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The Email Chronicles (Valuation - Spring 2014)

The emails for this class will be collected in this file. Have fun with them!

Date Email sent out

For those of you who were in my corporate finance class, the torture begins again (http://www.youtube.com/watch?v=7edeOEuXdMU). For those of you who are new to this experience, you will soon find out... 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 it time to buy or sell Twitter? Is Apple now the first bargain basement $ 500 billion company? Is there a market bubble? What is the value added by the Kardashian sisters? If you have not visited my blog, I put my thoughts down on these issues (though I am still working on the Kardashian valuation and the Superbowl) over the summer:

1. 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

2. Syllabus & Calendar: The syllabus for the class is available on the website for the class and there is a google calendar for the class that you can get to by clicking on
For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due.

3. 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 only the first packet on discounted cashflow valuation. If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...

4. Delivery choices: I hope to see you all in class for every session, but there are two supporting delivery mechanisms that I would like you to take advantage of:
a. Lore: I don't use Blackboard. Instead, I use a site called Lore that some you knew as Coursekit in the Corporate Finance class. You can find the link to the class by clicking below:
You should be getting an invite to join the class on Lore. Please accept the invite, because your quiz scores will be recorded here and some of your assignments have to be submitted here.
b. iTunes U: I will also be posting the material for the class on iTunes U. If you have never used iTunes U, you need an Apple device (iPad or iPhone) and have to download the iTunes U app (free). Once you have the app, use the link below:
I really like the set up and I think you may enjoy it too.

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... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. If you can get the Asian edition, even better. It is exactly the same book and costs about a third. Or, 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". https://www.stern.nyu.edu/~adamodar/New_Home_Page/public.htm

6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store: http://itunes.apple.com/us/app/uvalue/id440046276?mt=8
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 (The first day of class is February 3, 2014, in KMEC 1-70).. I think we are going to have a lot of fun (at least, I am... ).

1/31/14 Just a couple of quick notes leading into next week's class. First, 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
Second, please do accept the invite to the class on Lore that I sent you on Sunday. If you have no idea what I am talking about, just email me and I will send you a private invitation.
Third, visit the website for the class and check out the Google calendar to make sure that you don't have any quiz conflicts:
Finally, we don't have to wait until next week to start talking about valuation, right? So, what do you think about the market meltdown in the last couple of weeks. Is this just a long-overdue mild correction or the beginning of something bigger? How can you tell? Big questions, but well worth answering! Until next time!

First, a quick note about today's class. During the session, I made clear that this was a class about valuation in all of its many forms – different approaches (intrinsic, relative & contingent 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 first packet (intro to valuation) by giving you my reasons for doing valuation (to fight looming lemingitis) 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:
1. Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, please let me know... The orphan list is ready to go.

2. 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 2012) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings...

3. The web cast for the first class will be up in all three forums (website, iTunes U and Lore), when I get the links (should be in a couple of hours). You can access it by going to:

4. 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 the webcast page.

Just to restate what I said in class today, 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. Until next time!

Attachments: Post-class test and solution.


I am still waiting on the webcasts of yesterday's classes as technology rears its ugly side. I do have the valuation of the week ready to go. It is of Vale, the Brazil-based mining company. It is best to start with the background and financials, which you can find here:
Vale: Background Information - http://topics.nytimes.com/top/news/business/companies/companhia-vale-do-rio-doce/
Vale: Annual Report (2012) - http://www.vale.com/EN/investors/Quarterly-results-reports/20F/20FDocs/20F_2012_i.pdf
Vale: Yahoo! Financials - http://finance.yahoo.com/q?s=VALE
Vale: Bloomberg Financial Summary - https://www.stern.nyu.edu/~adamodar/pc/blog/Vale2014/ValeBloomberg2014.xls
You can then read my valuation post on the company:
I have attached the spreadsheets that contain the cost of capital, base case valuation and conservative valuation of Vale to this email.
Finally, when you have tried your hand at the spreadsheet (and please do), you can go into this shared Google spreadsheet and put in your numbers. Have fun with the valuation. Until next time!

Attachments: Vale: Cost of Capital, Vale: Base Case Valuation, Vale: Conservative Valuation


I know that this is close to class time, but we will start today's class with this test. If you get a chance, browse through the page and form your conclusions. We will talk about it at the start of class. Still no webcasts links from Monday (and I am sorry), but I will see you in a little while. Until next time!

Attachment: Valuation bias: A test


Thank you for braving the elements and coming to class. 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 he is trying to be the catalyst for the correction... and think about the dark side of this process.

Speaking about input fatigure, I am attaching the link to a New York Times piece on decision fatigue. It is a fun and interesting read. Please take a look at it, when you get a chance:
We ended the class today with the question of whether equity valued directly (by discounting cash flows to equity at the cost of equity) will yield the same value as equity valued indirectly (by valuing the firm and subtracting out debt). i know that we really have not delved into valuation in depth, but if you are up to it, try the first weekly challenge (which is attached). When you are done, go into lore.com and submit your answer. (If you are still not registered in the Lore class, let me know) I will give you mine on Sunday. I am also attaching the post class test and solution for the session.

Attachments: Post-class test and solution, Weekly challenge #1


As I mentioned in class on opening day (I like baseball analogies), Thursday is the project update day. Since this is the first week, there is really not much to update, but here is where you should be by the end of the week:
1. In a group: If you have a group of four or more, great. If not, you need to find a group. If you are having trouble finding one, use the orphan spreadsheet below to enter your name and relevant details:
Hopefully, you will be adopted soon. If not, I will try more desperate measures.
2. Pick a company: I know that you want to pick the "perfect" company, but I would rather an imperfect company right away and change your mind later than try to pick the perfect company for the next six weeks. Remember that each group has to meet the constraints: at least one money losing company, at least one foreign company, at least one high growth company and at least one service company.
3. Start collecting information: Start with the company's website and download the latest annual report. If the company has filed quarterly reports since, try to get at least the latest one. Check for news stories about the company and try to avoid reading too much opinion about the company. Avoid equity research reports about your company since they will only cement your biases.

Finally, on the webcasts, this week has been a disaster so far and I am really sorry. I am still waiting for the reprocessed videos. If you are looking to catch up (especially yesterday's class), you can try the first two webcasts from last semester:
I was not as scintillating last semester as I am this one, but them's the breaks!!!!


I know! I know! Friday is supposed to be your day of rest, but I decided to break that rule. (If you make the rules, you can change them). 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.

On a different note, a couple of reminders of notes that I have already sent out. First, the valuation of the week (Vale) and the shared google spreadsheet await you. You can find the full details on the webcast page for the class:
Give it a shot, when you get a chance. Second, the weekly challenge was posted (and emailed to you) a couple of days ago. I will post my solution on Sunday, but please try it out before then. If you do so, you can go into lore (you have to be registered) and submit your answer in lore (look under Calendar for the first weekly challenge). If you have not registered yet and you are registered in the class, go to lore.com and type in the code: QWCRAG.
Have a great weekend! Until next time!


I will keep this email short, but the newsletter for the week is attached. If you get a chance, please browse through it. There really is not much news there, but the format will stay the same and it will give you a roadmap for the class (both of where we have been already and where we plan to go). One more additional news item. The second session's webcast has finally been posted (on the webcast page for the class (https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr14.htm), iTunes U and Lore). If you missed the class, please watch the webcast before Monday's class. Until next time!

Attachment: Newsletter #1

2/9/14 If you have not tried out the weekly challenge yet, it is still open:
Once you have a solution, you can post it on Lore (http://www.lore.com). Check for the weekly challenge #1 under calendar.
I will post my solution later today. Until next time!

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. In fact, we will be starting off tomorrow's class with the question of firm versus equity valuation. I am attaching the cash flow table that we will be using for the start-of-the-class test as well. If you get a chance, please take a look at it before you come into class. Until next time!

Attachments: Weekly challenge solution


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 under the webcast page fand on the coursekit 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
Finally, I did a post on my blog specifically on the question of the risk free rate being low and the implications for valuaton:

The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand:
The post class test and solution are also attached.

Attachments: Post-class test and solution, , Updated CDS spreads


If you have been following markets for the last few weeks (and you should be), you probably read about Twitter's earnings report last week, where the company beat expectations (on revenues and income) but saw its stock price collapse by 25% because its user base did not grow fast enough. Given the price drop, is it time to buy Twitter now? Well, that is the question that I am trying to answer (hopefully with your help) this week. Start with the blog post I just put up on my valuation:
(If you want to see the prior posts on Twitter, just click through the links and you will see the pre-IPO valuations of Twitter)
The, download the news release containing the quarterly information from last week:
Then, move on to a one-page summary that lists all the key financial numbers over Twitter's limited life:
Finally, download my valuation of Twitter:

Please don't be intimidated. You can value Twitter and you should feel free to disagree with me. Go through the spreadsheet and make the changes that you feel are necessary and then post your valuation on the Google shared spreadsheet:
Hope you get a chance to try this. It is fun! Until next time!

Attachments: Twitter financials: Bloomberg summary page, My valuation of Twitter


I got this email from OCD about Capital IQ. For those of you who are wondering, Capital ?, this is an insanely good database of global companies with data on everything from accounting to market to corporate governance data. If you have never used it, you should try it and you will probably find it helps a great deal in your projects. To be able to use it, though, it looks like you have to jump through a few hoops. Please try to do so, because the payoff is big.

Begin forwarded message:

From: Kathi To <kto@stern.nyu.edu>
Subject: Spring Enrollment for Capital IQ Accounts
Date: February 10, 2014 at 4:51:10 PM EST
Cc: Amanda Hower <ahower@stern.nyu.edu>

Dear Faculty,

If you are planning to have your MBA students use Capital IQ this semester, please be advised that the enrollment period for the spring semester is from February 3rd to February 28th. They can enroll by filling out the Capital IQ form on their Career Account www.stern.nyu.edu/careeraccount. Please note that if students will need Capital IQ for projects later on in the semester, they will need to request access during this official enrollment period at the beginning of the semester. Also, if they had an account last semester, they will still need to request an account for this semester if they need one because last semester's accounts will expire this month.

For non-MBA Stern students, there are 10 Capital IQ terminals on campus that don’t require a Capital IQ account. They are located in the undergrad lab (L-100) and on the fifth floor graduate student computers near the Office of Career Development.

If you have any questions about the process or Capital IQ access in general, please feel free to contact Amanda Hower (ahower@stern.nyu.edu) or Kathi To (kto@stern.nyu.edu) in the Office of Career Development.

Kathi To
Senior Associate Director | Office of Career Development

Leonard N. Stern School of Business
New York University
Direct 212-998-0989 | Main 212-998-0623


We are little more than 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
Scroll down and look towards 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 1.5 to get a rough measure of the country risk premium.
As for other sites that look at country risk, here is one that you may want to look at. It is the site maintained by Professor Campbell Harvey at Duke who does very good work on country risk:
If you want my estimates of country risk premiums, check under updated data on my website. (See website above)

c. Company risk exposure to country risk: My concept of lambdas for countries is a work in progress. I have a paper on the topic that you can read, if you are so inclined:

d. Implied equity risk premiums: I know that we barely touched this concept in class today, but its is not rocket science and I am sure that you can work with it. I am attaching the excel spreadsheet that will allow you to compute implied equity risk premiums. I am using the numbers that I used at the start of February to come up with an equity risk premium of 5.17%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy) and the 10-year T.Bond rate (easy). Leave everything else untouched including growth rate in earnings for next five years & updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will explore it further in class a week from today (since there is no class on Monday).

The post class test and solution are attached. Until next time!

Attachments: Post-class test and solution, Implied ERP for February 2014


I hope the week was a good (and productive one). Next week is a short week, since we have no class on Monday. Just to prod you (and harass you), 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 had suggested after Monday's class that you estimate a riskfree rate in the currency that you will be doing the valuation in. If you have doubts about how to do this, the weekly challenge for this week will be a good way to test your understanding. It is online in the usual spots (webcast page, Lore and iTunes U) and is attached to this email. By the way, if you do have a chance, give the Twitter valuation a few minutes of your time as well....

Once you have a risk free rate, here are your next few steps:
1. 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...
2. 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.
3. 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 of updating the implied equity risk premium spreadsheet that I sent you with Wednesday's email. 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). Until next time!

Attachments: Weekly challenge # 2 (Simpler- China & Messier- Peru)


As you get ready for the long weekend, a couple of quick notes:
1. Google Groups & NYU Classes: As I struggle to get Google groups to update to have everyone on the list, I decided to open a new front and have created at least a version of the class on NYU classes. This has a couple of advantages. First, there is a chance that NYU classes may update faster than Google Groups (Why? I have no idea!) Second, NYU classes also has a grade book which will allow you to see your grades, as recorded by me, as we go through the class.

2. Implied ERP: In case you have a chance to try out the implied ERP spreadsheet (attached again to this email), I put together a short webcast (20 minutes) on both the mechanics of the implied ERP (using the February 2013 version of the spreadsheet) and how I get the numbers for the spreadsheet. I hope you get a chance to look at the webcast (and any feedback on making these webcasts more useful will be appreciated):
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/ERP/ImpliedERP.ppt
I have also put the links up on my webcast page(and Lore & iTunes U) for the data on buybacks and earnings growth.

If you are reading the news (not just the sports news), I am sure that you have seen the Comcast/TWC story. Since it involves everything that we talk about in this class (valuation, bias, pricing, synergy etc.), it will be worth following as it unfolds. Until next time!

Attachments: Implied ERP for February 2014


Last week, we put the basics of valuation behind us and started on the nuts and bolts. In particular, we spent Monday talking about how to estimate risk free rates in different currencies and why they may be different. On Wednesday, we looked at equity risk premiums, talked about why historical risk premiums may be flawed and how to estimate equity risk premiums in other markets. Next week, we will have only one session and will examine a different way of thinking about equity risk premiums and also talk about alternatives to measuring the relative risk in a stock. I know that this is a long weekend and I hope you have fun. However, please do find a group, pick a company, estimate a risk free rate in the currency of your choice and start thinking about the ERP for your company. ( What a fun sucker? I know.. I know.. That is what my kids call me to...) Until next time!

Attachment: Newsletter #2


I will keep this short. The solution to the second weekly challenge is attached, with the challenge. If you did not get a chance to do it, you can still try it. Next week is going to be a short one, since we have no class tomorrow. On Tuesday, I will still put up my valuation of the week and on Wednesday, we will look at how to estimate implied equity risk premiums and estimating the relative risk of a company. If you have picked a company, try to find a beta for your company from a service and bring it to class with you. Other than that, not much more to do. Have a wonderful rest of the weekend. Until next time!

Attachment: Solution to weekly challenge #2 (Simpler & Messier)


I hope that you had a productive weekend (or at least a fun one). Well, it is time to get back to work and to celebrate, I just posted my assessment of the Comcast/TWC deal. You can begin by reading the news story of the deal:
Follow up with this blog post where I try to estimate the value of synergy in this deal.
You get the summary data for the two companies at the link below:
Comcast Summary data: https://www.stern.nyu.edu/~adamodar/pc/blog/ComcastSummary.pdf
TWC Summary data: https://www.stern.nyu.edu/~adamodar/pc/blog/TWCSummary.pdf
As always, this is not about me pontificating about the value of anything but about you trying your hand at valuation. I have attached my spreadsheet to this email. Please go into it and make the changes to reflect your views. Once you have done that, go to the Google shared spreadsheet and give me your estimate of the value of synergy in this merger.
Until next time!

Attachments: TMC/Comcast Synergy valuation


By now, you are probably tired of equity risk premiums and I don't blame you. Today's session, though, was all about implied equity risk premiums and what causes them to change over time. Other things remaining equal, higher stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushed the ERP down. If you get a chance, please play with the equity risk premium spreadsheet to check for yourself.
As for the inputs into the model, there is not much suspense. Here is where you can get them:
a. Level of the index: Almost everywhere
b. Cash flows on the index: For the S&P 500, I go to the source:
Click on the S&P 500 and then on index announcements. The most recent release on the buybacks/dividends on the index should be there somewhere. The only problem is that S&P updates these numbers on December 15, March 15, June 15 and September 15. So, you will have to leave the numbers unchanged during those months where there are no updates.
You have a choice on which cash flows to use in computing your premium: Current (trailing 12 month), average over last 5 years, average over last 10 years.
c. Expected growth rate: The easy route is to do what we did in class and get the data from Yahoo! Finance, where you will find it in any company's Yahoo page (under analyst estimates at the bottom of the page ). The better way to get it is to find a Bloomberg terminal, find the index in question (S&P 500 in this case) and type in EE. You will get expected earnings at least for the next 2 years and you can extrapolate from there.
d. Riskfree rate: Use the ten-year default free rate in the currency in which your expected growth/cash flows are denominated. For the S&P 500, this would be the 10-year US treasury bond rate.
If you want to carry forward and compare the equity risk premium to the bond default spread, here are the places you can go to get those numbers:
a. For the bond default spreads, visit my favorite macro data source (FRED, the Federal Reserve data site in St. Louis)
Click on categories first, then on interest rates and then on corporate bond rates. Finally, click on Moody's. You will see Baa rates going back to 1919 (Isn't that awesome?) You have to subtract out the ten-year bond rate and if you want to get that, you should find that on FRED as well. There is a iPhone and iPad app for FRED that you should download. It is free and you can download directly into Excel...
b. For the cap rates, you should try this site:
I am sure that there are better sources, but most of them require you to pay money. I am cheap..

If after all of this, you still want to read more about equity risk premiums, here is the link to my magnum opus (or something opus), the annual update I do on equity risk premiums:
Download the paper and browse through it. You will see much that is familiar. (The 2014 edition should be out in the next two weeks)
As for betas, the key thing to recognize is that it is a means to an end: a way of adjusting for relative risk. So, keep your eyes on the prize and don't let your disdain for modern portfolio theory get in the way of adjusting for risk and estimating value. The post class test and solution are attached.

Attachments: Post class test and solution

2/20/14 In the meantime, though, I thought it would make sense to do stop and look back, even though it has been only two weeks in the class. Here is what we have done:
Lectures: We are four sessions into the class, about 15% of the overall class. I know that most of you have been in class, but just in case, you have missed a session, please do try to watch the webcast of the session. You can get them in one of three places: (a) the webcast page for the class ( https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr14.htm), (b) the Lore page for the class, if you are enrolled in the class and (c) iTunes U (if you have the app and added the class). We have covered the Introduction to valuation lecture note packet and Lecture note packet 1 (Pages 1-84).
Pre-class and Post-class tests: As you probably know by now (unless you habitually come in five minutes after each class starts), we spend the first 5 minutes of each class on a start of the class test. At the end of each class, I also put up a post-class test and solution (which should take only a few minutes to work through) and relate back to the topics covered during class. If you have not tried these or were unaware that they existed, you can find them by going to:
Session 1:
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session1test.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session1soln.pdf
Session 2:
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/biastests.ppt
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2test.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2soln.pdf
Session 3:
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/kennecott.ppt
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session3test.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session3soln.pdf
Session 4:
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/risktest.ppt
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session4test.pdf
Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session4soln.pdf
Session 5:
Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/ERPtestspr14.xls
Post class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5test.pdf
Post class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session5soln.pdf
Weekly Challenges: These are weekly exercises, ungraded and optional, designed to stretch what was learned during the week to the next level (sometimes, I succeed, sometimes, I do not). We have had two weekly challenges so far:
Weekly Challenge 1:
Challenge: https://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkch1.htm
Solution: https://www.stern.nyu.edu/~adamodar/pc/wkch/wkch1.xls
Weekly Challenge 2:
Challenge: https://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkchnew2.htm
Solution: https://www.stern.nyu.edu/~adamodar/pc/wkch/wkch2new.xls
Weekly Challenge 3 (attached to this email, since I forgot to send it to you yesterday)
Challenge: https://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkch2a.htm
Data for challenge: https://www.stern.nyu.edu/~adamodar/pc/wkch/wkchdata.xls
Solution: Will be posted on Sunday
Valuation of the week: In keeping with my belief that you learn valuation by doing, not talking or reading, I will be putting up a valuation every week of the class. This too is optional and you are welcome to take my spreadsheet, change it to reflect your different assumptions and post it on a shared Google spreadsheet. We have had two so far:
Week 1:
Vale: Valuing a global mining company: https://www.stern.nyu.edu/~adamodar/pc/blog/Vale2014/ValeValuation2014.xls
Shared Google spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadGVHOUlwWi03aUpvZEpNcFhnYXY2eGc&usp=sharing
Week 2:
Twitter: A post-earnings valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/TwitterFeb2014.xls
Shared Google spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadFZwWldiZVliRVZhNFVWWFNYMXo0S1E&usp=sharing
Week 3
TSC/Comcast valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/TWCComcast.xls
Shared Google spreadsheet: https://www.stern.nyu.edu/~adamodar/pc/blog/TWCComcast.xls
Group project: By now, you should be in a group and have picked a company. (If not, please let me know). Assuming that you have picked a company, you should also have pulled up the financials for the company. In fact, if you are really on top of things, you should also have a risk free rate in the local currency and an equity risk premium. One approach that we started on Wednesday was the implied ERP and I did post a webcast on how the model is constructed and can be used:
Valuation tools webcast #1: Getting Data for Valuation
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/gettingdata.mp4
Valuation tools webcast #2: Estimating an implied ERP
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/ImpliedERP.ppt
Readings: With all this stuff to do, who has time to read? If you do, and have one of my books, you should be looking at the introductory chapters (on the philosophy and big picture of valuation) and on the mechanics of estimating the risk free rate and equity risk premium (chapters 7 &8 in investment valuation, for instance).
As you can see, it has been a busy three weeks, but if you can still catch up. Each week that you put if off will be a harder climb. Good news... you have a weekend ahead of you... Bad news... there will be a valuation tools webcast .
Until next time!

If you have picked a company and collected the basic data (see last week's webcast), you probably more data in front of you then you want. In particular, those of you who have picked US companies have a 10K to read, in all of its bulk. Today's valuation tools webcast is about reading a 10K, with the intent of valuing a company. You can get the webcast by going to:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4
The webcast is accompanied by some supporting material, which you can get below:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf
P&G 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/ProcterGamble10K.pdf
P&G valuation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls
This is a longer webcast than I would have preferred it to be.

If you get done with this, the next step is to get a riskfree rate in whichever currency you are working in. I have a webcast (that you may or may not remember from Corporate Finance) on how to do this:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
The webcast is accompanies by supporting material:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
The webcast uses the Moody's ratings and CDS spreads from February 2013 but I have also attached the updated CDS spreads (which I handed out in class last week) and the updated sovereign Moody's ratings.
The links are also available on the webcast page for the class and will be on iTunes U and Lore soon.

Two final quick notes. First, if you are having troubles with this class, please do come in and see me. If you are too intimidated to do so (Why? Am I that scary?), you should draw on Tomer Raved, who is the TA for this class. His contact details are below:
Tomer Raved, Email: Tuesdays, 4:30pm-6:00pm at KMC 7-100., Office hours: Tuesdays, 4:30pm-6:00pm at KMC 7-100.
Second, I don't mean to scare you but the first quiz is a week from next Wednesday (March 5). If you are interested in starting your preparation for the quiz, you can find every quiz 1 I have ever given in this class and there are a lot of them at the links below:
Past Quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf
Past Quiz 2 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xls
Until next time!


It is sunny and it is warm! I know that the latter is a relative statement, but then again life is full of relative judgments. Whatsapp is cheap at $42/user, relative to Facebook at $130/user. We know how much danger there is in going down that road, but it is so much fun to stroll down. Just in case you don't get enough of me in class and from the emails, here is the post that I had on the topic earlier this week:
I am also attaching the newsletter for the week! Until next time!

Attachment: Newsletter #3


I hope you had a chance to try the weekly challenge. If you did, you probably found it more an exercise in statistics than valuation and that is good. Statistics is a vastly under used tool in valuation. On a different note, we will complete our discussion of bottom up betas and discount rates this week. If you can find a beta page for your company (on Bloomberg or elsewhere) and the business breakdown for your company, you can see the contrast between the regression and bottom up betas for yourself. Until next time!

Attachment: Weekly Challenge solution


Today's class represented the final pieces of the discount rate puzzle. We began with a continued discussion of 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 continued with 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, even for firms that don't have traded bonds/ bond ratings. We also took a detour into estimating the cost of debt for firms that may receive subsidized debt from the government/ other entities. Finally, we looked at the costs of other hybrids and how to weight the different sources of capital to arrive at a cost of capital.

I am attaching the post class test and solution for today's class.

Attachments: Post class test and solution


Tomorrow, we start on our discussion of earnings, with two adjustments for consistency, one for operating leases (converted them from operating to financial expenses) and the other for R&D (converting from operating to capital expenses). This week's valuation is of Starbucks, where leases play a key role. I have two valuations of Starbucks, one with leases treated conventionally (as operating expenses) and one with leases treated as debt.
Starbucks valuation with conventional lease treatment: https://www.stern.nyu.edu/~adamodar/pc/blog/SBUXwithoutleases.xls
Starbucks valuation with leases treated as debt: https://www.stern.nyu.edu/~adamodar/pc/blog/SBUXwithleases.xls
To make sense of the numbers in the valuation, I have included two pieces of raw data:
Starbucks Financial Summary (from Bloomberg) for the last few years and including the Last Twelve Month numbers: https://www.stern.nyu.edu/~adamodar/pc/blog/SBUXsummary.pdf
Starbucks last annual report (from September 2013): https://www.stern.nyu.edu/~adamodar/pc/blog/SBUXannualreport.pdf
You will notice that I have estimated the equity risk premium for Starbucks using the annual report's breakdown of stores by region (and I thank Patrick Gunn for the idea, since he is valuing Starbucks for class).

You will notice that I get wildly different values per share, using the two views of leases (about $42 with leases treated as debt and >$60 with conventional lease treatment). The stock price is higher than both at $71. I have summarized the differences in inputs/outputs in the two valuations in the link below:
Comparison of SBUX inputs/outputs: https://www.stern.nyu.edu/~adamodar/pc/blog/SBUXcomparison.xls

If you have no idea what I am talking about, when I mention capitalizing leases, you may want to read the following paper I have on the topic:
Paper on leases, debt & value: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1390280

Once you get a chance to dip into the spreadsheets and change the numbers, please do go into the shared Google spreadsheet and post your answers:


Today's class looked at the 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.
3. 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 on Amazon
4. If you are interested in exploring effective tax rates, I have attached the the updated averages that I have for effective tax rates for US companies, by sector in January 2014.
If you are really interested in nailing down the basics of cash flows (and preparing for the quiz next week), please try the post-class test (with solution) that is attached but really do try the weekly challenge for this week. It is a great exercise in tying up loose ends.

Attachments: Post class test and solution, Weekly challenge #3


With the quiz coming up next week, you have probably put the project on the back burner. But just in case you are working on it (and it is great preparation for your quiz), here is where you should be. You should obviously have a company picked and been able to estimate the different pieces that go into the cost of equity: a risk free rate in the currency of your choice, an equity risk premium reflecting where the company operates and a beta, reflecting the businesses it is in. For your debt, you should have a pre-tax cost of debt, based upon an actual or synthetic rating and converted this pre-tax cost of debt into an after-tax cost with a marginal tax rate. Finally, you should be able to use this pre-tax cost of debt, in conjunction with the book value of debt, interest expenses and the "weighted" maturity of the debt to convert the interest bearing debt into a market value.

I also promised you some readings on forensic accounting and I always deliver. Here are the Amazon links for forensic accounting:
There are denser books on the topics but those are for forensic accountants. These books work for the rest of us. Until next time!


I know you are busy doing other stuff, but as the discussion shifts from discount rates to cash flows, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, I have put together three webcasts for this week:
How to compute trailing 12 month earnings: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
How to convert leases to debt: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Leases.mp4 (Uses Disney in 2012)
How to capitalize R&D: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4 (Uses Microsoft annual reports from 2012 & 2011)

They are all about 10-15 minutes each... and you can download the spreadsheets and supporting material by going to
I hope you get a chance (at least after the quiz) to watch one or more of these webcasts.


Last week, we completed our discussion of discount rates and moved on to talking about cash flows. Lots of little details to trip you up, but if you are methodical and remember first principles, you will be okay. I am attaching this week's newsletter. And dont't forget to try the weekly challenge!

Attachment: Newsletter # 4 (March 1


Next week brings the quiz, with all the angst and stress that quizzes usually bring. Note that the quiz will be in the first 30 minutes (1.30-2) of Wednesday's class and will cover everything through cashflows (about page 145 in the packet). We will not cover growth on this quiz. So ignore them on the past quizzes. What past quizzes, you ask? Here are the links:
Past quizzes: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf
Past quiz solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xls
It is open book, open notes and open iPad but not open laptops. (Sorry!) If you are going to miss the quiz, you need to let me know before Wednesday at 1.30.

We will spend tomorrow finishing the discussion of cash flows and then start on growth rates, by first looking at the usefulness (or lack thereof) of historical (past) growth. We will then move to both analyst estimates and what I like to term intrinsic or fundamental estimates of growth, which we probably will turn to after the quiz on Wednesday. Yes, there is class after the quiz.

Finally, the weekly challenge #3, which I have been nagging you to do, has a solution. I have attached it (with the rating spreadsheet that I needed to get the solution).


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. While you can use analyst forecasts of growth, they have historically not done much better than time series forecasts, perhaps because analysts wear multiple hats.

One final point. As you work through the past quizzes, you will notice a lot of problems that deal with country risk and cost of equity. You will notice that in some of these questions, the answer uses the weighted equity risk premium approach, where you compute the equity risk premium for the risky country or countries, and multiply by the beta. In others, I use the more elaborate lambda approach, with lambda estimated by dividing the proportion of revenues in the country (for the company) by the proportion of the average company in the market.
Cost of equity = Risk free rate + Beta (Mature market premium + Country risk premium(s)); the equity risk premium can be a weighted average across multiple countries.
Cost of equity = Risk free rate + Beta * Mature market premium + Lambda(s) * Country risk premium(s)
Which one should you use? If you are given the data on what the average company makes in an emerging market, I am nudging you towards using a lambda approach. If that is not given, use the more conventional beta approach. Also, if you see an equity risk premium of 5.5% being used when none is given in the problem, that reflects a time period when I used to let people look up the ERP in their lecture notes and that was the historical ERP at the point in time that these quizzes were written.

As for the quiz, it is in the first 30 minutes of Wednesday's class. There will be class after the quiz. So, please hang around, if you finish early. IF YOU WILL NOT BE MAKING THE QUIZ, I NEED TO KNOW BEFORE 1.30 ON WEDNESDAY AFTERNOON. If you are, it is open-book, open-notes but no laptops. You can use your iPads but no connectivity... I have attached the post-class test and solution.

Attachment: Post class test and solution

3/4/14 For those of you who were in my corporate finance class, you may remember that I did a review before each quiz. Unfortunately, with room and time constraints, I have never been able to do that for the Valuation class. However, a couple of semesters ago, I decided to use technology to do an end run around these constraints and did a webcast review session for the quiz. You can get the webcast by going to this link:
The supporting presentation for the quiz is at the link listed below:
In case you still have not been able to find the past quizzes and solutions, here are the links to those:
Past quizzes: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf
Solutions to past quizzes: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xls
Finally, if you were not in class yesterday, you probably have been looking for the webcast links. They just showed up this morning and I have posted them on the webcast page for the class. See you at the quiz tomorrow!

I know that you are busy preparing for the quiz but if you do get a chance later in the week, take a look at the valuation of Merck. I have assume that the company is in stable growth, growing 2% a year in perpetuity. I value the company twice, once with R&D capitalized and one with the conventional treatment of R&D. That allows me to isolate the effect of R&D. I will give away the punch line. The valuations suggest that Merck is over valued at its existing price and that Merck's R&D over the last decade has generated a return on capital of only 4% (which is less than the cost of capital of 7.60%). If you feel the urge to change numbers in the spreadsheets and make your own judgments, please do enter whatever you find in the shared spreadsheet:

Attachments: Merck: Annual Report, Merck: Valuation (with R&D capitalized), Merck: Valuation (with conventional accounting treatment of R&D), Merck: Evaluation of R&D


I told you it would be quick and the quizzes are ready to pick on the 9th floor of KMEC. The exams are face down, in alphabetical order, on the table just outside the front door to the finance department. The solution and distribution are next to it. Please take your exam and do not mess with the order. Since I graded the quizzes, if you have any issues, please do come and see me. I do make mistakes and if I do, I fix them.

Attachments: Solution as well as the distribution of grades for the class.


I won't ask you how the first quiz went because that may evoke the wrong response. The good news is that it is over.

If you were able to hang in there mentally and physically, we did complete our discussion of growth by looking at 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 three 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? The weekly challenge for this week revolves around fundamental growth. Try it, if you get a chance. I have also attached the post class test and solution for today's class. Hope you get a chance!

Attachment: Post class test and solution


I hope that most of you have picked up your quizzes. I will leave them out until Monday but please do pick them up, if you have not already. You are probably in no mood for more valuation, but if you are, I would spend some time estimating the "secret number" in valuation: the return on invested capital and/or return on equity. Here are the steps:
1. Start by getting the current year's operating income and net income. Do all of the things we talked about last week including
- removing any one time charges or income
- update the numbers to make them current
- see if you can find out the interest income earned on cash and multiply by (1-tax rate). If you cannot find it, just multiply last year's cash balance by the treasury bill rate during the year.
Your preliminary estimate of income will be:
After-tax operating income = Operating income (1- Effective tax rate)
Net Income from non-cash assets = Net Income - Interest income from cash (1- tax rate)

2. Go to the balance sheet for the prior year (if you are doing trailing 12 months, go to the same quarter of the previous year)
- Get the shareholders' equity (this can be negative for some firms)
- Add up the interest bearing debt on the balance sheet (short term and long term debt)
- Get the cash balance
Your preliminary estimate of invested capital
Invested capital = Shareholders equity + Total Debt - Cash
Your preliminary estimate of book value of equity in non-cash assets will be
Book equity from non-cash assets = Book equity - Cash

3. Adjust for leases & R&D
- Adjust the operating income and net income for leases & R&D
- Adjust the book debt for the PV of operating leases
- Adjust the book equity for unamortized R&D
Recompute your invested capital

4. Compute your ROE, non-cash ROE and ROIC
ROE = Net Income/ BV of equity
Non-cash ROE = Net Income from non-cash assets/ Book equity from non-cash assets
ROIC or ROC = After-tax operating income/ Invested Capital

You may get strange looking numbers. For instance, for some firms with large cash balances, your ROIC can be astronomical or negative. For young, growth firms, the ROIC and ROE can be negative. Don't freak out. You still have the power to override these numbers, when you make your forecasts for the future. In other words, what you really care about is ROE and ROIC on future new investments and you are not bound to use last year's numbers. If you are looking at industry averages for these numbers, they are on my website under updated data.

We also talked about items like goodwill and restructuring charges that can throw you off. If you are interested, here is the sleep-provoking paper of mine on ROE and ROIC that you will find absolutely engrossing (NOT!!!):

3/7/14 This week, we focused on estimating growth from fundamentals and built growth rates from accounting returns - return on equity and return on invested capital. Accounting returns can be messy and misleading. 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
I hope you get a chance to take a look at it.

Two very quick notes. First, the newsletter for the week is attached. Second, the second and third packets are ready to download online.
Look to the top of the page. The bookstore should also have a combined packet that includes packets 2 and 3 on their shelves right now, if you want to skip downloading and printing on your own.

Attachment: Newsletter #5 (March 8)


I hope that you had a chance to try the weekly challenge (I know.. I know.. No chance.. but no harm trying).... I have attached thes solution to this email. Just a heads up that this week, we will turn our attention to that big number in every DCF valuation, the terminal value, as well as how best to pick the right DCF model to value your company. If you want to get started on the DCF valuation for your company, it is a good week to get started or moving.

Attachment: Weekly Challenge #4 solution


The heart of today's class 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.
As for which model is right for you, use a firm valuation model if you believe that debt ratios will change over time or are not sure and reserve the dividend discount model for desperate times (when you lack the inputs to compute cash flows).
I have attached the post class test & solution for today's class

Attachment: Post class test and solution

3/11/14 Given that you just got your quiz back and probably want to get to work on your DCF valuation. So, I decided to go off on a tangent and do a fun assessment. Like me, you have probably been watching Bitcoin go from $13 to $1000 and back down to $640 and wondered not only what was driving the price but what exactly it was. I tried last weekend to make sense for myself in this blog post:
I must confess that I am still working on understanding bitcoin but do take a look at the post and try to make your own judgments on four issues:
1. Do you think Bitcoin is a currency?
2. If no, what is it? (An equity instrument, a credit card, a scam)
3. Would you buy Bitcoin for a transaction? (I have a list of vendors who accept Bitcoin, in my post, and lay out the process for acquiring Bitcoin)
4. Would you trade in Bitcoin at today's price?
Finally, I looked at five currencies: the US $, the Chinese Yuan, the Argentine Peso, Gold and Bitcoin as competing currencies and given my priors, I ranked them as follows from best to worst as a currency that I would like to be paid in or in my pocket in any part of the world: US dollar, Gold, Chinese Yuan, Bitcoin, Argentine Peso. Please make your own rankings. Once you have them, go to this shared google spreadsheet and give me your views:

Today's class was about 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 April 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 the weekly challenge for this week, though this is little chance that you will be able to do it, on spring break. I will give a longer window than usual for submissions, and not send you the solution until March 24. Just one more email later today with the to do list for the valuation and I will then leave you to your own devices (I promise).

Attachments: Post class test and solution


As you take for different parts of the world, I know that the last thing you want to think about is your DCF valuation. Anyway, I thought I would lend a helping hand:
1. Model building versus Model borrowing: This is not a modeling class and I am fine with you borrowing and adapting my models. If you decide to build your own model, keep it simple. Please do not use investment banking valuation models that you may have borrowed from a prior, current or summer job. Not only do they add detail, where you need none, but they often have fundamental mistakes built into them.
2. Which model should I use? First, go through the slides from a couple of sessions ago where we developed a roadmap for picking the right model. Once you have decided whether you want to use dividends, FCFE or FCFF, here is my suggestion. For companies where operating margins are not likely to change dramatically, use one of the ginzu models on my website. They are versatile and will do a lot a great deal of your dirty work (capitalizing R&D, converting leases to debt, taking care of management options) for you. For companies where margins are likely to change over time or companies with negative earnings, use the higrowth.xls spreadsheet (even if you do not expect high growth). In particular, stick with the following choices:
a. fcffginzu.xls: if you are doing a FCFF valuation of a firm that has positive operating income and you do not expect dramatic shifts in margins (and return on capital) over time
b. fcffsimpleginzu.xls: if you are doing a FCFF valuation for a money losing firm or a high growth firm or want to allow your margins to change over time.
c. fcfeginzu.xls: if you are doing a FCFE valuation of a firm that has positive net income and you do not expect dramatic shifts in margins and leverage over time
d. divginzu.xls: for financial service firms
You can find all four of these under spreadsheets on my website.

Let me clarify, though, what I would like to get from you when you turn it in:
1. Each of you can turn in your valuation individually. You do not have to submit as a group.
2. All I want is a base case valuation of your firm. It will be easiest if you submit the excel spreadsheet containing your valuation and include your assumptions page in the same spreadsheet.
3. There is no hard copy required and you can submit your DCF valuation spreadsheet electronically. But please do the following:
In the subject enter: "My perfect DCF Valuation". Do not deviate from the script or my filtering program will dump your email into my general email pile.
In the email text, specify the name of the company that you are valuing (yes, there are people who have submitted valuations of unnamed companies), the price per share that the stock is trading at on the day of your valuation and your estimate of value per share.
4. Your DCF valuation will not be graded. I will review the valuation and send you back your own spreadsheet with my comments embedded in the spreadsheet. Some of the comments will be suggestions (which you are free to ignore) and some will be stronger than suggestions (and these should probablyy not be ignored).
5. If you don't get back your valuation within 48 hours of submitting it, please send me another email to let me know. My filtering program sometimes works in mysterious ways.
6. If you get done before April 4, go ahead and send your valuation in early.
So, don't freak out about this deadline. It is more feedback on your valuation than judgment day...

Finally, if you are one of those people who likes checklists, I have attached one of those as well. Hope you find it useful.

Attachments: Spreadsheets, DCF to-do list


I hope that your spring break was great but the bad news is that it is almost over. I don't mean to be the skunk at your party, but it is my duty to remind you that your DCF valuation is due for feedback by April 4. If you are working on it or plan to work on it, you will undoubtedly find that errors you make on your terminal value can drown out all of the good work that you do in estimating your inputs. I have a webcast that you may find useful in checking your terminal value (or someone else's estimate of terminal value). I hope you get a chance to check it out.

Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/terminalvalue.mp4
Terminal value DCF (for use with the webcast): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvalueDCF.xls
Terminal value analyzer: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvaluecheck.xls

Finally, if you want to see how this works in practice, take a look at the attached equity research report on Tesla from Morgan Stanley. Skip through the first 40 pages (they are impressive but a distraction) and go to page 41 to the DCF valuation. Put the terminal value to the test (using both the EBITDA multiple and the perpetual growth model used by the analyst).


I hope that you had a great break and have made it back home to enjoy a picture perfect day in New York city. The newsletter covering the last two weeks is attached. While nothing happened last week, it may help remind you of where we are in the class and where we are going next.

Attachment: Newsletter #6


Hope you are back and raring to go (Right... But no harm hoping...)! Anyway, ready or not, we are back to work tomorrow. After tying up a couple more loose ends (complexity, debt to net out of firm value to get to equity value and employee options/restricted stock), we will start on a series of valuations. We will begin easy, using a stable growth dividend discount model to value Con Ed, move up the difficulty ladder to value 3M with a FCFF model before and just after the 2008 market crisis and follow up with a valuation of the S&P 500 at the start of 2013. We will then move into what I call the dark side of valuation, looking at difficult to value companies across the life cycle (from start up to decline), across sectors (financial service, cyclical, commodity) and across markets. If you are having trouble with your DCF valuation, odds are that we will address that issue in the context of valuing some other company in the next few sessions. I am also attaching the solution to the weekly challenge for this week. While you probably did not get a chance to work through the challenge, please do take a look at it since it relates to DCF's biggest number, the terminal value.

Attachments: Solution to weekly challenge


Today, we put the three final loose ends to rest. First, we examined whether and if yes, how to punish complex companies in valuations. Second, 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. Third, 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.
We then started on our first valuation, Con Ed, using a stable growth dividend discount model. To qualify to be valued with this model, we argued that a company had to meet three criteria: have a high payout ratio, have a fundamental growth rate less than that of the economy (or the risk free rate) and a beta close to one. We then valued 3M both before and after the 2008 crisis to show the impact that macro variables can have on intrinsic value. We moved on to value the S&P 500 using a dividend discount model and an augmented dividend discount model, with the latter suggesting that today's index level is defensible. We closed with a valuation of Amazon, using the valuation as a vehicle to talk about ways in which high growth companies can be valued. If you are interested in downloading the excel spreadsheets with these valuations, you can get them here:
I have also attached the post class tests/solutions for today!

Attachments: Post class test and solution


As promised, the valuation of the week is up and it is of Tesla. The place to start is with the blog post that I put up this morning on the valuation:
To make sense of it, you may want to retrace my steps and look at my valuation from September 2013:
You will find links to the DCF valuations in both posts. The raw data comes from Tesla's latest 10K:
Finally, if you do get a chance to make this valuation your own (by changing the assumptions you don't like), please go to the shared Google spreadsheet and enter your numbers (and what you would do):

Attachments: Tesla valuation


In today's class, we started with two conventional valuations, one of 3M and the other of the S&P 500. We then talked about 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. We then moved on to valuing mature companies, arguing that you need to value many of them twice: once with existing management in place (status quo) and once with new and revamped management. Overall, we are approaching the end of the DCF section of this class. If you have not printed off packet 2 of the lecture notes, please do so or buy the packet at the bookstore (you will get packets 2 & 3 consolidated). We will be getting to it next week. I have also attached the weekly challenge for this week and the post class test and solution. I will be in Brazil for the next couple of days doing a valuation seminar but rest assured that I will find ways to harass your from there as well, over the next few days.

Attachments: Post class test and solution


am sorry for sending you two emails in a day, but I did not attach the weekly challenge to the last email. This week's challenge revolves around management options and how to value them. Please give it a shot and you can use the employee option spreadsheet that I have attached. Until next time!

Attachments: Weekly challenge on employee options


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/fcffginzu2014.xls
b. fcffsimpleginzu.xls: For a money losing firm or a high growth firm or want to allow your margins to change over time. https://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2014.xls
c. fcfeginzu.xls: For valuing a firm using the FCFE approach: https://www.stern.nyu.edu/~adamodar/pc/fcfeginzu2014.xls
d. divginzu.xls: for financial service firms and perhaps REITs/MLPs: https://www.stern.nyu.edu/~adamodar/pc/divginzu2014.xls

Attached: Valuation Checklist

3/28/14 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 this week's weekly challenge is 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.

News on two fronts. The first is that the solution to the option weekly challenge is attached. If you are at all confused about valuing employee options, I would check it out. The second is an update on the week to come. We will start tomorrow by looking at other companies on the dark side of valuation, including distressed companies, cyclical companies and emerging market companies. On Wednesday, we will (hopefully) finish our discussion of packet 1. If you can, please download, print or buy packets 2/3. They are both ready to download online:
Packet 2: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/packet2spr14.pdf
Packet 3: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/packet3spr14.pd
Also, not to be a nag, but please do work on your DCFs and get them to me by Friday.

Attachments: Weekly Challenge solution & Option value


In today's session, we started with the depressing job of valuing declining and distressed companies, moved on to emerging market companies and ended with financial service companies. We are almost to the end of the DCF process now. Next session, we will look at the difference between value and price, what it tells u and what it does not. The post class test and solution are attached.

On a different note, please do work on your DCF valuations this week and try to get them to me by Friday. I could draw lines in the sand (by 5 pm Friday, or else) but I will not. So, do your best and I will do mine.

Attachments: Post class test and solution


You may have read the story about Citigroup failing its stress test last week (and its stock price dropping 5%):
This week's valuation of the week is of Citi and it is a very basic, very conservative valuation. It uses a stable growth dividend discount model, with an input for the capital shortfall that you think Citi has to make up before it will be allowed to increase dividends. I assumed, based on news stories, that it would be about 10% of its book equity, which reduces its ROE and increases the number of shares outstanding. The spreadsheet is attached. I will give away the suspense. Even assuming the worst as I have, which is that capital will be needed and the low ROE that is generated as a result (6.08%) will persist forever, even though it is below the cost of equity, I end up with a value per share of $43. If the company is even remotely able to improve its ROE towards its cost of equity, its all gravy.

If you want access to the raw data, I have links to the most recent 10K and to a sheet breaking down Citi by geography (useful in estimating equity risk premiums)
10K: https://www.stern.nyu.edu/~adamodar/pc/blog/citi10Kfor2013.pdf
Geographic breakdown: https://www.stern.nyu.edu/~adamodar/pc/blog/citiregional.pdf

Once you have done the valuation, you can enter your numbers in the shared Google spreadsheet:

Finally, remember that we used Citi to illustrate the problems of complexity. (The 10K has been slimmed down to 324 pages). I found this news story about Citi interesting, because it shows you how the creators of complexity often refuse to take responsibility for doing so:

Attachment: Citigroup stable growth dividend discount model


In today's class, we finally put to rest DCF by having a discussion of the difference between value and price, why they might be different and when the gap will close. Before entering into that discussion by talking about the values of intangible asset companies and commodity/cyclical companies. With the latter, we noted the importance of keeping separate our macro views (about the economy or commodity) from our micro views, and the use of Monte Carlo simulations to deal with uncertainty. During that discussion, I talked about a paper that I have on statistical distributions and the link is below:

We ended the class by starting the discussion of multiples and comparable firms. We will continue that discussion after the second quiz. I have put the review session 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!

Attachments: Post class test and solution

4/3/14 I know that it seems like I am piling on, with your DCF due tomorrow and your quiz on Monday and I am sorry. However, I will not harass you too much today.
1. DCF: Please remember to put "My Perfect DCF" in the subject, when you send your DCF to me. All you have to send is your spreadsheet, with questions and comments embedded in it (if you have any)
2. Quiz: The quiz review, presentation and links to past quizzes were in yesterday's email. In case you did not get it, you can also get them by going to
4/3/14 Sorry for second email today. When you submit your DCFs, please remember to list the current price and your estimated value per share in your email. It gives me a sense of what I am looking for or at.
4/4/14 As I check my mailbox, I see that most of you have turned in your DCF valuations. I appreciate the effort and will get them back to you as soon as I can. There is no valuation tools webcast this week, as we take a break to get ready for the quiz. But I will see you Monday at 1.30. Please don't be late and if you are going to miss the quiz, let me know ahead of 1.30.

I will keep this brief. I have attached the newsletter to this email. In addition, I have gone back to the past quizzes and added finals from 2012 and 2013 to them, just in case you don't have enough problems to work through.

Attachments: Issue 7 (March 29), Past Quiz 2s, Solution to Past Quiz 2s


By now, you should have received back your DCF valuation back. If you have not, please send it again to me. 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.

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 3.5% 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 3.5%, 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 5% (January 2014) or 5.15% (April 2014). 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.

Attachments: Change in Growth spreadsheet, Terminal value checker, Valuation Post Mortem


I am sorry that I was not able to get the quizzes done before I left today but I had a meeting at 3.30 that took up too much of my time. I am done and will put them out tomorrow morning at about 9.30 am. I will post the solution and score distribution at that time. In today's class, we continued our discussion of multiples by looking at the distributional characteristics of multiples (skewed, shifting over time but lots of commonalities across markets). We also looked at how to back out the variables that determine multiples by going back to DCF fundamentals, and used these fundamentals that drive PE ratios. More on that in the next class!

Attachments: Post class test and solution

4/8/14 If the last problem on the quiz is still giving you nightmares, you may not want to take a look at this week's valuation of the week, but it is a fuller valuation of Yahoo! (though the quiz question came surprisingly close). The best place to start this valuation is with this summary page:
In the page, you will see links to three intrinsic valuations: Yahoo (parent), Yahoo Japan and Alibaba.
Valuation of Yahoo (S): https://www.stern.nyu.edu/~adamodar/pc/blog/YahooParent.xls
Valuation of Yahoo Japan: https://www.stern.nyu.edu/~adamodar/pc/blog/YahooJapan.xls
Valuation of Alibaba: https://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaApr14.xls
The last one is based on very primitive data and will be revisited when the prospectus comes out. I also have a master page, where I compute a value per share for Yahoo! (and let you play around with different ways of estimating the values of Yahoo Japan and Alibaba).
Master valuation of Yahoo!: https://www.stern.nyu.edu/~adamodar/pc/blog/YahooMaster.xls
Bottom line: My estimate of value per share for Yahoo! yields an estimate of about $50/share, well above the $34 it is trading at today. I may be missing something, but take a look and if you see a missing piece, let me know.

As promised (or threatened), the mystery project is ready for you. It is a group project, due a week from today (Friday, April 26 at 5 pm). The assignment is a pretty straightforward one, and the write up should be brief and to the point. Be creative, use statistics as a tool and don't be afraid to be different.... I have attached the project description and the data that you will need (it is also online on the webcast page for the class and under the main menu for the class... will also be posted on Lore and iTunes U).

Attachments: The mystery project, Data for mystery project


In today's class, we extended our analysis of multiples by first looking at PE and PEG ratios, then moving on to PBV ratios and finally examining enterprise value multiples: EV/Invested Capital, EV/EBITDA and EV/Sales. In particular, we noted that the drivers for EV multiples are analogs of the equity multiples: growth in operating income replacing growth in net income, reinvestment rates replacing payout ratios, ROC replacing ROE and cost of capital replacing cost of equity. There is a simple way to find the companion variable (the key driver) for a multiple. With an equity multiple, you can get this variable by dividing the net income by the denominator of the multiple. With an enterprise value, you divide after-tax operating income by the denominator of the multiple. With the EV/Sales ratio, this yields the after-tax operating margin as the determining variable. We used that measure to evaluate the value of a brand name, by comparing the pricing of Coca Cola with its current operating margin with its value with a generic margin.
Finally, I am attaching the post class test/solution for today as well as the weekly challenge for this week. I will post the latter on Lore, if you want to try it.

One final point. I seem to have completely mangled the due dates on the Mystery project. So, let me resolve the confusion. The project is due on April 25, 2014 by 5 pm. That should give you little more than two weeks to work on it.

Attachments: Post class test and solution, Weekly challenge

4/10/14 I know. I know. No rest for the wicked! You can take a little break from your project, since you should have your DCF back by now. (Incidentally, I went through the perfect DCF folder and it looks like I have returned your DCF). If you sent your DCF and did not get it back, please send it again. I am sorry if you have sent it already and I did not respond but last week was a monster one for emails and anything more than three days old is buried behind hundreds of other emails.
4/11/14 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:
Hope you find it useful!

Just a quick note. Last week, we continued to explore the determinants of multiples, looking at PE ratios, PEG ratios and EV multiples. In the process, we uncovered the unsurprising reality that the determinants of multiples are cash flows, growth and risk, the same variables that determine intrinsic value. Next week, we will finish our discussion of relative valuation. In fact, you have all the tools you need to do your mystery project, if you are so inclined. The newsletter for the week is attached.

Attachment: Newsletter # 9 (April 12)


In the week to come, we will continue and complete our discussion of multiples, by looking at extending the comparable list to the entire market. On Wednesday, we may be able to look at asset based valuation, including liquidation and sum of the parts valuation. I have attached the solution to this week's weekly challenge (that you may or may not have looked at). Until next time!

Attachment: Weekly challenge #7a Solution


In a change of pace, I thought I would do a relative valuation this week and I picked a high profile company (Amazon) to do it. Given its large market cap and low operating income, the conventional wisdom is that Amazon must be over valued. Well, as you will see in the link below, that is not the case:
I have attached the raw data that I used to make my judgments and you can play with it to see how sensitive my conclusions are to outliers. If you do get a chance, please make your own relative valuation judgment and put it into this shared Google spreadsheet:

Attachments; Global Internet Retail (32 firms), US large retail (market cap> $10 billion) (22 firms)


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 site 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.
Finally, here is a fun article on how relative valuation is used in hotel valuation (It can be based on how much a can of soda at the hotel costs... I am not kidding)
We then moved on to asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and closed the class by starting on the process of valuing private businesses. Finally, the third packet is available to be printed off online. (If you bought the second packet in the book store, it already includes packet 3... So, you are all set). Post class test and solution is attached, as is the weekly challenge for this week.

Attachments: Post class test and solution


For the moment, I expect that you are working on the mystery project. I don't have much specific advice for you on the project, but remember that your mission is to do a relative valuation (not an intrinsic value). That gives you a lot more leeway in how you deal with items. For instance, if your were doing DCF valuations, you would have to value the employee options, using option pricing models, and subtract from the value of equity to get to value of common stock. With multiples, you may adjust for options much more casually (adjusting the number of shares for options outstanding, for instance). It will also mean that if you do not have the data to do something correctly, you may have to settle for an approximation. In case, the confusion about the due date is still persisting, the mystery project is due on April 25 at 5 pm.

I have also 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:


I hope that you are getting a chance to enjoy the weather today, even if it means lugging your laptop to the park. Anyway, the newsletter for the week is attached. And keep plugging away at the mystery project.

Attachment: Newsletter 10 (April 19)

4/20/14 If you did try the weekly challenge, the solution is attached. Even if you did not, you can take a quick look at it. Tomorrow, we will continue our discussion of valuing private businesses by looking at illiquidity and key person discounts in a private-to-private transaction, how value changes when the buyer is a public company and close this section with a discussion of how valuation for an initial public offering and to a venture capitalist. We will be beginning on lecture note packet 3. If you have not downloaded it yet, please do so.
If you did buy packet 2 from the bookstore, it is a combinations of packets 2 and 3. So, you are all set.

In today's class, we put the finishing touches on private company valuation by looking 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. We then started on real options, arguing that they add "premiums" on to intrinsic value and the reason for those premiums. We will continue this discussion on Wednesday!

Attachments: Post class test and solution

4/22/14 I had promised you the IPO valuation of Alibaba but the prospectus seems to be on hold. Perhaps, this evening. I will wait until it is out to make the final valuation.

In today's session, we started with a quick overview of option pricing and tests for the viability of real options. We then tried applying (with mixed results) option pricing to value a patent. With a patent, we argued that the fact that a patent is not viable today does not imply that the patent is not valuable. Valued as an option, patents have values in excess of their discounted cash flow value, though the magnitude of the premium can be a function of how competitive the market place is. I have attached a simple option pricing model that I use to value patents. I also have attached the post class test & solution.

Attachments: Post class test and solution, Product option


I know that you have neither the time nor the inclination to deal with a weekly challenge. However, when you get done with your mystery project, you may find this weekly challenge that deals with the issues that you face when valuing private businesses to be useful in preparing for the next quiz. I know that we have not dealt with the voting right and non-voting right shares in class yet (and it will not be on the quiz) but give it a shot. The solution will be posted on Sunday.

Attachment: Weekly challenge #9


The review session for quiz 3 is up and running! You can get it on the webcast page for the class. The link to the webcast is below:
The slides for the presentation are at this link:
You can find the past quiz 3s and the solutions below:
Past quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
Solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls
Remember that the earlier quiz 3s included a big chunk of real options, which are not covered on this quiz. So, stick with the relative valuation and private company valuation questions.

On a different note, I hope that your mystery project is progressing. The deadline remains tomorrow at 5 pm. When you do submit your project, though, please follow these guidelines:
1. Electronic format: Please try to create a pdf file of your submission. It is easier for me to work with, comment on and grade.
2. Cover page: On the cover page, please include the names of everyone in your group (in alphabetical order) and the following information: the multiple or multiples you used, your five cheapest stocks, your five most expensive ones and your buyout target.
3. Format: Please keep your write up short and to the point. Explain why you picked the multiple that you used, how you used that multiple to find cheap and expensive stocks and what process you used to find your buyout target. Should not take more than 2-3 pages.
4. Excel spreadsheets: You don't have to add on all of your excel spreadsheets and worksheets.
5. Mail subject: In the subject, please enter "No mystery here", when you send your submission.
Thank you !


I know that you have absolutely no time for this, but just in case, I have a webcast on valuing patents as options:
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


Thank you for getting your mystery projects in on time. You should be getting them back soon (or may already have them back). The weekly newsletter is attached and the third and final quiz approaches.

Attachment: Newsletter # 11 (April 26)


By now, you should have your mystery projects back. If you have not, please send it to me again. Looking over your analyses, here are some of the overall impressions I have:

1. Multiple used: The two most widely used multiples were PE and EV/Sales. EV/EBITDA was close behind. In making your choices, the following factors seemed to come into play: (a) the regression R-squared (higher R-squared) (b) differences in accounting standards across markets (led people to choose Revenue or EBITDA over EPS) (c) Number of firms that you would lose in the sample (steered away from multiples that cost you too many firms). I think that these are all legitimate factors. 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 twogroups 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.

2. Regressions: Almost everyone followed the script and ran the regressions... 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 rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets. Four 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.)

3. 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. 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. Good to know, but perhaps not surprising. However, there were some companies that showed up more frequently than others.

Company % of groups that found it undervalued
Gazprom 61.54%
SAIC Motors 46.15%
China Unicom 38.46%
Panasonic 38.46%
Surgutneftegas 30.77%
McKesson, OAO Novatek, Samsung, Toyota 23.08%
We all know why Gazprom is on top of the list. Let's call it the Putin effect.

Most over valued firms
Overvalued company % of groups that found it over valued
Adobe 46.15%
Amazon, Fanuc 30.77%
GE, Naspers, Industries Qatar, SABMiller 23.08%

Amazon took quite a fall on Friday. So, you were remarkably prescient.

4. 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 choses. Only two were picked by more than one group: Canon and McKesson. 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.

4/27/14 I know that you are ready for the quiz. If you did try the weekly challenge, here is the link to the solution:
After the quiz, we will continue with our discussion of real options by looking at natural resource options and the option to expand. OnWednesday, we will complete the real options section.

In today's class, we completed our discussion of the option to delay by looking at natural resource options, i.e., undeveloped reserves owned by natural resource companies. We argued that these reserves will be under valued using conventional DCF approaches, which ignore the optionality embedded in them, and that the option premium would increase with the uncertainty about natural resource prices. We also looked at two more investment options: the options to expand into new markets or products and the option to abandon. Both options can be used to justify taking bad investments, but the option to expand derives its value from exclusivity. I am attaching the post-class

Attachments: Post class test and solution


The quizzes are done and can be picked up outside the front door to the finance department. The solution is attached, as is the distribution. As always, if you feel that you've been cheated out of a few points, please talk to me.

Attachments: Solution & distribution of grades


You probably know that I have a long-standing obsession with all things Apple. That applies not only to the company's products but to its stock. Last week, Apple reported earnings and the news about its operating performance (which was middling) was drowned out by a whole host of other actions that it announced: an increased dividend, a stock buyback and stock split. The stock is up almost $70/share in the days since. I valued Apple for the thirteenth time in three years the day after the earnings announcements. Today, I thought it would be fun to pull together all of the valuations that I have done of the company over the last three years and super impose them on the price chart for the stock. I posted the results on my blog this morning:
I have posted links to all of the valuations that I have done of Apple in the last three years.

If you get a chance, please read the post. If you feel so inclined, my latest valuation of Apple is attached. Download it, make the changes you would make, and once you get your estimate of value, use the shared Google spreadsheet:
Until next time!

Attachments: A valuation of Apple on April 24, 2014 (just after earnings report)


We started today's class by looking at valuing 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, and this week's weekly challenge, if you are so inclined.

Attachments: Post class test and solution


There is good news and bad news in this email. The good news is that the end of the semester approaches. The bad news is that the end of the semester approaches. As promised, here is your to-do list on the rest of the project. It is a long email but I hope it helps.

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 (Wednesday'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.

Attachments: Equity as an option

5/2/14 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.

The final newsletter is attached. I won't add my usual nag about working on your project, since the calendar will do it much more strongly than I can. Hope you sit outside in the sun, while you do your relative valuation. It is too nice a day to let go to waste.

Attachments: Newsletter #12


Next week, we will cover the last two pieces of valuation. Tomorrow, we will look at what is different and not different about valuing companies for acquisitions. We will start with the sorry track record of acquisitions and argue that at least some of the failures can be attributed to ignoring first principles in valuation. To set up for the class, I would like you to go through the attached pre-class test. Since the entire session will be built around these tests, both you and I will gain, if you can spend the 5-10 minutes it will take to review the questions and make your choices. On Wednesday, we will switch hats and move from estimating value (which is what we spent all semester doing) to ways of enhancing value. I think that this session will bring together corporate finance and valuation and be a foundation for those of you who are thinking about starting your own businesses, consulting or going into other disciplines.

Attachment: Acquisition Tests


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 deal and see if you can break it down into its components. Post class test and solution are attached. I am also including the solution to the weekly challenge for last week on patent valuation.

Attachment: Post class test and solution, Weekly challenge #10 solution