Description
Presentation is the act of introducing via speech and various additional means
Corporate Finance The Project
Aswath Damodaran
Aswath Damodaran!
1!
The big picture..
?? ??
??
You should ?nd a group to work with of between 4-8 people. You can make the judgment of optimal group size.
If corporate ?nance is best learned through application and in real time, there is no better way to learn the subject than to try out everything we do in class on a real company in real time…
You should consider this project a live lab experiment that you will be doing in class for the next 15 weeks. While I will try to apply the principles of corporate ?nance to the companies I have chosen Disney, Tata Chemicals, Deutsche, Aracruz and Bookscape… etc. you will be applying the same principles to your company.
Aswath Damodaran!
2!
Picking your companies
??
??
??
Each person picks a company. The company should be publicly traded and have at least one year of trading history and one set of annual ?nancial statements. The company can be listed in any market.
There should be a common theme in each group. The theme can be broadly de?ned. For instance, an entertainment group can include movie companies, television broadcasters and syndication companies. An automobile group can include auto companies, suppliers to auto companies and even an auto dealership. In putting together the group of companies, try to pick as diverse a mix of companies as possible (small and large, domestic and foreign, closely held and widely held….)
Avoid the following:
•? •? •? •? Financial service ?rms (banks, insurance companies & investment banks)
Money losing companies
Companies with large capital arms (GE and the auto companies)
Real estate investment trusts
3!
Aswath Damodaran!
I. Corporate Governance Analysis
?? ?? ??
??
Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?
What are the other potential con?icts of interest that you see in this ?rm?
How does this ?rm interact with ?nancial markets? How do markets get information on the ?rm?
How does this ?rm view its social obligations and manage its image in society?
Applies material from: Sessions 1-4
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
-
CEO pay by ?rm (Forbes)
Jensen’s Alpha by Industry
Aswath Damodaran!
4!
II. Stockholder Analysis
?? ??
What is the breakdown of stockholders in your ?rm - insiders, individuals and institutional?
Who is the marginal investor in this stock?
Applies material from: Session 5
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
-
Insider Holdings by Industry
Institutional Holdings by Industry
Aswath Damodaran!
5!
III. Risk and Return
??
??
?? ?? ??
What is the risk pro?le of your company? How much overall risk is there in this ?rm? Where is this risk coming from (market, ?rm, industry or currency)? How is the risk pro?le changing?
What return would you have earned investing in this company’s stock? Would you have under or out performed the market? How much of the performance can be attributed to management?
How risky is this company’s equity? What is its cost of equity?
How risky is this company’s debt? What is its cost of debt?
What is this company’s current cost of capital?
Applies material from: Sessions 6-11
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
Risk&Ret.xls (if needed)
Betas by Industry
Jensen’s Alpha by Industry
Cost of Debt/Capital by Industry
6!
Aswath Damodaran!
IV. Measuring Investment Returns
??
?? ??
Is there a typical project for this ?rm? If yes, what does it look like in terms of life (long term or short term), investment needs and cash ?ow patterns?
How good are the projects that the company has on its books currently?
Are the projects in the future likely to look like the projects in the past? Why or why not?
Applies material from: Sessions 12-16
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
capbudg.xls
ROE and Equity EVA by Sector
ROC and EVA by Sector
Aswath Damodaran!
7!
V. Capital Structure Choices
??
?? ??
??
What are the different kinds or types of ?nancing that this company has used to raise funds? Where do they fall in the continuum between debt and equity?
How large, in qualitative or quantitative terms, are the advantages to this company from using debt?
How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?
From the qualitative trade off, does this ?rm look like it has too much or too little debt?
Applies material from: Session 17
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
-
Debt Ratios by Industry
Trade-off Variables by Industry
8!
Aswath Damodaran!
VI. Optimal Capital Structure
?? ?? ??
Based upon the cost of capital approach, what is the optimal debt ratio for your ?rm?
Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this ?rm?
Does your ?rm have too much or too little debt
•? •? relative to the sector?
relative to the market?
Applies material from: Sessions 18-19
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
capstru.xls; capstruo.xls
Earnings Variance by Industry
Market Debt ratio Regression
Aswath Damodaran!
9!
VII. Mechanics of Moving to the Optimal
??
If your ?rm’s actual debt ratio is different from its “recommended” debt ratio, how should they get from the actual to the optimal? In particular,
•? should they do it gradually over time or should they do it right now?
•? should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity?
??
What type of ?nancing should this ?rm use? In particular,
•? should it be short term or long term?
•? what currency should it be in?
•? what special features should the ?nancing have?
Applies material from: Sessions 20-21
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
macrodur.xls
Firm Value Sensitivity by Industry
10!
Aswath Damodaran!
VIII. Dividend Policy
?? ?? ??
How has this company returned cash to its owners? Has it paid dividends or bought back stock?
How much cash has the ?rm accumulated over time?
Given this ?rm’s characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?
Applies material from: Session 22
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
-
Yields/Payout by Industry
Tradeoff Variables by Industry
Aswath Damodaran!
11!
IX. A Framework for Analyzing Dividends
?? ??
??
How much cash could this ?rm have returned to its stockholders over the last few years? How much did it actually return?
Given this dividend policy and the current cash balance of this ?rm, would you push the ?rm to change its dividend policy (return more or less cash to its owners)?
How does this ?rm’s dividend policy compare to those of its peer group and to the rest of the market?
Applies material from: Sessions 23-24
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
dividends.xls
Cap Ex Ratios by Industry
Working Capital Ratios By Industry
Debt Ratios by Industry
Aswath Damodaran!
12!
X. Valuation
?? ?? ??
??
What growth pattern (Stable, 2-stage, 3-stage) would you pick for this ?rm? How long will high growth last?
What is your estimate of value of equity in this ?rm? How does this compare to the market value?
What is the “key variable” (risk, growth, leverage, pro?t margins...) driving this value?
If you were hired to enhance value at this ?rm, what would be the path you would choose?
Applies material from: Session 25
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
Choice of valuation spreadsheets
Betas by Industry
Growth Fundamentals by Industry
Cap Ex and Wkg Cap by Industry
13!
Aswath Damodaran!
Project Time Frame
By this date 1 (2/9) 2
(2/16) 3
(2/23) 5
(3/16) 6
(3/30) 8
(4/13) 9
(4/20) 10
(4/27) 12 (5/4) 13 (5/11) 13 (5/11) 5/13
Aswath Damodaran!
You should be done with
Find a group
Pick your ?rm; Get data;
Corporate Governance; Stockholder Analysis
Risk and Return
Measuring Investment Returns
Capital Structure Choices
Optimal Capital Structure
Mechanics of Moving to the Optimal
Assess Dividend policy
A Framework for Analyzing Dividend Policy
Valuation
Project Due by the end of the day (5 pm)
14!
doc_367402238.pdf
Presentation is the act of introducing via speech and various additional means
Corporate Finance The Project
Aswath Damodaran
Aswath Damodaran!
1!
The big picture..
?? ??
??
You should ?nd a group to work with of between 4-8 people. You can make the judgment of optimal group size.
If corporate ?nance is best learned through application and in real time, there is no better way to learn the subject than to try out everything we do in class on a real company in real time…
You should consider this project a live lab experiment that you will be doing in class for the next 15 weeks. While I will try to apply the principles of corporate ?nance to the companies I have chosen Disney, Tata Chemicals, Deutsche, Aracruz and Bookscape… etc. you will be applying the same principles to your company.
Aswath Damodaran!
2!
Picking your companies
??
??
??
Each person picks a company. The company should be publicly traded and have at least one year of trading history and one set of annual ?nancial statements. The company can be listed in any market.
There should be a common theme in each group. The theme can be broadly de?ned. For instance, an entertainment group can include movie companies, television broadcasters and syndication companies. An automobile group can include auto companies, suppliers to auto companies and even an auto dealership. In putting together the group of companies, try to pick as diverse a mix of companies as possible (small and large, domestic and foreign, closely held and widely held….)
Avoid the following:
•? •? •? •? Financial service ?rms (banks, insurance companies & investment banks)
Money losing companies
Companies with large capital arms (GE and the auto companies)
Real estate investment trusts
3!
Aswath Damodaran!
I. Corporate Governance Analysis
?? ?? ??
??
Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?
What are the other potential con?icts of interest that you see in this ?rm?
How does this ?rm interact with ?nancial markets? How do markets get information on the ?rm?
How does this ?rm view its social obligations and manage its image in society?
Applies material from: Sessions 1-4
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
-
CEO pay by ?rm (Forbes)
Jensen’s Alpha by Industry
Aswath Damodaran!
4!
II. Stockholder Analysis
?? ??
What is the breakdown of stockholders in your ?rm - insiders, individuals and institutional?
Who is the marginal investor in this stock?
Applies material from: Session 5
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
-
Insider Holdings by Industry
Institutional Holdings by Industry
Aswath Damodaran!
5!
III. Risk and Return
??
??
?? ?? ??
What is the risk pro?le of your company? How much overall risk is there in this ?rm? Where is this risk coming from (market, ?rm, industry or currency)? How is the risk pro?le changing?
What return would you have earned investing in this company’s stock? Would you have under or out performed the market? How much of the performance can be attributed to management?
How risky is this company’s equity? What is its cost of equity?
How risky is this company’s debt? What is its cost of debt?
What is this company’s current cost of capital?
Applies material from: Sessions 6-11
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
Risk&Ret.xls (if needed)
Betas by Industry
Jensen’s Alpha by Industry
Cost of Debt/Capital by Industry
6!
Aswath Damodaran!
IV. Measuring Investment Returns
??
?? ??
Is there a typical project for this ?rm? If yes, what does it look like in terms of life (long term or short term), investment needs and cash ?ow patterns?
How good are the projects that the company has on its books currently?
Are the projects in the future likely to look like the projects in the past? Why or why not?
Applies material from: Sessions 12-16
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
capbudg.xls
ROE and Equity EVA by Sector
ROC and EVA by Sector
Aswath Damodaran!
7!
V. Capital Structure Choices
??
?? ??
??
What are the different kinds or types of ?nancing that this company has used to raise funds? Where do they fall in the continuum between debt and equity?
How large, in qualitative or quantitative terms, are the advantages to this company from using debt?
How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt?
From the qualitative trade off, does this ?rm look like it has too much or too little debt?
Applies material from: Session 17
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
-
Debt Ratios by Industry
Trade-off Variables by Industry
8!
Aswath Damodaran!
VI. Optimal Capital Structure
?? ?? ??
Based upon the cost of capital approach, what is the optimal debt ratio for your ?rm?
Bringing in reasonable constraints into the decision process, what would your recommended debt ratio be for this ?rm?
Does your ?rm have too much or too little debt
•? •? relative to the sector?
relative to the market?
Applies material from: Sessions 18-19
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
capstru.xls; capstruo.xls
Earnings Variance by Industry
Market Debt ratio Regression
Aswath Damodaran!
9!
VII. Mechanics of Moving to the Optimal
??
If your ?rm’s actual debt ratio is different from its “recommended” debt ratio, how should they get from the actual to the optimal? In particular,
•? should they do it gradually over time or should they do it right now?
•? should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity?
??
What type of ?nancing should this ?rm use? In particular,
•? should it be short term or long term?
•? what currency should it be in?
•? what special features should the ?nancing have?
Applies material from: Sessions 20-21
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
macrodur.xls
Firm Value Sensitivity by Industry
10!
Aswath Damodaran!
VIII. Dividend Policy
?? ?? ??
How has this company returned cash to its owners? Has it paid dividends or bought back stock?
How much cash has the ?rm accumulated over time?
Given this ?rm’s characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?
Applies material from: Session 22
Quantitative
Qualitative
Spreadsheets: Useful Data Sets:
-
Yields/Payout by Industry
Tradeoff Variables by Industry
Aswath Damodaran!
11!
IX. A Framework for Analyzing Dividends
?? ??
??
How much cash could this ?rm have returned to its stockholders over the last few years? How much did it actually return?
Given this dividend policy and the current cash balance of this ?rm, would you push the ?rm to change its dividend policy (return more or less cash to its owners)?
How does this ?rm’s dividend policy compare to those of its peer group and to the rest of the market?
Applies material from: Sessions 23-24
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
dividends.xls
Cap Ex Ratios by Industry
Working Capital Ratios By Industry
Debt Ratios by Industry
Aswath Damodaran!
12!
X. Valuation
?? ?? ??
??
What growth pattern (Stable, 2-stage, 3-stage) would you pick for this ?rm? How long will high growth last?
What is your estimate of value of equity in this ?rm? How does this compare to the market value?
What is the “key variable” (risk, growth, leverage, pro?t margins...) driving this value?
If you were hired to enhance value at this ?rm, what would be the path you would choose?
Applies material from: Session 25
Qualitative
Quantitative
Spreadsheets: Useful Data Sets:
Choice of valuation spreadsheets
Betas by Industry
Growth Fundamentals by Industry
Cap Ex and Wkg Cap by Industry
13!
Aswath Damodaran!
Project Time Frame
By this date 1 (2/9) 2
(2/16) 3
(2/23) 5
(3/16) 6
(3/30) 8
(4/13) 9
(4/20) 10
(4/27) 12 (5/4) 13 (5/11) 13 (5/11) 5/13
Aswath Damodaran!
You should be done with
Find a group
Pick your ?rm; Get data;
Corporate Governance; Stockholder Analysis
Risk and Return
Measuring Investment Returns
Capital Structure Choices
Optimal Capital Structure
Mechanics of Moving to the Optimal
Assess Dividend policy
A Framework for Analyzing Dividend Policy
Valuation
Project Due by the end of the day (5 pm)
14!
doc_367402238.pdf