CORPORATEFINANCESYLLABUSANDOUTLINESPRING2017

AswathDamodaran

Aswath Damodaran 1

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GeneralInformation

Aswath Damodaran

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¨ Office:Room9-69¨ Phone:998-0340¨ E-mail:adamodar@stern.nyu.edu¨ OfficeHours

¤ Monday9.45-10.20,1.15-1.50¤ Wednesday9.45-10.20,1.15-1.50¤ The“fairgame” principleapplies.

¨ TeachingAssistants1. Sanam Mechkat,ssm588@stern.nyu.edu2. HussainKazim,shk573@stern.nyu.edu3. JorgeFernandez-Cuervo,jorge.fernandez-

cuervo@stern.nyu.edu

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Classstructure

Aswath Damodaran

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Monday- Class- Followup

Tuesday- CorporateFinancestoryoftheweek

Wednesday- Class- Followup

Thursday- Projectupdateemail

Friday- Inpracticewebcast

Saturday- WeeklyNewsletter

Sunday- Weekaheadpreview

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Foreachclass,pleasetryto..

Aswath Damodaran

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¨ Behereandontime:Eachclasswillstartontime.Iwilltrytogethereafewminutesahead.

¨ Announcements:Iknowthatthisisoneofthefewchancesyougettotalktoalmosttheentireclass.Ifyouwanttomakeanannouncement,pleaseletmeknowaheadoftimeandtrytokeepittounder2minutes.

¨ Bringyourlecturenotepacketwithyou:Theseareavailableinthreeparts.Theycanbeboughtatthebookstoreordownloadedfrommywebsitebygoingto:http://www.stern.nyu.edu/~adamodar/New_Home_Page/cflect.html

¨ Ifyoudomissaclass,pleasecatchup:Allclasseswillbewebcast.Thewebcastswillbeonline(usually)withinafewhoursoftheclass.Thewebcastswillbeavailableinfourformats:¤ asastream(withahigh-speedinternetconnection)¤ asaYouTubevideo(ifyouhavealower-speedconnectionorsmallscreendevice)¤ asadownloadablevideofile(foracomputer,atabletorasmartphone)¤ asadownloadableaudiofile.

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InformationHubs

Aswath Damodaran

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¨ TheWebsite:Thecentrallocationforeverythingrelatedtothisclassisonthehomepagefortheclassonmywebsite:¤ http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.htmlIwilltrytoalsokeepthematerialonNYUClasses,butIdon’tlikeclosedsystems.Enoughsaid!

¨ TheAppleiTunesUversion:TheclasswillbecarriedonAppleiTunesU.IfyouhaveanAppledevice(aniPadorevenaniPhone),youcanwatchthewebcastsandgettheclassmaterialhere.Togettheclass,downloadtheiTunesUapptoyourdeviceandthenusethecodeEXC-JJS-XEAtoenrollintheclass.Alternatively,trythislink:

¨ https://itunes.apple.com/us/course/id1192407290IfyouhaveanAndroid(whatpossessedyoutocommitsuchamortalsin?),youcanwatchiTunesU,ifyouhavetheTunesviewer apponyourAndroid.Youcangetitbygoingtohttp://sourceforge.net/projects/tunesviewer/¤ YouTubeChannel:Thereisafinaloption,ifyourbroadbandconnectionisnotthatgreat

andyouarewatchingonaTablet/smartphone.ThereisaYouTubeplaylistforthisclass,whereallclasssessionswillbeloaded.

n https://www.youtube.com/playlist?list=PLUkh9m2Borqn0-LdT27pVxn-nJwpxTvYaWhenyougetachance,checkitout.

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MorewaysthatIcanharassyou!!

Aswath Damodaran

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¨ TheGooglecalendar:TheGooglecalendarfortheclassisavailableat:http://bit.ly/2hsWk6E

¨ Blog:Ipostonfinanceandvaluationonmyblog.Ifyouhavetimeonyourhands:http://aswathdamodaran.blogspot.com/

¨ Twitter:Ihaveatwitterfeed(@AswathDamodaran).Idon’ttweetmuchandyouwilllearnnothingaboutmypersonallife,butIhopetokeepyoupostedoncorporatefinanceandvaluation.

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Whatiscorporatefinance?

Aswath Damodaran

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¨ Everydecisionthatabusinessmakeshasfinancialimplications,andanydecisionwhichaffectsthefinancesofabusinessisacorporatefinancedecision.

¨ Definedbroadly,everythingthatabusinessdoesfitsundertherubricofcorporatefinance.

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CourseObjectives

Aswath Damodaran

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¨ Togiveyouthecapacitytounderstandthetheoryandapply,inrealworldsituations,thetechniquesthathavebeendevelopedincorporatefinance.¤ Mottoforclass:Ifitcannotbeapplied,whocares?.

¨ Togiveyouthebigpictureofcorporatefinancesothatyoucanunderstandhowthingsfittogether.¤ Mottoforclass:Youcanforgetthedetails,butdon’tmissthestoryline.

¨ Toshowyouthatcorporatefinanceisfun.¤ Mottoforclass:Arewehavingfunyet?

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TheTraditionalAccountingBalanceSheet

Aswath Damodaran

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Assets Liabilities

Fixed Assets

Debt

Equity

Short-term liabilities of the firm

Intangible Assets

Long Lived Real Assets

Assets which are not physical,like patents & trademarks

Current Assets

Financial InvestmentsInvestments in securities &assets of other firms

Short-lived Assets

Equity investment in firm

Debt obligations of firm

Current Liabilties

Other Liabilities Other long-term obligations

The Balance Sheet

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TheFinancialViewoftheFirm

Aswath Damodaran

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Assets Liabilities

Assets in Place Debt

Equity

Fixed Claim on cash flowsLittle or No role in managementFixed MaturityTax Deductible

Residual Claim on cash flowsSignificant Role in managementPerpetual Lives

Growth Assets

Existing InvestmentsGenerate cashflows todayIncludes long lived (fixed) and

short-lived(working capital) assets

Expected Value that will be created by future investments

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FirstPrinciples&TheBigPicture

Aswath Damodaran

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The Investment DecisionInvest in assets that earn a

return greater than the minimum acceptable hurdle

rate

The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and equity to

fund your operations

The Dividend DecisionIf you cannot find investments

that make your minimum acceptable rate, return the cash

to owners of your business

The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used

to fund it.

The return should relfect the magnitude and the timing of the

cashflows as welll as all side effects.

The optimal mix of debt and equity

maximizes firm value

The right kind of debt

matches the tenor of your

assets

How much cash you can

return depends upon

current & potential

investment opportunities

How you choose to return cash to the owners will

depend whether they prefer

dividends or buybacks

Maximize the value of the business (firm)

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Theme1:Corporatefinanceis“commonsense”

Aswath Damodaran

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¨ Thereisnothingearthshatteringaboutanyofthefirstprinciplesthatgoverncorporatefinance.Afterall,arguingthattakinginvestmentsthatmake9%withfundsthatcost10%toraiseseemstobestatingtheobvious(theinvestmentdecision),asisnotingthatitisbettertofindafundingmixwhichcosts10%insteadof11%(thefinancingdecision)orpositingthatifmostofyourinvestmentopportunitiesgeneratereturnslessthanyourcostoffunding,itisbesttoreturnthecashtotheownersofthebusinessandshrinkthebusiness.

¨ Shrewdbusinesspeople,notwithstandingtheirlackofexposuretocorporatefinancetheory,havealwaysrecognizedthesefundamentalsandputthemintopractice.

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Theme2:Corporatefinanceisfocused…

Aswath Damodaran

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¨ Itisthefocusonmaximizingthevalueofthebusinessthatgivescorporatefinanceitsfocus.Asaresultofthissingularobjective,wecan¤ Choosethe“right” investmentdecisionruletouse,givenamenuofsuchrules.

¤ Determinethe“right”mixofdebtandequityforaspecificbusiness

¤ Examinethe“right” amountofcashthatshouldbereturnedtotheownersofabusinessandthe“right” amounttoholdbackasacashbalance.

¨ Thiscertitudedoescomeatacost.Totheextentthatyouaccepttheobjectiveofmaximizingfirmvalue,everythingincorporatefinancemakescompletesense.Ifyoudonot,nothingwill.

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Theme3:Thefocusincorporatefinancechangesacrossthelifecycle…

Aswath Damodaran

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Stage 2Young Growth

Stage 1Start-up

Stage 4Mature Growth

Stage 6Decline

Revenues

Earnings

Stage 3:High Growth

Growth stage

$ R

even

ues/

Earn

ings

Time

Stage 5Mature Stable

Have an idea for a business that meets an unmet need in the market.

DescriptionCreate a business model that converts ideas into potential revenues & earnings

Build the business, converting potential into revenues.

Grow your business, shifting from losses to profits

Scale down your business as market shrinks.

The

Bar

Mitz

vah

The

Prod

uct T

est

The

Ligh

tbul

b (I

dea)

Mom

ent

The

Scal

ing

up T

est

The

Mid

life

Cri

sis

The

End

Gam

e

Defend your business from new competitors & find new markets

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Theme4:Corporatefinanceisuniversal…

Aswath Damodaran

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¨ Everybusiness,smallorlarge,publicorprivate,USoremergingmarket,hastomakeinvestment,financinganddividenddecisions.

¨ Theobjectiveincorporatefinanceforallofthesebusinessesremainsthesame:maximizingvalue.

¨ Whiletheconstraintsandchallengesthatfirmsfacecanvarydramaticallyacrossfirms,thefirstprinciplesdonotchange.¤ Apubliclytradedfirm,withitsgreateraccesstocapitalmarketsandmore

diversifiedinvestorbase,mayhavemuchlowercostsofdebtandequitythanaprivatebusiness,buttheybothshouldlookforthefinancingmixthatminimizestheircostsofcapital.

¤ Afirminanemergingmarketsmayfacegreateruncertainty,whenassessingnewinvestments,thanafirminadevelopedmarket,butbothfirmsshouldinvestonlyiftheybelievetheycangeneratehigherreturnsontheirinvestmentsthantheyfaceastheirrespective(andverydifferent)hurdlerates.

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Theme5:Ifyouviolatefirstprinciples,youwillpayaprice(nomatterwhoyouare..)

Aswath Damodaran

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¨ Therearesomeinvestors/analysts/managerswhoconvincethemselvesthatthefirstprinciplesdon’tapplytothembecauseoftheirsuperioreducation,standingorpastsuccesses,andthenproceedtoputintoplacestrategiesorschemesthatviolatefirstprinciples.

¨ Soonerorlater,thesestrategieswillblowupandcreatehugecosts.

¨ Almosteverycorporatedisasterorbubblehasitsoriginsinaviolationoffirstprinciples.

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RequiredMaterial

Aswath Damodaran

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I.Text:LectureNotes;Theyaresoldinthebookstoreintwoparts.Thelecturenotesarealsoavailableinpdfformatontheweb:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/cflect.htmII.SupplementaryText:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htmAppliedCorporateFinance:AUser’sManual(FourthEdition) byAswathDamodaran

III.PracticeProblems/Exams:EveryquizandfinalexamthatIhaveevergivenisonline,withsolutions.http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfprob0.htmlTherearealsoproblemsinthesupplementarybook,andsolutions.http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfprset.htm

IV.Spreadsheetsanddataareaccessibleonmyhomepage:www.stern.nyu.edu/~adamodar/New_Home_Page/data.htmlwww.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm

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ClassStructure&Chapterreferences

Aswath Damodaran

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The Investment DecisionInvest in assets that earn a

return greater than the minimum acceptable hurdle

rate

The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and equity to

fund your operations

The Dividend DecisionIf you cannot find investments

that make your minimum acceptable rate, return the cash

to owners of your business

The hurdle rate should reflect the riskiness of the

investment and the mix of debt and

equity used to fund it.

Chapters 3,4

The return should relfect the magnitude and the timing of the

cashflows as welll as all side effects.

Chapters 5,6

The right kind of debt

matches the tenor of your

assetsChapter 9

How much cash you can

return depends upon

current & potential

investment opportunitiesChapter 10

How you choose to return cash to the owners will

depend whether they prefer

dividends or buybacks

Chapter 11

Maximize the value of the business (firm): Chapter 2 & 12

The optimal mix of debt and equity

maximizes firm value

Chapters 7,8

Session 2-4, 24-25

Sessions 5-12Sessions 13-15 Sessions 16-19 Session 20

Session 21Sessions 22-23

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Anditwillbeapplied…

Aswath Damodaran

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Applied Corporate Finance

DisneySector: EntertainmentIncorporated in: US

Operations: MultinationalSize: Large market cap

ValeSector: Mining/MetalsIncorporated in: Brazil

Operations: MultinationalSize: Large market cap

Other: Government stake

Tata MotorsSector: Automotive

Incorporated in: IndiaOperations: Multinational

Size: Mid market capOther: Family Group

BaiduSector: Online Search

Incorporated in: Cayman IslOperations: China

Size: Mid market capOther: Shell company (VIE)

Deutsche BankSector: Bank/ Investment Bank

Incorporated in: GermanyOperations: MultinationalSize: Large market cap

Other: Regulated

BookscapeSector: Book RetailIncorporated in: US

Operations: New YorkOther: Privately owned

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GradingDistribution

Aswath Damodaran

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GradingBasis

Aswath Damodaran

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¨ GroupWork:Eachgroupwillberequiredtoworkononecase(youwillgetitinclassinthefourthweek)andonecomprehensiveproject(Seeattacheddescription).¤ Case:Duesession15(March29beforeclass) 10%¤ GroupProject:DueSession26(May8at5pm) 30%

¨ IndividualWork:¤ Quizzes:Therewillbethreeopen-bookandopen-notesquizzesworth10%each.n Quiz1:Session10- Coverssessions1-9(March6)n Quiz2:Session17- Coverssessions10-16(April5)n Quiz3:Session23- Coverssession17-22(April26)

¤ FinalExam:Thiswillalsobeanopen-bookandopen-notescumulativeexamworth30%.TBA.

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ExamGroundRules

Aswath Damodaran

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1.Quizzeswillbeonthedesignateddaysinthefirst30minutesoftheclass.2.Examswillbeopenbook,opennotes.Youcanbringinasmuchsupportingmaterialasyoucancarry.3.ExamsareNOTgroupwork.Youcannotconsultwith,talkto,communicatewithorpasstelepathic(ortext)messagestoanyoneelseinoroutoftheclassroom.Therearenoculturalexceptions.4.Whentimeiscalledonthequiz,pleasestopwriting.5.Eachquizisworth10%.6.Ifyouhavetomissaquizforgoodreason,youwillhavetoletmeknow(byemail)atleast15minutesbeforethequizthatyouwillbemissingthequiz.7.Ifyoumissaquizforgoodreason,the10%weightonthatquizwillbereallocatedacrossyourremainingexams(quizzesandfinal).Youcannotweightpriorquizzesmore.8.Ifyoutakeallthreequizzes,thescoreonyourworstquizwillbepusheduptotheaveragescoreacrossallofyourotherexams(theothertwoquizzesandthefinalexam)(Note:Itwillnotbethrownout). Ifyoumissaquiz,youwillnothavethisoption,evenifyoumissthequizforgoodreason.9.IgradeallofyourquizzesandIgivepartialcredit.So,pleaseshowallwork.Ifyouhaveabeefwiththegrading(andIdomakemistakes),pleasecometome10.Youcanbringcalculatorstothequizbutyoucannotuseyourlaptop(yet).Goodreasonsformissingquiz:Physicalormentalsickness(you,spouseorchild),Stalledsubwaytrain,Importantinterview(andyoucannotchangetime),TicketstoYankeeOpeningday.Notgoodreasonsformissingquiz:Didnothavetimetoprepare,Feelingoverwhelmed,Notquiteready,TicketstoRedSoxorMetsopeningday.

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RulesofEngagementforclassandgroupwork

Aswath Damodaran

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¨ Rulesofgroupwork¤ Pickyourowngroups.(Ifyouhavetroublegettingpicked,Iwillhelp)

¤ Allgroupworkwillbeselfpoliced,exceptinextremecircumstances.

¤ Therewillbeonegradepergroup,nomatterhowtheworkloadisdistributedamongthegroupmembers

¨ Rulesforclass¤ Idonotenforceattendance,butIwouldreallylikeyoutobehere.Ofcourse,ifyouhavetomissaclass,youcanalwaysusethewebcastasafallback.

¤ Cellphones…(Please,needIsaymore..)¤ Allparticipationiswelcome.