The emails for this class will be collected on this page, arranged chronologically. Have fun with them!
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 Uber worth $70 billion? Is there a market bubble? What is the value added or destroyed by the Kardashians? Are the Dallas Cowboys really worth more than the New York Yankees? Is there a Trump effect on markets and if so what is it? If you have not visited my blog, I put my thoughts down on these issues (though I am still working on the Kardashian valuation):
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 page:
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
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
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:
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". Finally, if you really want to take a leap, try my newest book, Narrative and Numbers at
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
One of the themes of this class will be that while your valuation looks like a collection of numbers, the story that holds these numbers together is the glue. Consequently, to get a handle on valuation, you have to learn to navigate that space between stories and numbers and your skills have to be broad. I know that you are still on break and that the last thing you want to do is reading, but if you do get a chance, please read this post that I have on my blog:
Just a few quick notes leading into class on Monday:
We are officially rolling. If you enrolled in the class in the last couple of days, you did miss the first two emails but they are already in the email chronicle, in case you are interested:
|1/24/17||If you are going to do a valuation of Star Wars, I think it makes complete sense to start with Yoda talk. So, for your first valuation of the week, let’s have some fun. I have always been a Star Wars fan, and like other fans, I was a little worried when Disney bought Lucas Films (and with it the rights to the Star Wars franchise) for $4 billion a few years ago. Disney was explicit about its plans at the time, and said that it planned to produce three major Star Wars movies, continuing the story, and three side stories (like Rogue One) filling in history. I went to see Force One in December 2015 and wrote this post on my blog about what I thought the value of Star Wars was at the time;
I assigned a value of almost $10 billion to the franchise, with a big chunk coming from the side products (toys, software, apps) coming from the franchise. You can download the spreadsheet that contains the valuation here:
When I wrote the post, Force Awakens had been out in theaters only a few days and I estimated box office revenue of $2 billion for the movie. Rogue One, of course, had not been released yet and I estimated revenues of $1 billion. Force Awakens is now one for the history books, with global revenues of just over $2 billion and Rogue One just crossed the $1 billion threshold.
Updated box office for Force Awakens: http://www.boxofficemojo.com/movies/?id=starwars7.htm
Updated box office for Rogue One: http://www.the-numbers.com/movie/Rogue-One-A-Star-Wars-Story#tab=summary
Armed with this additional information, here is what I would like you to do. Go into the spreadsheet and reestimate the value of the Star Wars franchise. It may be only tweaks but give it your best shot. Once you have a value, go into this shared Google spreadsheet:
Enter your numbers and lets see how the distribution of values evolves over time. And since this is a Star Wars post, might as well end with some good advice:
did not mention this in the opening session but at the start of every class for most of the semester (other than the three quiz days), there will be a start of the class test, where we will look at questions that preview the material that is coming in the rest of the class. (I know… I know.. This sounds backward, but trust me on this one).We will start class today with a series of scenarios, where you have to decide whether you will be biased to push your values up or push them down. To give you chance to look at the scenarios before you get hit with them, I am attaching the start of the class test for tomorrow. With each one, think of the direction of the bias and also think about the mechanism that you will use to bring that bias into your numbers. (As an owner, you may inflate the market potential for your product..)
Attachments: Valuation bias: A test, Post-class test and solution.
It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
On a different note, I told you that I would be experimenting with some neat online technologies through the class. If this is not your think, that’s fine but the platform that I am trying out is called Acadly. You can learn about it by going to:
Three quick notes.
2. There are three TAs for the class, all of whom have gone through this class in prior semesters. Their names, email addresses and office hours are listed below:
3. As should have been obvious, this is a big class with more than 300 people in it. That makes it a great venue for announcements that you may want to make about club activities or events. I will open each class session by allowing one announcement. If you want to make an announcement, please sign up for it as well in the Google shared sheet below:
I hope that you are enjoying your first weekend back at school. I will intrude with a couple of notes. First, the first newsletter for the class is attached. As I said, there is usually not much news in these newsletters. Think of it more as a GPS for the class, telling you where we went last week and laying out our plans for the week ahead. If you get a chance, take a look at it. Second, we will be starting with the first lecture note packet in class on Monday. Please have it with you for class. Have a great weekend!
Attachment: Issue 1 (January 28)
First things first. This week, we will be delving into the mechanics of discount rates, starting with the risk free rate and then moving on to the equity risk premium. They are both central to valuation and we live in unusual times, where the former, in particular, is doing strange things.
Second, 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. The question is at the bottom of the page.
Third, I was checking out the Google shared spreadsheet on my first valuation of the week. Well done! I see 81 of you have tried to value the franchise. You can still do it, if you have not done it already. If you have already forgotten about it, you can find the details on the webcast page for the class.
Attachment: Cash Flow Test (for class on 1/30)
|1/30/17||Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
I hope that the discussion of riskfree rates a left you fairly clear about what to do next. In case, you are still confused, this is the next step in the process:
1. Pick a company (in case you have not already).
2. Determine a currency that you will value the company in. Once you have decided on the currency, find a riskfree rate in that currency. If your company is a US or European company, you just got lucky. Either take the easy way out and use the US T.Bond rate as the dollar riskfree rate and the German 10-year bond rate as the Euro riskfree rate, or adjust them for the default risk you see in each sovereign.
If you are valuing a company in an emerging market in the local currency (be brave), your job is a little more complicated.
2a. Get the longest term government bond rate you can get in the local currency. You can check out the Economist (look at the tables towards the end of the publication and at the long term interest rate). You can also try this site for long term local currency government bond rates:
2b. Get the local currency rating for the country by going to the moody's web site: http://www.moodys.com (Look under sovereign ratings). Estimate the default spread given the rating by downloading the country default spread spreadsheet that you can find at the link below
On Wednesday, we will go through the mechanics of converting a government bond rate into a risk free rate.
I have a blog post on risk free rates that may help clarify things better:
The post class test and solution are also attached
|1/31/17||Since we are still not into the nuts and bolts of valuation, I decided that we should spend this week too on a “fun” valuation”, tied to Super Bowl weekend. This is a throwback in time, but it is a valuation and pricing that I did of the Los Angeles Clippers, when Steve Ballmer paid $2 billion for the team. I explain how I value the Clippers and how I would value any sports franchise in this post:
You can find my valuation of the Clippers in this link:
You can do one of the two things in this week’s valuation challenge.
1. You can take my Clipper valuation and make your own assumptions (there are relatively few) and value the Clippers as of June 2014.
2. The other is more challenging but could be more fun. I have raw data on sports franchises below:
For MLB, NFL, NBA and NHL: https://www.stern.nyu.edu/~adamodar/pc/blog/SportsTeamData.xlsx
For European soccer teams: https://www.stern.nyu.edu/~adamodar/pc/blog/eurosoccerrawdata.xls
For IPL (Indian cricket) teams: https://www.stern.nyu.edu/~adamodar/pc/blog/IPLrawdata.xls
The IPL and Euro soccer data is a little outdated and you are welcome to update them, if you want. If you are a fan, you can pick your favorite team and using the raw data in these spreadsheets, try to value and price your franchise. Once you have that number, please do share what you find on the Google shared spreadsheet:
In the last column, I ask you how much you would pay to own the team. For the Clippers, I have set that equal to my value. But if I were valuing the Yankees, I might pay a premium because I love the Yankees. They are not just an investment and I will pay an ego or fan premium.
We started the class by completing the discussion of risk free rates, exploring why risk free rates vary across currencies and what to do about really low or negative risk free rates. The blog post below captures my thoughts on negative risk free rates:
|2/2/17||In class on Monday, we started with the claimholder consistency principle, arguing that there are two ways to value equity: discount cash flows to equity at the cost of equity or discount cash flows to the firm at the cost of capital and then subtracting out debt. Done right, I argued that you should get the same answer. I hope that you had a chance to try the first weekly challenge. It starts simple but it will test you on your implicit assumptions about valuation. It does not have to be turned in to me and it will not be graded. I will post the solution on Sunday and you can check your answer out. Just another prod on the project. Please pick a company and find a group soon. If you are on the orphan list and are still having trouble finding a group, let me know.|
|2/3/17||Just two quick notes. The first is that I did put up an in-practice webcast today. It is a very basic webcast on how to read a 10K, using P&G as my example. The links are below:
Downloadable video: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4
YouTube Video: https://youtu.be/UzUJzdn7c2w?list=PLUkh9m2BorqmRAGzJb5OIvTAKZZu9HWF-
P&G 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf
P&G Valuation (excel spreadsheet): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls
The second is that I am still working on getting you access to S&P Capital IQ and should be able to give you an update later. It will make your data collection a lot easier.
As you get ready for Super Bowl weekend, I thought I would get my dibs in early. I have attached the second newsletter to this email. Also, if you do get a chance, please try the weekly challenge that I sent you a couple of days ago. (Since for many of you, that seems like decades ago, I have attached it again). And please do nail down a group and a company to value!
Attachment: Issue 2 (February 4)
|2/5/17||I am sure that you are not checking your emails in the middle of a Super Bowl party, while Lady Gaga is performing , or are you? In case you are, the solution to the weekly challenge is attached and if the Patriots don’t score soon after the second half starts, it may be more interesting than the game. Please take a look at it, and in case you gave it your best shot, compare it to your answer. This week, we will continue our discussion of equity risk premiums by introducing the notion of an implied equity risk premium in class tomorrow. Since the concept takes a little getting used to, you may want to read ahead by looking at this blog post on equity risk premiums:
On Wednesdays, we will turn to measures of relative risk (including betas) and move on to computing costs of equity.
In the session today, we started by doing a brief test on risk premiums. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. I am attaching the excel spreadsheet that I used to compute the implied ERP at the start of February 2017. Play with it when you get a chance. Post class test and solution attached.
|2/7/17||Sorry it took me so long but the valuation of the week is up and this time, we have a real company, Apple. I have gathered the facts in this page:
This valuation has a little bit of everything that we have talked about in the class - the need for a story, connecting story to numbers and why value can be different from price. It also has enough of the details that we talked about - risk free rate, equity risk premiums and a preview of betas. Please give it a shot and after you have, download the spreadsheet with my latest valuation of Apple:
Feel free to disagree with my story and make it yours. Change the inputs in the spreadsheet and see what happens to the value.
I hope that we can get a couple of hundred of you valuing Apple before next week.
In today’s class, we started by reviewing the pitfalls of regression betas and went on to talk about bottom up betas, focusing on defining comparable firms and expanding the sample. I did make a big deal about bottom up betas, but may have still not convinced you or left you hazy about some of the details. If so, I thought it might be simpler to just send you a document that I put together on the top ten questions that you may have or get asked about bottom up betas. I think it covers pretty much all of the mechanics of the estimation process, but I am sure that I have missed a few things.
For this week’s weekly challenge, you will be looking at equity risk premiums. There is a lot of mythology about equity risk premiums and the best way to separate the truth from fiction is to look at the data. That is what we do in this week’s challenge. The attached dataset contains my estimates of implied ERP each year, with the T.Bond rate, the T.Bill and the Baa bond default spread each year. Your mission, if you accept it, is to play Moneyball with the data and to try and answer a few questions:
I want to check to see where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I hope that you have estimated a risk free rate in the currency of your choice. Once you have that, please try the following:
Speaking of valuation (and that is always all I am speaking about), I don’t know whether you have had a chance to see the valuation of the week yet, but if you have not, please take a look. In fact, you can supplement it with this blog post that I put up on Apple a few minutes ago (fresh off the press):
I am not sure whether this will help you keep on track or freak you out, but I have opened a Google shared spreadsheet with everyone in the clas on it for the project. You can go in and input the data on your company as you get deeper and deeper into the project.
|2/10/17||First things first. I have been told that you should be able to access S&P Cap IQ data now. Since I take everything that I am told with a grain of salt, could you check and make sure that this is true. (It should be a live link under Sternlife.) Two tools webcasts are up this week. The first one is on risk free rates and the second on implied equity risk premiums.
Risk free Rates
Moody’s ratings (3/13): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/Moodys.pdf
Sovereign CDS spreads (3/13): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/CDSfeb13.pdf
Implied Equity Risk Premiums
The supporting materials are below:
Implied ERP spreadsheet (from February 2013): https://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb13.xls
S&P on buybacks (from earlier this year): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500buyback.pdf
S&P 500 Earnings: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500eps.xls
I hope that you get a chance to watch one or both!
The third newsletter is attached and I hope that you get a chance to browse through it. Also, I am going to nag you to go into the Google shared spreadsheet and start entering details of the company you have chosen:
Attachments: Issue 3 (February 11)
I hope that your weekend went well, bad weather notwithstanding. I also hope that you got a chance to try out the weekly challenge that I sent you. If you did, you got to test out your rusty excel statistics tools or perhaps Minitab. I am attaching both the weekly challenge and the solution. Give it a look, when you get a chance.
Attachments: Weekly Challenge #2a solution
In today’s class, we started with computing debt ratios for companies and how to deal with hybrid securities.. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis:
We then moved on to getting the base year's earnings right and explored several issues:
|2/14/17||This week, I will be valuing a company that most of you probably have not heard off. In fact, I had never heard of the company until last Thursday, when I decided to pick a company to value for my Nigerian trip (coming up in two weeks). The good news that comes out of this ignorance is that I had absolutely no preconceptions about the company, unlike my valuation of Apple last week, where my connections to the company run deep and sometimes get in my way. The bad news is that I know nothing about the company’s management and its products and very little about the Nigerian economy. Keep that in mind as you read the narrative that I have set up for this week’s valuation:
After you have read the narrative, you can download the spreadsheet that contains the valuation here:
Even if you are as ignorant as I am about the company, I would encourage you to play with the numbers just to get a feel for what growth rates and costs of capital look like in a high inflation currency (Nigerian Naira). Look at the story that I am telling about the company and see if your story is different and if so, how it will play out in your valuation inputs. Once you have a valuation, please do put your two cents in the Google shared spreadsheet:
Today's class covered a lot of topics, some related to cash flows and some related to growth. Let's start with the cash flow part first. I argued that capital expenditures should be defined broadly to include R&D and acquisitions, for consistency reasons. If you want to count the good stuff (growth) that comes from these investments, you have to also count the cost. To get from cash flow to the firm to cash flow to equity requires us to bring in cash flows to and from debt. While borrowing more can make your cash flows to equity higher, they also make your equity riskier, raising the cost of equity. The net effect of leverage on the value of equity can be positive, negative or neutral, depending on the firm and where it is in its borrowing cycle. On growth, we started with historic growth and quickly dispensed with the notion that it is a fact. Depending on how it is estimated (arithmetic vs geometric) and over what period, you can get different numbers. It is also thrown off when a company's earnings go from negative to positive and generally becomes lower as companies get larger.
I also mentioned forensic accounting in the context of accounting game playing. While truly extraordinary items are easy to deal with, accounting ploys to move expenses into the extraordinary column may require some detective work. For those interested in forensic accounting, here are a couple of references:
This week’s challenge will help you nail down the concepts of adjusting earnings for leases and R&D and how to compute synthetic ratings. It is good preparation for the quiz. So, give it your best shot and I will send you the solution on Sunday.
Attachments: Weekly challenge #3
We are done with the cost of capital portion of the class and while I know that this is probably unrealistic, it is a good time for you to compute the cost of capital for your firm. If you have not started and are intimidated, try this paper that I have on estimating and using cost of capital
Two more quick notes. First, there is no class on Monday (2/20). So, have a long weekend, enjoy yourself and start on your work for the first quiz, which will be a week later on February 27, 2017. The past quizzes for this class are at the link below.
|2/17/17||I know that you have big and fun plans for the weekend and it is my job to ruin them. If you feel the urge to catch up on your project, I am going to give you the capacity to do so by posting not one, not two but three in-practice webcasts:
1. Trailing 12-month numbers: In the webcast for this week, I look at how to compute trailing 12 month earnings from a 10K and a 10Q:
https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
The most productive use of the webcast is to print off the most recent annual and quarterly report for your company and work with your company’s numbers.
2. Converting leases to debt: I have also posted a second webcast on converting leases to debt which takes you through the process of which numbers to use in this conversion and how to deal with loose ends (like the lump sum that is often given for past 5 years).
3. Converting R&D to capital expenditures: We also talked about converting R&D from operating to capital expenses. I use Microsoft from a year gone by to illustrate this concept:
How to capitalize R&D: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4
Microsoft 10K 2011: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoftlastyear10K.docx
Microsoft 10K 2012: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoft10K.docx
You may be wondering whether to spend your time on these or on preparing for the quiz but sometimes doing the project work is the best preparation for the quiz.
I hope that you are enjoying this long weekend and the great weather. That said, I hope that you are also catching up on your project. If you had a chance to work through the third weekly challenge, the solution is attached. If you did not, I would suggest working through it, at least as review for the first quiz. You will notice a synthetic ratings spreadsheet attached, where I estimate a rating and a cost of debt for the company.
Attachments: Weekly challenge #3, Solution & Synthetic rating
|2/21/17||I know that most of you have Snap on your phone and your own reasons for liking it more or less than Instagram. In fact, you have an advantage over me, since I have neither and had to put my seventeen-year old son through a strenuous questioning to find out the pluses and minuses of each (and I am still a little fuzzy about how these filters make things better). Since the Snap IPO is coming up and has been priced, this is as good a time as any for us, as a class, to value Snap.You can check out the prospectus for teh IPO (if you have never gone through a prospectus, this is a nice start):
You can read my post on the Snap IPO and valuation:
You can follow up by downloading my spreadsheet with the valuation:
You can them disagree with me on my story and numbers, change the inputs and come up with your own value. Enter them into the shared Google spreadsheet.
I know that this week is quiz week and that you have other things on your plate, but let’s make this a crowd valuation of the company and see how it goes.
We continued our discussion of growth by first looking at the limitations of analyst estimates of growth and then examining the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering two questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? In the next session, we will continue this discussion after the quiz.
|2/22/17||The first quiz is coming up and I wanted to cover some logistical details.
1. Quiz location and timing: The quiz will be from 2-2.30 on Monday, February 27. There will be an extra room to take the quiz. Please see below for where you should go for the quiz:
If your last name begins with Go to
A - I KMEC 1-70
J - Z Paulson
There will be class after the quiz. So, please come to Paulson, when you are done with your quiz.
2. Quiz coverage: The quiz will cover everything through midway through last Wednesday’s class (about slide 152). It will therefore include the big picture sessions on valuation, discount rates and cash flows.
3. Past quizzes: I am reposting the links to the quizzes from just the past few years. While there are older quizzes you can cover, these are much more relevant for the quiz at hand.. If you do run into a growth question, skip it.
Practice quizzes: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/shortquiz1.pdf
Practice quiz solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/shortquiz1sol.xls
As you work through these quizzes, please do remember that I will be grading the quizzes, not a computer or a TA. I grade on process. Please show your work, with your solution and I am perfectly open to alternate solutions to problems, if I feel that you have been logical and consistent and used all of the information in the problem.
4. Quiz review webcast: I have a webcast that I have put together where I take you through the material that will be covered on the quiz. It is about 35 minutes long and it may help you get ready for the quiz (or not)…
I hope that you find it useful.
|2/24/17||I know that the project is not even on your mind this week, as you get ready for the first quiz. However, they are not mutually exclusive. To the extent that your firm has operating leases or R&D, you should try capitalizing them and view it as prep for the final. If you can estimate the free cash flow to the firm and free cash flow to equity last year, you are well on your way.
Now that we are on to growth, you can try a couple of exercises with your company:
1. Compute historical growth, across different time periods, in different measures, and using arithmetic and geometric averages.
2. See if you can find analyst estimates of growth for your company and whether you can decipher what measure (revenues, operating income, net income or earning per share) the estimate is for.
Next week, we turn to the fundamentals that drive growth.
|2/25/17||Accounting returns can be messy and misleading but they are a key input into estimating growth and the value of growth. In this webcast, I look at the process of estimating accounting returns, using Walmart as my example:
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
Just a quick note. The weekly newsletter is attached. I would wish you a great weekend, with the uncommonly warm weather, but I may risking blowback, since I might have ruined it for you. I live to inflict pain, though!
Attachment: Issue 5 (February 25)
I’ll keep this brief since you are probably busy preparing (if you say, “for what”, I think that you are in big trouble). A reminder again about tomorrow’s quiz and quiz seating. The quiz is in the first 30 minutes of class (from 2-2.30) and it is open-book, open-notes but no laptops or connectivity. The seating is as follows:
Attachment: Weekly challenge #4 solution
The good news is that the first quiz is over and I will let you know as soon as it is ready to be picked up. If you were able to hang in there mentally and physically, we continued our discussion of growth by the fundamentals that drive growth. In particular, we looked at how much efficiency can add to growth and how to estimate growth in companies with negative earnings. I have shortened the post-class test and solution for this session, since it was a short session.
Your quizzes are done and are ready to be picked up.
Attachments: Solution (a or b) as well as the distribution of grades
In this week’s valuation of the week, I take a look at Tesla, a fascinating company that I have called the ultimate story stock. To understand why, start with this blog post:
In the post, I value Tesla at about $152 (it was trading at $224) and you can find the valuation at this link:
In today’s class we began by looking at the four rules that keep terminal value in check. We then looked at which model to use in valuing a company and then moved on to the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. I have attached the post class test and solution. On a different note, please do get a jump on the DCF valuation of your firm. The valuation is due on March 24 but only for feedback, not grading. So, don't feel the pressure to get it right. Just get it done. I have also attached weekly challenge for this week, if you feel the urge to try them. If not...
Attachments: Post class test and solution, Weekly challenge #4a
|3/2/17||In yesterday’s class we started with a discussion of which model to use in valuing a company and then moved on to the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Now that the quiz is behind you, it is time to turn your attention to your project, recognizing that the DCF for feedback (not a grade) is due on March 24, the Friday of the week that you get back from break. We have covered everything you need to do this in class from estimating the inputs to picking the right model. So, no reason to put it off any more. Incidentally, I am in Lagos, Nigeria, until Saturday. So, if you have questions about your quiz, and you want to see me, you’ll have to wait until Monday.|
|3/3/17||In this week’s webcast, I look at the terminal value and how to run diagnostic checks on it to make sure that you have been internally consistent and grounded while estimating this number.
Sample DCF: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvalueDCF.xls
Diagnostic Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvaluecheck.xls
Hope you get a chance to check it out.
Just a quick note. The newsletter is attached. I hope that you are getting a chance to work on your DCF as well.
Attachment: Issue 6 (March 4)
This week, we will close out the loose ends part of DCF tomorrow and then talk about how to connect stories to numbers on Wednesday. Since the week after is Spring break and your DCF is due for feedback on the Friday of the week you get back, please do start on your DCFs. I am attaching the solution to the last weekly challenge.
Today we put the last loose ends to rest. First, we completed the discussion of cross holdings and why they are so difficult to deal with in valuation. Second, well looked at complex businesses and how to incorporate our concerns into value. Then, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:
|3/7/17||I decided to use a bank as this week’s valuation of the week, partly because I felt like doing it and partly to help those of you valuing financial service companies. The bank that I valued was Deutsche Bank in October 2016, when it was the throes of a crisis. You can get the back ground and my narrative at this blog post:
You can follow up by downloading my valuation of Deutsche Bank here:
Finally, the stock is up to about $18, but that is after a disastrous couple of days where it dropped almost 10% after it announced new plans
If you get a chance, please take my valuation and make it yours, changing what you don’t agree with and leaving alone what you do. Once you are done, you can put your numbers into the shared Google spreadsheet at this link:
As you slip into spring break mode, today’s class was about connecting stories to numbers. Using Uber as an example, I went through the process of telling a story about a company and then converting that number into a valuation. Ultimately, valuation is as much about story telling as it is about modeling. The post class test and solution are attached.
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 that you may find useful to keep yourself moving forward. 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:
Attachments: Valuation Checklist
You must admit that I was remarkably self-restrained during the break and fought the urge to send you more and more messages. That time is now over and I am baaaaaaaack!
2. The Project: As you know (or should know), your DCF is due this Friday for review. It is true that there is no grade attached to it but it you chance to get some feedback on the session. To advance you on the valuation, I have a tools webcast on dealing with equity options in a company,. Let’s face it. Employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why last week's weekly challenge was built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
3. Lecture Note packet 2: Finally, we are approaching the end of the first lecture note packet for the class. When you get a chance, please print off or download or buy the second packet:
Attachments: Issue 7 (March 18)
In today's class, we started with a quick review of narrative changes, shifts and breaks and how earnings reports, in particular, can alter your narrative for a company. Since many of you will be dealing with new earnings reports, I thought you may find these two posts of interest in how narratives shift, and with them, values:
I hate to be a nag but your DCF is due for feedback on Friday. Again, I will emphasize that I will not be grading your DCF. Here are some more details about this submission:
|3/21/17||Remember that we were talking about the connection between story telling and numbers. I noted at the end that while it is critical that you tell a story about your company, it will not always be a happy story. This week’s valuation of the week is not a happy story. It is a story of Valeant, a once high flying company that shifted to being a cash cow to a dog to damaged goods in the blink of any eye. The place to start this story is with my first post on Valeant in November 2015, right after its fall from grace when many value investors were convinced that the market had unfairly sold off the stock:
You can follow this up with this post in May 2016, when many people had given up on the stock:
In November 2016, even more people had abandoned the stock and here is what I posted:
It is now March 2016 and it is tough to find anyone who likes the stock. You can read my latest take here:
My valuation of Valeant is in the attached spreadsheet:
I know that you are busy with your own company but if you want to play with the numbers and enter your Valeant value in the Google shared spreadsheet below, you can be my guest:
In today’s class, we started on the dark side of valuation, where we value difficult-to-value companies. We started the valuaton of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. I argued that to to value a young company, you have to visualize what you see as success for it and work backwards to get the numbers by year, and adjust this valuation for the likelihood that the company will not make it. We then moved on to companies in transition and how you can arrive at two values for these companies: a status quo value and a changed-management value and how you have to take an expected value. We closed off by looking at declining and distressed companies, arguing that you need to adjust your expected value for the likelihood of truncation risk or failure. On an unrelated note, NYU has finally picked a day for the final exam for this class. Since you have to make travel plans, I thought I should let you know that the final exam is scheduled for May 15 (Monday of the final week). More on that as we get closer.
|3/23/17|| The DCF is due by late Friday (try to get it in by 5 pm, but if not, 6 pm or 7pm..). A few notes on the submission:
1. Individual, not group: This portion of the submission can be done individually and should be done individually rather than as a group, The feedback is specifically for you.
2. Submission content: An Excel spreadsheet will do, with notes embedded on your story and any specific assumptions
3. Submission subject: Use “My Perfect DCF” in your subject
Remember that this DCF is for feedback, not a grade, but work on it as if were your final valuation. That way, the feedback will be more focused and perhaps more useful. About a fifth of the class has sent their DCFs to me and I will try to get those back by the end of today. To put a bow on this part of the class, I have a blog post that you may find enjoyable about dysfunctional DCFs.
I hope that none of your DCFs fall on this list.
I have attached the latest newsletter for the week. Thank you again for all of your DCF valuations. I got through about 150 of them yesterday but I have another 150 that I have not got to and I will try my best to work through them, but I also have a quiz to grade this week. So, don’t be surprised if you don’t hear back until Tuesday. I apologize for the tardiness but I am hopeless at multitasking, especially when that requires to me grade a quiz and look at a DCF at the same time. Just a reminder that we will be starting on the second packet in class this coming week. Packets 2 & 3 should be available as one packet in the bookstore. Alternatively, you can download packet 2 at the link below:
Attachments: Issue 8 (March 25)
By now, many of you (about 200, by my count, out of a class close to 300) should have received back your DCF valuation back. If you have not received yours back, you should be getting it in the next day or two. 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
Output page checks:
- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
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.
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.
In today’s session, we continued our travels on the dark side, starting by valuing financial service companies (where loss of trust has driven us from dividend discount models), moving on to emerging market companies (with corporate governance, cross holdings and country risk all playing starring roles) and then looking at companies with intangible assets (where capitalizing R&D-like expenses can increase or decrease value) and to commodity and cyclical companies. I suggested that you use Monte Carlo simulations to bring in uncertainty into your valuations. We ended the class by drawing a contrast between value and pricing processes, a set up for the next phase of the class. Please print off or buy packet 2 to bring to class on Wednesday.
I have put the review session for quiz 2 (scheduled for April 3) up online (on the webcast page for the class) with the presentation. The links are below:
You will see relative valuation/pricing problems (multiples) popping up in the pre-2008 quizzes. You can ignore them! As for the quiz seating, here are the seating plans:
On a different note, I was planning to put up a pricing of the week for this week, but think I will skip it. I have asked enough of you already in the last two weeks.
In today’s class, we started by looking at why the value and pricing processes can diverge and the difference between investing and trading. Value is driven by cash flows, growth and risk and price is driven by momentum, liquidity and herd behavior. A trader makes money playing the pricing game (buy low and sell high) and an investor from playing the value game (buy something when its price is less than your assessed value and then wait for the gap to close). Each side has its own weaknesses, but it is important that you decide which game you are playing and choose the right tools for that game. We then looked at the process of relative valuation (pricing) by examining what goes into a multiple. Starting on the process of deconstructing the multiple, starting by defining the multiple and checking to see if it is consistently defined and uniformly estimated. We have a quiz on Monday and it will cover lecture note packet 1, through page 340 and will cover the rest of DCF not covered by the first quiz (everything from growth on). The quiz will be in the first 30 minutes of class and there will be class afterwards. Finally, if you are going to be missing the quiz, please let me know before 2 pm on Monday. On a completely unrelated note, I am returning to the practice of posting weekly challenges (on management options).
I am piling on now, and I am sorry. However, the clock is running and we do have stuff to get done. Two quick notes. First, next week, we will be starting on pricing and using multiples. One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
Now, on to the other important note. As promised (or threatened), I will be getting your mystery project to you on Monday. It is a group project, due on April 14. I know that I am asking a great deal of you, with the DCF due last week, the quiz next week and the mystery project a week and half after that. I thank you, in advance, for the work that you will be putting into it.
I know that you are probably busy preparing for the quiz and I will keep this short. The newsletter is attached.
Attachments: Issue 9 (April 1)
A few last-minute notes about the quiz tomorrow.
Attachments: Solution & Option value
Let me start off with a quick review of what we did after the quiz. We continued our discussion of PE ratios by looking at the distributional characteristics of PE ratios as well as the drivers of PE, arguing that its determinants are growth, risk and payout/ROE. A cheap stock is one with a low PE, high growth, low risk and a high ROE and that becomes the foundation for screening for cheap stocks. If you want to read up more on screening, try this blog post:
I am piling on but I cannot help myself. I know that you are recovering from the quiz but I had promised you a mystery project and I am delivering. The mystery project is a pricing project, not a valuation one. If you don’t get the distinction, rewatch yesterday’s lecture. The description of the project and the dataset that you will need to do it are both attached. This is a group project and the project report is due on April 19, 2017 by 5 pm.
The quizzes are ready to be picked up in the usual spot (KMEC, 9th floor, to the right just as you come off the elevator). They are in alphabetical order, face down, in two stacks. Please leave them in order and don’t browse. The solutions and the grading template are attached (with quiz a going with Cravath and quiz b with Swingell in problem 1). As always, if you feel that I have missed something or have been unfair in my grading, come in and talk to me.
Attachments: Solution (a or b) as well as the distribution of grades
|4/4/17||I hope that you have had a chance to pick up your quiz. I know that you have a mystery project to do this week and won’t have time to add more to the list. So, I decided to make this week’s valuation exercise a pricing exercise and revisit two assets that people talk about all the time and can only be priced. One is gold and the other is bitcoin. I have tried to price both assets in blog posts, and while the posts are dated, the approach that I used can easily be updated:
My blog post on gold: http://aswathdamodaran.blogspot.com/2013/04/the-golden-rule-thoughts-on-gold-as.html
My blog post on bitcoin: http://aswathdamodaran.blogspot.com/2014/03/bitcoin-q-bubble-or-breakthrough-both.html
In this session, we extended the discussion of the analysis of multiples by looking at PEG ratios, EV multiples and book value multiples. Each multiple, we argued, has a driver and companion variable.We then moved on to application and how best to find comparable firms and control for differences. At this point, you have the tools you need to price just about any stock (or asset). Remember that you are paying to heed to the market, controlling for differences as much as you can and hoping that pricing divergences disappear over time. I am also attaching the weekly challenge for this week (on pricing).
|4/6/17||I know that you just got your quiz back and have a mystery project to work on. So, I would not blame you for putting the big project on the back burner. Assuming that you have done your DCF, and perhaps even sent it to me and received feedback, you can, if you have time, complete the pricing section of the project. This will require you to get on S&P Capital IQ and downloading raw data on your company and the peer group (and you will have to make judgments on what to include in this peer group). You can then go through the pricing exercise, standardizing prices (with multiples), controlling for differences in risk, growth or whatever else the market seems to be pricing in and makinga pricing judgment on your company. Don’t be surprised if you get a pricing judgment (that your company is cheap or expensive) that contradicts your DCF conclusion. You will have to pick but there is no better illustration of the difference between value and price than doing both a DCF and relative valuation.|
|4/7/17||If you have opened up the mystery project, you probably also are recognizing that this is an exercise in working with data sets. I have put up a webcast that is more statistics than finance about how to look at data and try to evaluate relationships between variables. I use the banking sector to illustrate my case but I hope that you find it useful for both your mystery project as well as for your overall project. If you are solid on your statistics, you can skip this webcast, since you already know everything that I am saying. If you need a quick review of the process, I think it will be useful.
Start with the webcast:
Download the slides:
Here is the raw data:
And the descriptive statistics:
The weeks are ticking by and I am reminded of this as I see that this is the ninth newsletter (and there are only twelve all together). I hope that you have had a chance to take a look at the mystery project and at the data that goes with it. Since it is due a week from Monday, I think it would be a good idea. Just in case your response is “what mystery project?”, I have attached both the project and the data again to this email. Attachment: Issue 10 (April 8)
In today’s class, we extended our discussion of pricing by looking at how to use pricing to analyze young companies, where multiples are often difficult to apply. We then extended the analysis of pricing by looking at entire markets. In the process, we looked at how multiple regressions can be used and misused to make pricing judgments. If you are interested in seeing the updated numbers for January 2017, you can get them here:
In the next session, we will complete our discussion of pricing and move on to asset based valuation and valuing private businesses.
I know that you are busy doing your mystery project. So, this week’s pricing/valuation of the week is both simple and focused on a company in the news, Tesla. As many of you have probably read, Tesla last week saw its market cap exceed that of Ford and GM, two firms with long histories that sell far more cars than Tesla does. There is the usual hand wringing about the craziness of investors and I won’t join in. As someone who has watched and valued Tesla for a long time, I find myself disagreeing with both extremes. I don’t agree with those who view Tesla as a fad and Elon Musk as a fraud and view any investor in Tesla as deluded. Tesla is a company that has substance and has a special pull to it that manifested itself when it announced the Tesla 3 a year ago and say 400,000 people put money down for a car whose prototype had not been built and where assembly lines were still in peoples’ imaginations. At the same time, I am uncomfortable in the Tesla fan club where Musk is a ruling deity and any critique of the company is viewed as a unpardonable sin. In fact, a few weeks ago I valued Tesla as the valuation of the week. Let’s turn our attention to pricing Tesla today. I downloaded the raw data on all auto companies on S&P Capital IQ today and computed every multiple and metric that I could think of in the data set below:
I then computed the median values for each multiple and metric for all auto firms, broken down my market cap class into four quartiles, and looked at where Tesla fell relative to these firms in this link:
No surprises here. Tesla trades at a hefty premium against other large auto companies but has higher growth (while losing money). Even if you allow for the higher growth in Tesla and forecast a multiple of sales (for instance), controlling for growth, Tesla is massively overpriced relative to auto stocks today.
But here is a quirk to consider. Investors don’t always compare a company to what you or I may view as its chosen sector. What if Tesla is being priced as a tech company. In that case, you should be comparing the numbers for Tesla against tech company averages. On that comparison, Tesla’s pricing still looks high, though perhaps not as high as it did against tech companies.
So, what does this all mean? If you are an intrinsic value person, you probably will have a tough time stretching your story to cover its current price. If you are a traded, you may very well be a buyer of the stock if you view it as more young tech than auto company and a seller, if you view it as auto rather than tech.
In today's class, we closed the book on relative valuation by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this link recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
I have two weekly challenges for this week, both simple and both on relative valuation.
We then moved on to asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation. Specifically, we focused on when it makes sense to value a company by valuing its assets and what pitfalls to avoid. We ended the class by starting on a discussion of what makes private company valuation tricky, i.e., the absence of a market price, the opacity and unevenness of financial statements and how motive can affect valuation and we will continue with this discussion on Monday.
I know that you are working on your mystery project right now and that you don’t want to be distracted. However, if you feel the urge to be distracted, I suggest that you read this excerpt that I found in a guide for appraisers trying to value a hotel on how to do it.
Another valuation rule-of-thumb used in the lodging industry is that each room of a hotel is worth 100,000 times the price of a Coke™
in the on-floor vending machine or in-room mini-bar. More formally:
Value = Coke™ price x Number of Rooms x 100,000
The Edgemore Hotel sells cans of soda for $1.50 in the room mini-bars. Thus, the value of the Edgemore by this "precise"
valuation method is:
$1.50 x 300 x 100,000 = $37,500,000
We urge market participants to use this technique judiciously, as some properties seriously "misprice" soda in relation to property
No. This is not a parody but a real technique. You may find it laughably simplistic, but in pricing, if it works, don’t fight it.
First things first. I know that you have been working on the mystery project (I get the emails that testify to it). I know that some of you have asked me questions about whether you “should” do something or the other and that you have been frustrated with my answer which always that there is no “should” on this project. If you feel that doing something will advance you towards your final mission of finding the cheapest and most expensive stocks, do it. If not, don’t. The newsletter for the week is attached, in case any one is still reading it. Just a reminder that we will be starting on packet 3 next week. If you bought the second packet at the bookstore, you should already have packet 3. If not, you can print it by going to:
I know that the final exam seems like it is way down the road but it is not and I thought I would bring you up to speed on it. The official date of the final exam is May 15 from 2 pm - 3.50 pm. It is a comprehensive, open book, open notes exam. I do know that some of you need to be done earlier. I am offering an early final exam on May 11 from 1 pm to 2.50 pm in KMEC 2-70. Since there are only 60 seats in the room, i am setting up a Google sign up sheet for anyone who may want to take the exam early. Please go to the link below and sign up:
I hope that you are moving along with your mystery project. It is due Wednesday at 5 pm but you can submit any time you feel ready before that time. When you are ready to send it it, please put “No mystery here” and cc everyone in your group. It will help me keep things in order and send back my graded version to all of you at the same time. I have also, on the very, very tiny chance that you have tried the weekly challenges for this week, attached the solutions to the two challenges. In the week to come, we will put the closing touches on valuing private companies and start on the basics of real options. If you have not printed off packet 3 already, please do.
In today’s session, we completed our discussion of private company valuation, starting with how to deal with illiquidity when valuing private businesses. We then looked at why the value of a private business will be higher to a public company or in an IPO and the special issues that arise from IPOs, including dealing with the IPO offer proceeds and the investment banking price guarantee. We closed the session byy looking at how to deal with expected transitions as a private company moves from a sole ownership to VC financing to a public offering. If you are interested in total betas and how different they are from market betas, by sector, you can get my estimates at the link below:
Also, I have added the review session webcast and slides to the webcast page. You can get them at the links below:
I know that you are working on your mystery project right now, but this week’s pricing is of a Russian steel company, Severstal. You can get the story of the pricing at this link:
You can see the raw data for steel companies in this link, with an added worksheet for just the top 25 steel companies in market cap terms:
I used this raw data to estimate median values and compared Severstal to those values in this link:
Finally, I looked at the 25 largest steel companies and ran scatter plots and a regression. Even though you may not have the time to do this now, come back and take a look at it when you are working on your final project, if you get stuck on the pricing section.
I know that you are working on your mystery project right now, but this week’s pricing is of a Russian steel company, Severstal. You can get the story of the pricing at this link:
You can see the raw data for steel companies in this link, with an added worksheet for just the top 25 steel companies in market cap terms:
I used this raw data to estimate median values and compared Severstal to those values in this link:
Finally, I looked at the 25 largest steel companies and ran scatter plots and a regression. Even though you may not have the time to do this now, come back and take a look at it when you are working on your final project, if you get stuck on the pricing section.
In today's class, I did a quick introduction to real options, setting up the intuitive rationale for real options. We covered the basics of options, starting with why real options are so attractive to analysts and investors: they allow you to add a premium to your DCF value. The two building blocks for real option value are learning (from what is going on around you or ongoing events) and adapting your behavior. There are three questions that underlie the use of real options. The first is recognizing when you are dealing with an option, with a payoff diagram being the give away. The second is looking for exclusivity which is what gives options value. The third is using an option pricing model, which is built on replication and arbitrage. We then turned our attention to the option to delay, an option that can make the rights to bad project/technology valuable. We used it as a lever to talk about valuing patents and natural resource reserves as options, with significant caveats on both. After the quiz on Monday, we will continue with this discussion of real options.
Speaking of the quiz, here is the seating arrangement for Monday’s quiz:
If your last name begins with Go to
A -R Paulson
S- Z KMEC 1-70
If you are going to be missing the quiz, please let me know before 2 pm on Monday.
By now, you should have your mystery projects back. If you have not, please send it to me again with the subject head “No mystery here”. It may be because you got the subject wrong on your email. Looking over your analyses, here are some of the overall impressions I have:
I hope that you were able to get something of value out of the project. Screening is the name of the game in portfolio management and this project is just a small step towards how big data and big analytics are coming together (with mixed payoffs) in investing. I know that a few of you have emailed back asking about grade distributions and while I will not get letter grades on projects like these, the scores ranged from 6 to 10 on the project with a median grade between 8 and 8.5.
I know that options are not on the quiz. So, don’t panic. However, if you feel like exploring valuing a patent as an option after the quiz, I have a webcast on how to do it and here are the links:
I have also added a weekly challenge related to options that you can try out. It is attached.
Attachments: Weekly Challenge #9
The newsletter for the week is attached. As the clock winds down, deadlines are approaching. The third quiz will be on Monday. It will cover packet 2 (pricing, private company valuation and asset based valuation). So, keep that in mind as you review past quizzes. You can find them here:
Past quiz solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls
My suggestion, if you have limited time, is that you start with the most recent quizzes and work back since they will be more closely tied to the material for this quiz.
The review session for the quiz is at the links below:
Here is the seating arrangement for Monday’s quiz:
If your last name begins with Go to
A -R Paulson
S- Z KMEC 1-70
Attachments: Issue 12 (April 22)
I know that the sessions after quizzes are a let down, since you are tired and have had your fill of valuation for the time being. That said, I have no choice but to plough on and today we did. We started by looked at undeveloped natural resource reserves as options, with the premium a function of the volatility in oil prices. We then moved on to the option to expand and how it can add to the value of some companies with exclusive assets (like Facebook’s user base) and ended with the option to abandon, the option to walk away from your mistakes. All three have value and we will continue our real option discussion (and conclude it) on Wednesday.
|4/25/17||I know… I know.. The quizzes should have been done by now and put outside for you to pick up. The good news is that you are right but the bad news is that I am stuck at home today and cannot come into school. So, I will put them out right after I come in tomorrow morning at about 9.15 am. I won’t attach the solutions or grading template because that will only put your anxieties into high drive. Suffice to say that the average score on this quiz was similar the ones on prior quizzes and I will fill you in tomorrow.|
The quizzes are ready to be picked up in the usual spot. The solutions and grade distribution are attached. While I don’t want to pick at fresh wounds, here are a few notes on the most common “issues” that you had with the quiz:
Problem 1: This problem was a simple one, if you recognized that you can extract the ROE from the growth rate and payout ratio. ROE = g/ (1- Payout ratio). All you had to do was back out the cost of equity in the median bank and use it to compute the P/BV ratio for the bank sub (using its cost of equity and growth rate). I did give full credit if you used a (1+g) all the way through your solution.
Problem 2: On this problem, there were two parts.
Here is how the grading went. You lost a point each for getting either ROC or reinvestment rate wrong. If your comparison was on an EV basis instead of an equity value, you lost an extra point.
Problem 3: This was the “gimme” problem of the three. You had to value the two businesses (and you were already given FCFF, cost of capital and growth rate) and value the G&A (with its own cost of capital and growth rate). Your break up value of equity = Value of two businesses - Value of G&A - Net debt. You compare this to equity value. (Again, if you did use (1+g) in this problem, you should have full credit)
Now that the last quiz is behind us, the end game has begun.
Attachments: Solution (a or b) as well as the distribution of grades
|4/26/17||We started this session, by valuing financial flexibility as an option, and arguing 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 bottom line on options: they are everywhere, most of them are worth nothing or very little and only a few can be valued with option pricing models. I have attached the post class test and solution, for you to try out, if you are so inclined. (I forgot the start of the class test today.. I’ve included it with the post class test and solution).
If you have not started the project yet, please do. If you have already completed, kudos. If you are in the middle, here is the to-do list , just to keep you organized.
1. DCF Valuation
1.1. Consider feedback you got on your original DCF valuation and respond, but only if you want to.
1.2. Update macro numbers - riskfree rate to today's rate and equity risk premium
1.3. Update company financials. If a new quarterly report has come out, compute new trailing 12-month numbers
1.4. Review your final valuation for consistency
2. Relative valuation
2.1. Collect a list of comparable firms (stick with the sector and don't be too selective. You will get a chance to control for differences later) and raw data on firms (market cap, EV, earnings, revenues, risk measures, expected growth)
(You can this data from Bloomberg or Cap IQ. The latter is a little more user friendly)
2.2. Pick a multiple to use. There may be an interative process, where you use the regression results from 2.4 to make a better choice here)
2.3. Compare your company's pricing (based on a multiple) to the average and median for the sector. Make a relative valuation judgment based upon entirely subjective analysis.
2.4. Run a regression across the sector companies. (Be careful with how many independent variables you use. As a rule of thumb, you can add one more independent variable for every 10 observations. Thus, if you have only 22 firms in your list, stick with only two.)
2.5. Use the regression to make a judgment on your company and whether it is under or over valued. (If you are using an EV multiple, estimate the relative value per share. This will require adding cash and subtracting out debt from EV to get to equity value and then dividing by the number of shares)
2.6. Use the market regression on my website to estimate the value per share for your firm. You can find the regressions here:
3. Option valuation (tomorrow’s class)
3.1. Check to see if your company qualifies for an option pricing model. It will have to be a money losing company with significant debt obligations (a market debt to capital ratio that exceeds 50%).
3.2. If yes, do the following:
3.2.1: Use your DCF value for the operating assets of the firm (not the equity value) as the S in the option pricing model
3.2.2: Use the book value of debt (not the market value) as the K in the option pricing model
3.2.3: Check your 10K for a footnote that specifies when your debt comes due. Use a weighted-maturity, with the weights reflecting the debt due each year. (You don't have to worry about duration)
3.2.4: Estimate the variance in firm value, using your own estimates or the industry averages that I have estimated and are built into the linked spreadsheet.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
I have attached an excel spreadsheet that should help in this effort.
4. Bringing it all together
4.1: Line up your intrinsic value per share (from the DCF model), the relative value per share (from the sector), the relative value per share (from the market regression) and the option based value per share (if it applies)
4.2: Compare to the market price in May 2017 (the date will depend on when you get done)
4.3: Make your recommendation (buy, sell or hold(
5. Numbers to me!!!!
Fill in the attached excel spreadsheet when you have all the numbers for all of the people in your group and please get it to me by the evening of May 7, 2017 (If you have someone who is holding up the group, just send me the rest of the numbers). Please do not modify the spreadsheet in any way.
6. Final Project write up
Write up your findings in a group report and submit as a pdf file. The report should be brief and need not include the gory details of your DCF valuation. Just provide the basic conclusions, perhaps the key assumptions that you used in each phase of valuation. There should be relatively little group work. So, you may not really need to get together for much more than basic organization of the report. The group report is due electronically by Monday, May 8, at 5 pm. A pdf format works best. You do not need to attach the raw data and excel spreadsheets). I am not a stickler for format but here are good examples of reports from previous semesters online.
Just to keep the over zealous from going over board, I am going to put a page limit of 20 pages for each report (for up to five companies). You can add two extra pages for each additional company to the limit; with 7 companies, the page limit is 24 pages. And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters.
7. Celebrate, but remember that your final exam is a week later.
|4/28/17||This is the last of the valuation tools webcasts. If your company is the one that meets the equity-as-option test (losing money, lots of debt), you are probably not happy. However, it is really not an involved exercise. To assist you, I did put up my latest valuation tools webcast, on valuing distressed equity as an option. I used Jet India, an Indian airline with a history of losses and a mega debt load to illustrate the process. You can start with the webcast below:
The financials for Jet India are contained in this sheet:
The DCF valuation that you need to get your option model started is here:
The value of Jet India's equity as an option is contained in this spreadsheet:
It is pretty straight forward and may be useful.
|4/29/17||I hope that your weekend is going well, though I have probably ruined much of it. As you work through the relative valuation section, a few questions that seem to be recurring:
1. Sample size: There is a trade off between sample size and finding companies that look more like yours. If you are doing a subjective comparison - comparing your company's PE with the PE ratio of comparables, controlling for differences with a story, you want a small sample of companies that look like yours. If you are doing a regression, you should try to get a larger sample, even if it means bringing in firms that may not look like yours. You can control for differences in the regression. If you can get your sample size up to 20-25, you should be okay. And one more thing. Don't fight the data. If a regression does not work, it does not. Remember that you get to make the ultimate judgment and you can decide that given your company and its peers, the best estimate of relative value is just the average PE for the sector.
2. Market regressions: The updated market regressions from the start of 2017 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link
3. Young or money losing companies: Running these regressions with young companies is always tricky. The first is that if you use current data, the only multiple that you have any shot at using is a revenue multiple. Nothing that you can do about that. You can try to use forward numbers to do relative valuation. What does that mean? You can go into your DCF, find your revenues or earnings in year 10, and use the fundamentals at that point to get a multiple for your company. Remember, though, that this a value in the future and you still have to discount it back and deal with survival risk.
Finally, if you have been reading my newsletters, the last one is attached for you to read. If you have not been reading them, the last one is still attached to ignore.
Attachments: Issue 13 (April 29)
|4/30/17||In tomorrow’s class, we will look at acquisition valuation with all of its pitfalls. I have attached a pre-class quiz (to replace the start of the class quiz that we usually start with) and it will run through the entire class. If you can spend about 15 minutes answering the questions, it will make tomorrow’s class more productive (and fun).|
I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big M&A deal and see if you can break it down into its components. I did get briefly into the InBev/SABMiller merger in class but if you want something more extensive, I am going to offer you the blog post that I did on it when it happened:
If you look towards the bottom on the post, you will see a YouTube video on the merger.
I know that you have lots of stuff coming at you this week and I hate to add to the clutter but a few quick notes:
1. Early final exam: As I noted in class, there will be an early final exam for this class on May 11 from 1-2.50 in KMEC 2-70. The sign up sheet is here, if you want to still sign up.
2. Regular final exam: The regular final exam is on May 15 from 1 pm to 2.50 pm. It will be in Paulson. There may be a second room, but if 50 people take the early final, there may be no need for a second room.
3. Project: As you work on the finishing touches on the project, please stay focused on the end game, where you will make a recommendation of whether to buy, sell or hold the stock. If you have the numbers ready for the companies in your group, please fill them into the attached spreadsheet and send them back to me before Sunday (May 7).
In today's class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don’t).
As you embark on the closing touches of the project, here are a few things to keep in mind:
1. Tweak your DCF, if you need to, estimate a value and let it go. This is an ongoing story and this your take, as of right now.
2. Do the pricing of your company, recognizing that your final pricing conclusions are going to be a function of the multiple you use, the companies you use as comparable firms and how you control for differences. If your R-squared is low, try alternatives, but at some point, adopt the karmic pose. It is what it is.
3. Make your recommendation and I will accept your judgment.
I know that this is shaping up as the weekend from hell for some of you and I share some (or all) of the blame. Anyway, it is too late for me to be offering you "substantive" help on the project, at least on a collective basis, but here is a list of "to dos" for you and me over the weekend:
1. Finish the number crunching for the project.
2. Fill in the attached summary sheet with the numbers and get them in to me in an email. In the subject heading, please list “The End is Near”.
3. Work on writing up the project report. Don't get fixated on format or on small details.
4. On Monday morning, around 1 pm, check your email. You should find a presentation (see my tasks below) for the class attached to the email.
5. Come to class on Monday. I know that some of you have not been in class the last couple of weeks and I understand that there are finals and projects due in other classes. However, Monday's class is special. If this were a play, it would be when the fat lady sings. While I may not be fat, a lady or hold a tune, I will do my best impersonation.
6. Turn in your project report by email by 5 pm, as an attachment (pdf preferably, though I can take MS Word). In the subject, please list "The Grand Finale".
1. Send nagging emails every few hours asking for your summaries and providing updates.
2. Pull your summaries together in a master spreadsheet.
3. On Sunday night, do assorted magic on the summaries
4. Put into a final presentation (see above) and send to you by Monday morning at 10 am
5. Show up in class and do the "fat lady song"
6. Wait for your final project reports
7. Start grading…
I know exactly what you are working on and won’t intrude. But here is the update:
Company updates received: 15
Companies yet to come: 238
So, if you have not sent in your summaries yet, you have lots of company. But if you have the numbers for your company, please send them in with “The end is near” in the subject.
Thank you for the summaries.
Company updates received: 168
Companies yet to come: 85
The window will stay open until tomorrow morning. So, please do get your numbers in by then. I will be putting the slides together by midday and will email them to you by 1.15. Please do come to class tomorrow. It will be the grand finale, the show to end all shows, the icing on the cake..
1. Closing Class: Thank you for being at the closing class. I have attached links to both the closing presentation and the summaries of your valuation findings (for the entire class).
Closing Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valclosefall17.pdf
Summaries of class valuations: https://www.stern.nyu.edu/~adamodar/pc/eqrec/spr2017.xls
If you are on the list of the most undervalued companies and are buying your recommended stock, please let me know. I may very well join in.
2. Final Exam: The final exam is scheduled for next Monday in Paulson from 1-2.50 pm. The early exam is on Thursday in KMEC 2-70 from 1-2.50 pm. It is a comprehensive, open-book, open-notes exam.
3. Final Exam Reviews:If you are ready to turn your attention to the final exam, the webcast review for the final exam is now accessible:
Past final solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.xls
Hope this helps.
4. CFEs: Finally, please remember to do your CFE (right now). If you absolutely hated the class, this is your chance to let the rest of NYU know that they should never take a class like this one. If you liked the class, you can wax eloquent, if that is wont. The instructions for the CFE are attached. You have only until tomorrow to do these CFEs. I am sorry for not letting you know earlier but I was operating on the graduate school CFE schedule which starts after the last class. In fact, go do the CFEs now, before you forget.
I mentioned yesterday that you have only until tonight to get your CFE done. So please, please get it done. Instructions are below:
NYU Stern students:
Non-NYU Stern students:
There are three questions seems to be coming up on the real options problems and m afraid I have contributed to the confusion. So, here is some clarification:
1. What is the probability that S>K?
As stated in class, it is N(d2) which is the risk neutral probability that S>K. In some of the problems, though, I have used a range from N(d1) and N(d2) as the range of probabilities. Let me explain why. N(d1), in addition to being an option delta, is also a probability that the option will be in the money. In fact, the only reason d1 is different from d2 is because you are uncertain about S
d2 = d1 - square root of the standard deviation
If you had a standard deviation of zero, N(d1) = N(d2). As the uncertainty increases, the gap between these two numbers will widen. Thus, you go from being certain about the probability to having a range. Having said all of this, N(d2) should be the point estimate on the probability that S>K. You can use the range to indicate that there is uncertainty about this probability.
2, What is the cost of delay?
This is a tough one. Sometimes, I use 1/n and sometimes I use the cashflow next year/ S and sometimes I use no cost of delay at all. Lets look at the conceptual basis. The cost of delay is a measure of how much you will lose in the next period if you don't exercise the option now as a fraction of the current value of the underlyign asset (It parallels the dividend yield. On a listed option on a stock, if you exercise, you will have the stock and get the dividends in the next period) . Thus, if you have a viable oil reserve, the cost of delay is the cashflow you would have made on the developed reserve next period divided by the value of the reserve today.
Here is the overall rule you should adopt. If you have a decent estimate of the cashflows you will receive each period from exercising the option, it is better to use that cashflow/ PV of the asset as the dividend yield. If your cashflows are uneven or if you do not know what the cashflow will be each period, you should use 1/n as your cost of delay. If you will lose nothing in terms of cashflows by waiting, you should have no cost of delay.
Let me take three examples. The first is the bidding for rights to televise the Olympics in an earlier quiz. There were two years left to the Olympics and you were trying to price the option. In this case, there is no cost of delay since you really cannot exercise the option early even if it is deep in the money. (You cannot televise the Olympics a year before they happen...) The second is the oil reserve option. Since the cashflows from the reserve tend to be fairly uniform over time (based upon the barrels of oil you would produce and the current price per barrel, it is easy to estimate the cashflows you would generate each year on the reserve. In most of the oil reserve problems, therefore, you would go with the cashflow/ PV of oil in the reserve as your cost of delay. The third is the patent examples. While you may be able to estimate the expected cashflow each year from commercialising the patent, these cashflows are more difficult to obtain and are less likely to be uniform over time. That is why many of the patent problems use the less preferred option of 1/n as the cost of delay, where n is the number of years left in the patent.
3. How am I going to estimate N(d1) and N(d2)?
I will give you the cumulative normal distribution. You still should be able to estimate d1 and d2 on your calculator. While the distribution may not give you a precise N(d), I will accept the nearest number. Thus, if d =0.48, I will take N(.50) as your estimate.
I am working through your projects and am about 75% of the way through. I am sorry for taking so long but I had other things on my plate (but they are eaten now). The last order of business, for this class, is the final exam tomorrow and in case you did not get the memo, it is from 2-3.50 in Paulson tomorrow. It is comprehensive and will contain 8 questions that span the spectrum of this class. (I have changed the format slightly from the 5 questions with multiple parts where mistakes from one part seep into the other parts). In case you went through the review session links online, you probably have realized that the link is to the corporate finance class (still relevant but not quite right for this class). I have the right links below:
The finals are done and can be picked up in the usual spot. I have attached the solution and a distribution of scores for the final exam. You will notice that there are no grades on the distribution. That is because the final grades should be up shortly. I will let you know as soon as they are done. Until next time!
I hope you are done and are out celebrating. However, just in case you still care about grades, I submitted yours and they should be online soon. I want to to wish you the very best with whatever you plan to do with your lives. I hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. Well, at least, I have not. I mean it when I say that you have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees"). And just in case, you need a valuation fix... here are some links:
Twitter feed: @AswathDamodaran (Do your part to advance me to Lady Gaga or at least Kanye West status…)
If you have any questions about your grade, use the attached spreadsheet to see where you ended up. You do need to know your final exam grade to be able to use it.
Attachment: Grade checker