with this discussion on Monday. Just a head’s up that we will be starting on packet 3 in the next week. Post class test and solution is attached, as are the two weekly challenges for this week.

Attachments: Post class test and solution, Weekly challenge #7a, Weekly challenge #8

11/17/16 I know that you just got your quiz back and have a mystery project to work on and Thanksgiving coming up and Christmas shopping to do. So, I would not blame you for putting the big project on the back burner. Assuming that you have done your DCF, and perhaps even sent it to me and received feedback, you can, if you have time, complete the pricing section of the project. This will require you to get on S&P Capital IQ and downloading raw data on your company and the peer group (and you will have to make judgments on what to include in this peer group). You can then go through the pricing exercise, standardizing prices (with multiples), controlling for differences in risk, growth or whatever else the market seems to be pricing in and makinga pricing judgment on your company. Don’t be surprised if you get a pricing judgment (that your company is cheap or expensive) that contradicts your DCF conclusion. You will have to pick but there is no better illustration of the difference between value and price than doing both a DCF and relative valuation.

I have attached the newsletter though I seriously doubt that any of you will have the time to read it, given that the mystery project is due on Monday. I won’t butt in with great insights but I will make a few suggestions that may (or may not) help you on the project.
1. Don’t fight the data: I have heard from a few of you who have trouble getting the data to bend to your will. In particular, I can sense the frustration that you must feel when you take the time and the effort to set up regressions that should work (at least in theory) and they don’t (in terms of delivering high R-squareds in regressions). I will pass on a lesson that I have learned with data. You cannot fight the data. If something does not work as you expected it to, you cannot find a trick to make it work. It just does not work. In pricing, let the data guide you to what you should be doing.
2. Use statistics, but don’t forget that it is your tool: I know that I have pushed you down the statistics path and I do so with some reluctance. It is easy to get caught up in the power of statistics and forget that the ultimate decisions are yours. Statistical tools are good but as Nate Silver and other statisticians found out during this election, they are not “human” proof.
3. Focus on your mission: Your end mission is to first pick the five cheapest and most expensive stocks. Once you have the list, no matter how you got there, stop and ask whether you would feel comfortable investing in these stocks and if not, why not. In the second part of the mission, please read your mission statement carefully before you make your choice.
4. Don’t worry about other groups: I know that you will get rumors or actual lists of what other groups are doing and which stocks they are picking. Don’t let that influence you. Make your own choices, using your own methods and come up with your own rationale.

Attachment: Newsletter# 10 (November 19)


I hope that you are done or almost done with your mystery project. When you are ready to send it it, please put “No mystery here” and cc everyone in your group. It will help me keep things in order and send back my graded version to all of you at the same time. I have also, on the very, very tiny chance that you have tried the weekly challenges for this week, attached the solutions to the two challenges. Finally, this week is a short week. We have class tomorrow before Thanksgiving week kicks in. We will cover the rest of asset based valuation and a significant part of private business valuation.

Attachments: Weekly Challenge #7a Solution, Weekly Challenge #8 Solution


In today’s class, we completed the last few strands of sum of the parts valuation (not pricing) and then started on the discussion of private companies. After laying down the base principle, which is that the fundamentals that drive private company value are the same that drive public companies, we began looking at why motive matters with private company valuation, since the same business can be worth different amounts to different buyers. In terms of specifics, we looked at the challenges of undiversified buyers, illiquidity and key person effects in private-to-private transactions and how they all go away when the buyer is a public company. Next session, we will start on valuing/pricing IPOs and then move on to real options (packet 3, if you have not printed it off yet). We have no class on Wednesday! Have a happy and safe thanksgiving!

Attachments: Post class test and solution

11/22/16 I hope that you are headed off to be with family and/or friends. I will leave you alone for the rest of the week, but just in case you decided to get some studying done for the third quiz which is a week from tomorrow, I decided to put the review session online. As you work through the past quizzes, remember that it will cover three topics, multiples (pricing), asset based valuation and private company valuation. Thus, it will cover all of packet 2. While that seems like a lot, a great deal of it is old wine in new bottles. The review session for the quiz and the presentation are available below:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4
Slides: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pdf
Here are the links to past quiz 3s and solutions. As you work through, please remember to ignore the option-based problems that you may find on the earlier quizzes:
Past Quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
Past Quiz 3 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls
11/23/16 By now, you should have your mystery projects back. If you have not, please send it to me again. It may be because you got the subject wrong on your email. Looking over your analyses, here are some of the overall impressions I have:
Multiple used: The two most widely used multiples were PE and EV/EBITDA, with a smattering of other choices thrown in. There were two sets of rationale used for the choice of multiple. The first were intuitive, with the primary argument for EV/EBITDA being that it was unaffected (or less affected) by leverage. The second were statistical, with high R-squared dominating the statistics. A few groups mentioned that they were using equity multiples because they were equity investors. I don't think that is necessarily the case. Equity investors can use EV multiples and back into a value for equity... There were a few groups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran the regression within each sector and picked under and over valued companies on that basis. If you followed this path, though, remember that your sample sizes drop off and you are perhaps altering you mission of finding the five cheapest and most expensive stocks.
Regressions: Almost everyone followed the script and ran the regressions, though the project did not actually require it. One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out (when the t statistics suggest low or no significance) rather than leave it in is the better choice. A few groups ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. (The simple rule of thumb is that you can have one independent variable for every 15 observations. Thus, if your sample size is 35, you can have at the most 2 independent variables.)
Recommendations: When picking under and over valued companies, what matters is the percentage and not the absolute difference. In other words, a company that trades at a PE of 10 with a predicted PE of 15, is more undervalued that a company that trades at a PE of 40 with a predicted PE of 50. Also, if you mixed EV multiples and PE in making your choices, the two are not directly comparable; a company that trades at an EV ratio 20% below its predicted value is more under valued than one that trades at a PE ratio 20% below its predicted (and I will et you figure out why). As I checked through the lists, I was struck by how little commonality there was across the lists. Each of you had your own idiosyncratic list, which tells me that there are no clearly under or over valued companies that stick out, across all approaches and multiples. There were a few companies that showed up on many lists, with auto companies showing up most frequently on the under valued list and Amazon and Netflix on the over valued list.
LBO candidate: A good target for a leveraged buyout will be under valued, under levered, easy to takeover and badly managed. Almost all of you focused on finding an under valued company (which is good), an under levered company (makes sense) and a company easy to takeover (low takeover defenses), but the search on the fourth dimension (bad management) was all over the place. Some of you were looking for companies with high margins and others with stable cash flows. There was a scattering of companies that were chosen. The two most widely targeted were Kroger and Allergan. As a general rule, control requires inputs that you can change and that indicates a firm with below-average margins. There was almost no overlap between the groups with no company being picked more that twice. I have a paper on LBOs that fleshes out what you may want to look for in a LBO candidate. If you get a chance, please browse through it.
I hope that you were able to get something of value out of the project. Screening is the name of the game in portfolio management and this project is just a small step towards how big data and big analytics are coming together (with mixed payoff
11/27/16 I hope that you had a wonderful thanksgiving break and that you are back, rested and ready. Tomorrow, we will finish our private company valuation section, by looking at IPOs and VC valuations. We will start on the real options discussion. On Wednesday, we will have the third quiz from 10.30-11 and it will cover all of packet 2: multiples (pricing), sum of the parts valuation and private company valuation. After the quiz, we will take up the option to delay and use it as a vehicle to examine how best to value patents and exclusive licenses.

In today's class, we put the finishing touches on private company valuation by looking at key questions that arise in private company valuation (illiquidity, key person etc.) and then looked at valuing IPOs. In particular, the question of what happens to the proceeds from an offering can affect value per share, and the offering price itself is subject to the dynamics of the issuance process, with investment bankers more likely to under price than over price offerings. The third quiz will cover all of packet 2 and the seating arrangement is as follows:
If your last name begins with Go to
A - O Paulson Auditorium
P - Z KMEC 2-60
You will notice that this is the same arrangement that I announced for the second quiz before having to scramble it because KMEC 2-60 was taken. This time, I checked ant 2-60 is not taken.
In the last part of the class, I did a quick introduction to real options, setting up the intuitive rationale for real options. We covered the basics of options, starting with why real options are so attractive to analysts and investors: they allow you to add a premium to your DCF value. The two building blocks for real option value are learning (from what is going on around you or ongoing events) and adapting your behavior. There are three questions that underlie the use of real options. The first is recognizing when you are dealing with an option, with a payoff diagram being the give away. The second is looking for exclusivity which is what gives options value. The third is using an option pricing model, which is built on replication and arbitrage.

Attachments: Post class test and solution

11/29/16 I know that you have a great deal on your plate both from this class and others and have neither the time nor the inclination to do other valuations on the side. So, to ease things, I decided to do a fun pricing this week, drawing on a post that I did two years ago when Steve Ballmer bought the Los Angeles Clippers for $2 billion.
Start with the post, since it not only has the valuation of the Clippers but my pricing, as well as data on NFL, MLB, NHL, Euro Soccer and Indian Cricket league teams, which should cover almost every sports fan in the class. Have fun with the data, but also recognize the possibilities. The sports business is now big-money entertainment and it is run badly and priced/valued abysmally. There is opportunity here, if you choose to take it.

It was touch and go, but I touched and went. I was able to finish all of the quizzes and they are ready to be picked up. I will be in Vienna for the next three days. So, if you have issues with the grading, you can either wait until Monday or send me a picture of your contested page and what you think I might have missed.

Attachments: Solution (a or b) as well as the distribution of grades.


I know that your project has been on the backburner for a while, but please take a look at what is left. Broadly speaking, you have four more tasks to complete.
The first is updating your DCF valuation for any information (earnings reports, in particular) that has come out since. You may want to take this opportunity to update your risk free rate and perhaps even the ERP (I just updated the December 2016 ERP for the S&P 500).
The second is doing a relative valuation of your company against the sector in which it operates. This is very similar to what you did on your Mystery project but on a much smaller and more contained scale. If you can get on Cap IQ and download the data on comparable firms, this should not take a lot of time to do.
The third is doing a relative valuation of your company against the market. This will just require you to plug your company numbers into the market regressions that I have on my website (check under updated data at damodaran.com)
The fourth (and this will apply to only one in five or six of you) is to value the equity in your company, if it is distressed and it has lots of debt, as an option.
The project is due, as a group submission, on the last day of class (December 14) at 5 pm and I will send you more updates, prompts and nagging emails along the way. Finally, in my rush to get to the airport, I forgot to send you the weekly challenge for the week, which is attached.

Attachment: Weekly Challenge #9

12/2/16 I have a valuation tools webcast on using option pricing models to value patents and here are the links:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/optiontodelay.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/optiontodelay.pdf
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/productoption.xls
I hope that you find one or both useful.

The newsletter for the week is attached. Needless the say, the end is near and if you have been putting off finishing your project, this is a good week to get caught up.

Attachment: Newsletter #11 (December 3)


It is the second to last full week of the semester and I would like to tie up a few loose ends. First, I have attached the solution to this week’s weekly challenge. Second, this week, we will complete the discussion of real options by examining the options to expand and abandon tomorrow, as well as looking at financial flexibility and distressed equity as options. On Wednesday, we will look at acquisition valuation, with the intent of seeing why so many acquisitions go bad. Third, the project moves inexorably towards its end game and I thought you might like a list of to dos which you can either check off, if you are already done, or start checking off as you do them.

1. DCF Valuation
1.1. Consider feedback you got on your original DCF valuation and respond, but only if you want to.
1.2. Update macro numbers - riskfree rate to today's rate and equity risk premium
1.3. Update company financials. If a new quarterly report has come out, compute new trailing 12-month numbers
1.4. Review your final valuation for consistency

2. Relative valuation
2.1. Collect a list of comparable firms (stick with the sector and don't be too selective. You will get a chance to control for differences later) and raw data on firms (market cap, EV, earnings, revenues, risk measures, expected growth)
(You can this data from Bloomberg or Cap IQ. The latter is a little more user friendly)
2.2. Pick a multiple to use. There may be an interative process, where you use the regression results from 2.4 to make a better choice here)
2.3. Compare your company's pricing (based on a multiple) to the average and median for the sector. Make a relative valuation judgment based upon entirely subjective analysis.
2.4. Run a regression across the sector companies. (Be careful with how many independent variables you use. As a rule of thumb, you can add one more independent variable for every 10 observations. Thus, if you have only 22 firms in your list, stick with only two.)
2.5. Use the regression to make a judgment on your company and whether it is under or over valued. (If you are using an EV multiple, estimate the relative value per share. This will require adding cash and subtracting out debt from EV to get to equity value and then dividing by the number of shares)
2.6. Use the market regression on my website to estimate the value per share for your firm. You can find the regressions here:

3. Option valuation (tomorrow’s class)
3.1. Check to see if your company qualifies for an option pricing model. It will have to be a money losing company with significant debt obligations (a market debt to capital ratio that exceeds 50%).
3.2. If yes, do the following:
3.2.1: Use your DCF value for the operating assets of the firm (not the equity value) as the S in the option pricing model
3.2.2: Use the book value of debt (not the market value) as the K in the option pricing model
3.2.3: Check your 10K for a footnote that specifies when your debt comes due. Use a weighted-maturity, with the weights reflecting the debt due each year. (You don't have to worry about duration)
3.2.4: Estimate the variance in firm value, using your own estimates or the industry averages that I have estimated and are built into the linked spreadsheet.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
I have attached an excel spreadsheet that should help in this effort.

4. Bringing it all together
4.1: Line up your intrinsic value per share (from the DCF model), the relative value per share (from the sector), the relative value per share (from the market regression) and the option based value per share (if it applies)
4.2: Compare to the market price in December 2016 (the date will depend on when you get done)
4.3: Make your recommendation (buy, sell or hold(

5. Numbers to me!!!!
Fill in the attached excel spreadsheet when you have all the numbers for all of the people in your group and please get it to me by the evening of December 13, 2016 (If you have someone who is holding up the group, just send me the rest of the numbers). Please do not modify the spreadsheet in any way.

6. Final Project write up
Write up your findings in a group report and submit as a pdf file. The report should be brief and need not include the gory details of your DCF valuation. Just provide the basic conclusions, perhaps the key assumptions that you used in each phase of valuation. (There should be relatively little group work. So, you may not really need to get together for much more than basic organization of the report) The group report is due electronically by Wednesday , December 14, at 5 pm. A pdf format works best. You do not need to attach the raw data and excel spreadsheets). I am not a stickler for format but here are good examples of reports from previous semesters online.
And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters.

7. Celebrate, but remember that your final exam is two days later.


We started today's class by looking at the option to expand, where your capacity to enter or expand into new (big) markets can justify up-front bad investments and then at the option to abandon poorly performing investments. We then valued financial flexibility as an option, and argued that it was worth more to capital-constrained companies with unpredictable and high-value-added investments. We continued with our examination of equity in trouble, debt-laden companies. Given that the equity in these companies takes on the characteristics of an option, we teased out three implications:
The equity in these companies will be valued as out-of-the-money options are and not as conventional stocks. Thus, they will retain their value, even in the face of daunting debt, and will become more valuable as the risk in the business increases and with longer term debt.
Letting equity investors in deeply distressed companies make investment decision can lead to perverse consequences: risky, negative NPV projects may be attractive to these investors, because the transfer of wealth from lenders overcomes the drop in value from the negative NPV.
Acquisitions of companies in other businesses, if not funded with additional debt or accompanied by a renegotiation of interest rates on existing debt, can make equity investors in the acquiring company worse, even if the acquisition is at fair value.
The bottom line on options: they are everywhere, most of them are worth nothing or very little and only a few can be valued with option pricing models. I have attached the post class test and solution, for you to try out, if you are so inclined.

Attachments: Post class test and solution

12/6/16 For much of this class, we have talked about pricing as an alternative to valuation and how the two can yield different numbers. Thus, you can value a stock based on its expected cash flows or price it and get different numbers. There are some assets, though, where the only thing that you can do is price an asset. Here are some examples:
1. Gold: Gold is an asset that has been held by investors in their portfolios for millennia but do you value gold? The answer is that you cannot but you can price it, usually relative to paper currencies, with gold’s value increasing as your trust in paper currencies decreases. A few years ago, I wrote a post trying to price gold and you can read it here:
You can download the dataset that I used for my pricing, visit the Fed’s data site in St. Louis (FRED) and update the information through today; you can make your best pricing of gold.
2. Bitcoin: Much talked about, but how do you value Bitcoin? The answer again is that you do not. It is a digital currency and it can be priced against other currencies. Again, I try my best in this post:
Again, give it your best shot.
In fact, you can extend this discussion to include collectibles (baseball cards etc.), art and wine.

I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big M&A deal and see if you can break it down into its components. I did not get to look at the Inbev/SABMiller in class but rather than do it in class, I am going to offer you the blog post that I did on it when it happened:
If you look towards the bottom on the post, you will see a YouTube video on the merger.
Finally, the post class test and solution are attached.

Attachments: Post class test and solution


If you have not started the project yet, please do. If you have already completed, kudos. If you are in the middle, here is the to-do list that I sent out on Sunday, just to keep you motivated.
1. DCF Valuation
1.1. Consider feedback you got on your original DCF valuation and respond, but only if you want to.
1.2. Update macro numbers - riskfree rate to today's rate and equity risk premium
1.3. Update company financials. If a new quarterly report has come out, compute new trailing 12-month numbers
1.4. Review your final valuation for consistency

2. Relative valuation
2.1. Collect a list of comparable firms (stick with the sector and don't be too selective. You will get a chance to control for differences later) and raw data on firms (market cap, EV, earnings, revenues, risk measures, expected growth)
(You can this data from Bloomberg or Cap IQ. The latter is a little more user friendly)
2.2. Pick a multiple to use. There may be an interative process, where you use the regression results from 2.4 to make a better choice here)
2.3. Compare your company's pricing (based on a multiple) to the average and median for the sector. Make a relative valuation judgment based upon entirely subjective analysis.
2.4. Run a regression across the sector companies. (Be careful with how many independent variables you use. As a rule of thumb, you can add one more independent variable for every 10 observations. Thus, if you have only 22 firms in your list, stick with only two.)
2.5. Use the regression to make a judgment on your company and whether it is under or over valued. (If you are using an EV multiple, estimate the relative value per share. This will require adding cash and subtracting out debt from EV to get to equity value and then dividing by the number of shares)
2.6. Use the market regression on my website to estimate the value per share for your firm. You can find the regressions here:

3. Option valuation (tomorrow’s class)
3.1. Check to see if your company qualifies for an option pricing model. It will have to be a money losing company with significant debt obligations (a market debt to capital ratio that exceeds 50%).
3.2. If yes, do the following:
3.2.1: Use your DCF value for the operating assets of the firm (not the equity value) as the S in the option pricing model
3.2.2: Use the book value of debt (not the market value) as the K in the option pricing model
3.2.3: Check your 10K for a footnote that specifies when your debt comes due. Use a weighted-maturity, with the weights reflecting the debt due each year. (You don't have to worry about duration)
3.2.4: Estimate the variance in firm value, using your own estimates or the industry averages that I have estimated and are built into the linked spreadsheet.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
I have attached an excel spreadsheet that should help in this effort.

4. Bringing it all together
4.1: Line up your intrinsic value per share (from the DCF model), the relative value per share (from the sector), the relative value per share (from the market regression) and the option based value per share (if it applies)
4.2: Compare to the market price in December 2016 (the date will depend on when you get done)
4.3: Make your recommendation (buy, sell or hold(

5. Numbers to me!!!!
Fill in the attached excel spreadsheet when you have all the numbers for all of the people in your group and please get it to me by the evening of December 13, 2016 (If you have someone who is holding up the group, just send me the rest of the numbers). Please do not modify the spreadsheet in any way.

6. Final Project write up
Write up your findings in a group report and submit as a pdf file. The report should be brief and need not include the gory details of your DCF valuation. Just provide the basic conclusions, perhaps the key assumptions that you used in each phase of valuation. (There should be relatively little group work. So, you may not really need to get together for much more than basic organization of the report) The group report is due electronically by Wednesday , December 14, at 5 pm. A pdf format works best. You do not need to attach the raw data and excel spreadsheets). I am not a stickler for format but here are good examples of reports from previous semesters online.
And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters.

7. Celebrate, but remember that your final exam is two days later.

12/9/16 This is the last of the valuation tools webcasts. If your company is the one that meets the equity-as-option test (losing money, lots of debt), you are probably not happy. However, it is really not an involved exercise. To assist you, I did put up my latest valuation tools webcast, on valuing distressed equity as an option. I used Jet India, an Indian airline with a history of losses and a mega debt load to illustrate the process. You can start with the webcast below:
The financials for Jet India are contained in this sheet:
The DCF valuation that you need to get your option model started is here:
The value of Jet India's equity as an option is contained in this spreadsheet:
It is pretty straight forward and may be useful.
12/10/16 I hope that your weekend is going well, though I have probably ruined much of it. As you work through the relative valuation section, a few questions that seem to be recurring:
1. Sample size: There is a trade off between sample size and finding companies that look more like yours. If you are doing a subjective comparison - comparing your company's PE with the PE ratio of comparables, controlling for differences with a story, you want a small sample of companies that look like yours. If you are doing a regression, you should try to get a larger sample, even if it means bringing in firms that may not look like yours. You can control for differences in the regression. If you can get your sample size up to 20-25, you should be okay. And one more thing. Don't fight the data. If a regression does not work, it does not. Remember that you get to make the ultimate judgment and you can decide that given your company and its peers, the best estimate of relative value is just the average PE for the sector.
2. Market regressions: The updated market regressions from the start of 2016 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link
3. Young or money losing companies: Running these regressions with young companies is always tricky. The first is that if you use current data, the only multiple that you have any shot at using is a revenue multiple. Nothing that you can do about that. You can try to use forward numbers to do relative valuation. What does that mean? You can go into your DCF, find your revenues or earnings in year 10, and use the fundamentals at that point to get a multiple for your company. Remember, though, that this a value in the future and you still have to discount it back and deal with survival risk.

In today's class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. We closed the class by taking a very brief look at CFROI and EVA to illustrate that much of what passes for new and innovative in value enhancement is just old wine in new bottles. I have attached the post class test and solution.

Attachments: Post class test and solution


I don’t mean to rush you but as you get the numbers together for your project, please put them into the attached spreadsheet and send them to me as soon as you can and at the latest, by tomorrow night. If you can turn in the numbers as a group, great, but even if you don’t have all of the members, I will take the numbers that you have. Thank you again!

Attachments: Project Summary

12/13/16 The summaries are coming in much faster. Thank you. We are up to 150 and I am waiting on the last 100. The window will stay open for much of the rest of the night. So, get it in whenever you feel up to doing it. I know that you are probably busy on your final projects, but just in case you are ready to turn your attention to the final exam, the webcast review for the final exam is now accessible:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valfinalreview.mp4
Slides: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valfinalreview.pptx
Past finals: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.pdf
Past final solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.xls

1. Closing Class: Thank you for being at the closing class. I have attached links to both the closing presentation and the summaries of your valuation findings (for the entire class).
Closing Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valclosefall16.pdf
Summaries of class valuations: https://www.stern.nyu.edu/~adamodar/pc/eqrec/fall2016.xls
If you are on the list of the most undervalued companies and are buying your recommended stock, please let me know. I may very well join in.

2. Final Exam: The final exam is scheduled for Friday from 1-3 and will be in two rooms, KMEC 1-70 and Paulson. The seating arrangement is below:
If your last name begins with Go to
A - G KMEC 1-70
H - Z Paulson
It is a comprehensive, open-book, open-notes exam.

3. CFEs: Finally, please remember to do your CFEs. If you don't get them done, you will not be able to check your grades. I have been told that they will be accessible after midnight tonight but the window is open only for a day (tomorrow all day). So, please do it tomorrow.
Student Instructions for Completing Online CFEs
Login to https://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.

12/15/16 As you prepare for the final exam, you are probably discovering that there is way too much material to prepare for it all. I understand (really). Here is my advice (and feel free to ignore it). The final exam has 5 questions all worth 20% of the score. The last three questions are on value enhancement, acquisition valuation and real options, the three topics that we covered after the third quiz. Start with that material first. The first question is a DCF question (covering the first two quizzes) and the second question is a pricing question (from the third quiz material). The review sessions are up and running on the website page for the class. One more reminder to do your CFEs as soon as you can. The window is now open and will close at midnight. So, take a break and spend the five minutes completing the CFE. As I mentioned, my motive is selfish, since if you don’t, you will not be able to see your grade, and we know what follows.

There are three questions seems to be coming up on the real options problems and m afraid I have contributed to the confusion. So, here is some clarification:

1. What is the probability that S>K?
As stated in class, it is N(d2) which is the risk neutral probability that S>K. In some of the problems, though, I have used a range from N(d1) and N(d2) as the range of probabilities. Let me explain why. N(d1), in addition to being an option delta, is also a probability that the option will be in the money. In fact, the only reason d1 is different from d2 is because you are uncertain about S
d2 = d1 - square root of the standard deviation
If you had a standard deviation of zero, N(d1) = N(d2). As the uncertainty increases, the gap between these two numbers will widen. Thus, you go from being certain about the probability to having a range. Having said all of this, N(d2) should be the point estimate on the probability that S>K. You can use the range to indicate that there is uncertainty about this probability.

2, What is the cost of delay?
This is a tough one. Sometimes, I use 1/n and sometimes I use the cashflow next year/ S and sometimes I use no cost of delay at all. Lets look at the conceptual basis. The cost of delay is a measure of how much you will lose in the next period if you don't exercise the option now as a fraction of the current value of the underlyign asset (It parallels the dividend yield. On a listed option on a stock, if you exercise, you will have the stock and get the dividends in the next period) . Thus, if you have a viable oil reserve, the cost of delay is the cashflow you would have made on the developed reserve next period divided by the value of the reserve today.
Here is the overall rule you should adopt. If you have a decent estimate of the cashflows you will receive each period from exercising the option, it is better to use that cashflow/ PV of the asset as the dividend yield. If your cashflows are uneven or if you do not know what the cashflow will be each period, you should use 1/n as your cost of delay. If you will lose nothing in terms of cashflows by waiting, you should have no cost of delay.
Let me take three examples. The first is the bidding for rights to televise the Olympics in an earlier quiz. There were two years left to the Olympics and you were trying to price the option. In this case, there is no cost of delay since you really cannot exercise the option early even if it is deep in the money. (You cannot televise the Olympics a year before they happen...) The second is the oil reserve option. Since the cashflows from the reserve tend to be fairly uniform over time (based upon the barrels of oil you would produce and the current price per barrel, it is easy to estimate the cashflows you would generate each year on the reserve. In most of the oil reserve problems, therefore, you would go with the cashflow/ PV of oil in the reserve as your cost of delay. The third is the patent examples. While you may be able to estimate the expected cashflow each year from commercialising the patent, these cashflows are more difficult to obtain and are less likely to be uniform over time. That is why many of the patent problems use the less preferred option of 1/n as the cost of delay, where n is the number of years left in the patent.

3. How am I going to estimate N(d1) and N(d2)?
I will give you the cumulative normal distribution. You still should be able to estimate d1 and d2 on your calculator. While the distribution may not give you a precise N(d), I will accept the nearest number. Thus, if d =0.48, I will take N(.50) as your estimate.


I know that the final exam was challenging both in terms of concepts and time. They are now graded and ready to pick up int he usual place. Please, please don’t get them out of alphabetical order. I have attached the solution to the final exam (there was only one) with explanation of the grading. Please read the computational explanations that I have put for the answers. I have not added a grade distribution since your final grades will be up shortly.

Attachments: Final exam solution

12/19/16 I hope you are done and are out celebrating. However, just in case you still care about grades, yours just went online. I want to to wish you the very best with whatever you plan to do with your lives. I hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. Well, at least, I have not. I mean it when I say that you have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees"). And just in case, you need a valuation fix... here are some links:
Website: http://www.damodaran.com
Blog: http://aswathdamodaran.blogspot.com/
Twitter feed: @AswathDamodaran (Do your part to advance me to Lady Gaga or at least Kanye West status…)
If you have any questions about your grade, use the attached spreadsheet to see where you ended up. You do need to know your final exam grade to be able to use it. If you cannot pick up your exam tomorrow, I will figure out a way for you to check your final exam score. Also, I know that some of you were unable to finish your CFEs, since the Stern server went down on Thursday night. Using my immense negotiating skills, I have been able to ensure that all of you will be able to check your grades. For the last time (in this class, at least)!