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Corporate Finance: Spring 2014. Aswath Damodaran. Ponderous Thoughts, or maybe not. There are few facts and lots of opinions. Even the givens (cash & risk free rate) are not With accounting and market numbers, all bets are off. The real world is a messy place. - PowerPoint PPT Presentation
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Corporate Finance: Spring 2014
Aswath Damodaran
2
Ponderous Thoughts, or maybe not
1. There are few facts and lots of opinions.a. Even the givens (cash & risk free rate) are notb. With accounting and market numbers, all bets are off.
2. The real world is a messy place.a. Money making firms can become money losersb. Companies can be restructured/ given facelifts
3. Models don’t compute values and optimal paths. You do.
4. Change is the only constant.
3
The Breakdown in the Classical Objective Function
STOCKHOLDERS
Managers puttheir interestsabove stockholders
Have little controlover managers
BONDHOLDERSLend Money
Bondholders canget ripped off
FINANCIAL MARKETS
SOCIETYManagers
Delay badnews or provide misleadinginformation
Markets makemistakes andcan over react
Significant Social Costs
Some costs cannot betraced to firm
4
I. Where does the power lie?
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II. Who is your marginal investor?From Spring 2013
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III. Risk Profiles and Costs of Equity
7
Beta: The Standard Approach
8
Regression Estimation Approaches
Typical reasons1. My company is unique. I cannot find comparable firms.2. My company is in only one line of business3. My bottom-up beta is too different from my regression beta
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Beta Distribution
BetaAverage 1.09Median 1.07High 2.9Low 0.28
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Jensen’s Alpha Distribution
AlphaAverage 16%Median 5%High 1310% Keurig Green MountainLow -379% AMD
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R Squared
R squaredAverage 33%Median 20%High 69% Intuitive SurgicalLow 0% Many
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Cost of Capital
13
Distribution of Current Market Value Debt Ratios
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IV. The Quality of Investments: The Firm View
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Return Spreads
16
VI. The Optimal Financing Mix
Optimal debt ratio
Average 31.26%Median 30.00%High 90.00% Samsung, HP, Darden, ConocoLow 0.00% 17 firms
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Under versus Over Levered Firms
Under or over levered Average -10.49% Median -7.33% Low -67.86% SamsungHigh 27.00% Shutterfly
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VIII. The Right Kind of Financing
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IX. Measuring Potential Dividends
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Dividends versus FCFE
FCFE/DividendsAverage 66.65%Median 12.49%Low 0.E+0High 2164.00%
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X. Valuation: Match up cashflows and discount rates…
22
Getting to equity value per share
Approach used To get to equity value per shareDiscount dividends per share at the cost of equity
Present value is value of equity per share
Discount aggregate FCFE at the cost of equity
Present value is value of aggregate equity. Subtract the value of equity options given to managers and divide by number of shares.
Discount aggregate FCFF at the cost of capital
PV = Value of operating assets+ Cash & Near Cash investments+ Value of minority cross holdings-Debt outstanding= Value of equity-Value of equity options =Value of equity in common stock/ Number of shares
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Value versus Price
Under or over valuation
Average 56.88%Median 21.44%Low 0.000High 1578.26%
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Ways of changing value…
Aswath Damodaran25
Aswath Damodaran26
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So, how do you explain the price? Its all relative..
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Most undervalued stocks!!
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The Triple Whammy: Underlevered, Cash Build-up and Under valued?
Company PowerJensen's Alpha
ROC - WACC
Current Debt ratio
Optimal Debt Ratio Dividends FCFE Value/share Price/Share
AGCO 1 -8.58% 5.85% 22.36% 50.00% 57.5 241.6 $166.41 $55.15 AMCX 1 6.08% 15.42% 31.10% 80% 0 $29,584.00 $(7.34) $58.00 Apple 1 77.00% 54.23% 3.79% 80.00% 35912 120184 $720.97 $585.54 Apple 1 26.20% 22.61% 3.35% 70.00% 27172 48729 $1,293.71 $592.58 Chevron 0 -0.50% 6.51% 7.63% 60.00% 9532 9537.14 $148.94 $118.91 CISCO 1 -0.80% 2.27% 11.81% 50.00% 3310.00 5458.00 26.73 23.03Coca-Cola 0 -5.25% 0.58% 16.60% 30.00% 21732 54026 $40.91 $31.80 eBay 0 5.10% 1.41% 6.18% 40.00% 0 2036 $61.11 $50.54 Express 0 -9.77% 7.78% 49.43% 80.00% 0 70.98 $17.68 $14.62 Express, Inc. 1 -9.77% 7.78% 49.43% 80.00% 32.97 111.02 $17.68 $14.62 Francesca's 1 2.10% 16.86% 22.29% 40.00% $18,291 $73,592 $27.69 $16.27 FujiFilm Holdings Corporation 0 -0.04% -1.27% 24.13% 50.00% 40 2,681,154 $4,956.22 $2,570.00 Google 0 0.06% 20.13% 2.29% 20.00% 801 30809 $589.56 $518.73 Gran Tierra Energy 1 3.44% -1.00% 7.80% 30.00% 0 136.7 $9.28 $7.25 HP 1 -0.19% 5.74% 27.40% 50.00% $900.20 $9,644.40 $35.88 $32.23 Intel 0 -6.40% 6.26% 9.73% 50.00% 3913 5744 $37.51 $26.30 Intuitive Surgical 1 -10.21% 15.31% 0.14% 20.00% 2027.9 2152 $487.66 $363.50 LVMH 0 1.16% 4.94% 15.97% 50.00% 1242 € 6,143.60 € 176.46 € 140.10 Michael Kors 0 33.02% 98.12% 3.06% 40.00% 0 $397.60 116.25 91.82Michael Kors 0 33.02% 98.12% 3.06% 40.00% 0 $397.60 116.25 91.82Newmont Mining 1 -7.80% 5.11% 35.70% 50.00% $448 1999 $51.73 $24.02 NOV 0 17.00% 1.63% 16.60% 50.00% 203 249.29 $91.77 $77.87 Qualcomm 1 -2.98% 54.62% 0.25% 40.00% 1450.8 5790.2 $88.81 $79.50 Samsung 0 1.43% 9.73% 5.38% 90.00% $1,226.14 $11,231.18 $2,475,433.50 $1,350,000.00 Schlumberger 0 -0.10% 2.85% 9.80% 50% $15,169.00 $29,784.00 $99.91 $69.10 Tyson Foods, Inc 1 22.84% 8.81% 18.43% 70.00% 304 3708 $49.89 $38.44 Tyson Foods, Inc 1 22.84% 8.81% 18.43% 70.00% 304 3708 $49.89 $38.44 Verizon 1 -0.2517 8.30% 34.08% 60.00% 5936 18918 $55.08 $47.60 Verizon 1 11.46% 39.74% 60.00% 51031 71987 $78.27 $48.49 Viacom 0 1.11% 10.25% 26.01% 50.00% 509 3703 $101.64 $83.64 World Fuel Services 2 32.30% 2.60% 16.76% 50% 17.32 87.12 $49.96 $43.17 ZuoAn 0 -31.14% 20.92% 12.14% 80.00% 0 $90 $6.82 $1.70 ZuoAn 0 -31.14% 20.92% 12.14% 80.00% 0 $90 $6.82 $1.70
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First Principles
31
Objectives of this class
If you get the big picture, the details will come (sooner or later)
Tools are useful but only in the larger context of answering bigger questions.
Corporate finance is not so bad !!!
32
And don’t forget your CFEs…
1. This course was mentally challenging/intellectually stimulating.1 2 3 4 5 6 7
No-brainer! Brilliant insights!
2. This course was demanding of my time.1 2 3 4 5 6 7
What work? Haven’t slept all semester.
3. This course provided me with tools and information that I will find useful in the future .
1 2 3 4 5 6 7
Only in prison Completely relevant
4. Overall evaluation of the course1 2 3 4 5 6 7
Horrible! ( I want my money back) Stupendous!
5. The instructor was organized and well prepared for class.1 2 3 4 5 6 7
Had trouble finding classroom Scarily efficient!
6. The instructor communicated his/her ideas and material well.1 2 3 4 5 6 7
Garbled gobbledygook! Should have own TV show
7. The instructor was enthusiastic about his/her subject matter.1 2 3 4 5 6 7
Dead man talking! I am a convert
8. Overall evaluation of the instructor 2 3 4 5 6 7
Dog! Star!