project workbook (january 2016)people.stern.nyu.edu/adamodar/pdfiles/execs/projworkbook... ·...

PROJECTWORKBOOK(JANUARY2016)

“Talkischeap.TimeforacEon”

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Yourdata…

¨  DataPacket¤  Page1:HDS(Bloomberg)–Top17stockholders¤  Page2:Beta(Bloomberg)–2yearweeklyreturnbeta¤  Pages3-7:DES(Bloomberg)–5pagedescripEonofyourcompany(Forsomeof

you,itmaybeonly4pages)¤  Page8:CRPR–BondRaEngorBloombergDefaultRiskAssessement¤  Page9:DDIS:Debtduetable(withmaturiEes)¤  Page10:FA(MulE-yearfinancialsummary)

¨  Checklistbeforeyoustart¤  Whatcountryisyourcompanyincorporatedin?¤  Whatcurrencyarethefinancialstatementsin?(Notnecessarilyinthelocal

currency)¤  WhatcurrencyisyourmarketcapitalizaEonandstockpricestatedin?(Maynot

matchthecurrencyofthefinancialstatements)¤  Whatwasthemostrecentfiscalyear?(Formostofyourcompanies,itwillbea

yearendingDecember…butsomemayhaveotheryearends)

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Percent of outstanding shares in company

Source for data: Will vary across markets. 13F is SEC filing for US mutual/pension funds

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CorporateGovernance:AssessingwherethepowerliesandpotenEalconflictsofinterest

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1.InsEtuEonalDefault5

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2.SelfHoldings?6

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3.TheGovernmentInfluence?7

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4.DifferentvoEngrights?8

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5.FamilyGroupCompanies9

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6.Foundershangon…10

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7.CorporateCrossHoldings11

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8.AcEvistinvestors12

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Themarginalinvestorinyourfirmis….13

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Riskfreerate:MajorCurrencyGovernmentBonds

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LocalCurrencyGovernmentBondRates–January2016

Aswath Damodaran15

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Approach1:DefaultspreadfromGovernmentBonds

The Brazil Default SpreadBrazil 2021 Bond: 6.83%US 2021 T.Bond: 2.00%Spread: 4.83%

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Approach2:CDSSpreads–January2016

Aswath Damodaran17

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Approach3:TypicalDefaultSpreads:January2016

Aswath Damodaran18

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Geingtoariskfreerateinacurrency:Example

¨  TheBraziliangovernmentbondrateinnominalreaisonJanuary1,2016was16.51%.Togettoariskfreerateinnominalreais,wecanuseoneofthreeapproaches.¨  Approach1:GovernmentBondspread

¤  The2021Brazilbond,denominatedinUSdollars,hasaspreadof4.83%overtheUStreasurybondrate.

¤  Riskfreeratein$R=16.51%-4.83%=11.68%¨  Approach2:TheCDSSpread

¤  TheCDSspreadforBrazil,adjustedfortheUSCDSspreadwas5.19%.

¤  Riskfreeratein$R=16.51%-5.19%=11.32%¨  Approach3:TheRaEngbasedspread

¤  BrazilhasaBaa3localcurrencyraEngfromMoody’s.ThedefaultspreadforthatraEngis2.44%

¤  Riskfreeratein$R=16.51%-2.44%=14.07%

Aswath Damodaran19

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RiskfreeRates:ByCurrency–January201620

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RiskfreeRate:DesperaEonTime?

¨  ItisenErelypossiblethatyoumaybeunabletofindagovernmentbondissuedinthelocalcurrency(thatistraded)orthatyoudonottrustthegovernmentbondrateasafairmarketinterestrate.Therearetwowaysyoucangettoariskfreerate,inthiscase.

1.  Buildupapproach:Theriskfreerateinanycurrencycanbewrioenasthesumoftwovariables:

Riskfreerate=ExpectedInflaEonincurrency+ExpectedrealinterestrateTheexpectedrealinterestratecanbecomputedinoneoftwoways:fromtheUSTIPsrateorsetequaltorealgrowthintheeconomy.Thus,iftheexpectedinflaEonrateinacountryisexpectedtobe15%andtheTIPsrateis1%,theriskfreerateis16%.

2.  US$rate&DifferenEalInflaEon:AlternaEvely,youcanscaleuptheUS$riskfreeratebythedifferenEalinflaEonbetweentheUS$andthecurrencyinquesEon:

RiskfreerateCurrency=Thus,iftheUS$riskfreerateis2.27%,theinflaEonrateintheforeigncurrencyis15%andtheinflaEonrateinUS$is1.5%,theforeigncurrencyriskfreerateisasfollows:Riskfreerate= 1.0227 !.!"

!.!"# − 1=15.87%

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Black #: Total ERPRed #: Country risk premiumAVG: GDP weighted average

ERP

: Jan

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Regressionbetais0.422

Interceptin%0.057%

AdjBeta=(2/3)(0.422)+(1/3)(1)=0.614

Rsquared(decimals)=21.5%

Stderrorofbeta=0.0867%confidence:0.34(=0.42-0.08)to0.50(=0.42+0.08)95%confidence:0.26(=0.42-2*0.08)to0.58(=0.42+2*0.08)

Ifannualizedriskfreerateduringperiodwas1.5%,Jensen’salpha=0.057%-(1.5%/52)*(1-0.422)=0.0403%

Usinga6%ERPformaturemarketsandacurrentriskfreerateof1.87%,ExpectedReturn=Riskfreerate+RawBeta(ERP)

=1.87%+0.422(6%)=4.40%23

Basedonweeklyreturns

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ThebestR-squaredever?24

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Whatsectorisyourfirmin?Bloombergsectorcategory

ReadthedescripEonandmakeyourownjudgment

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InterestcoverageraEos

InterestcoverageraEo=OperaEngprofit/Interestexpense =17,741/1,441=12.10

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SyntheEcRaEngsandDefaultSpreads

Market cap > $ 5 billion Market cap < $ 5 billion

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Marginal Corporate Tax Rate- By Country (2015)

Marketvalueofequity=66,452.45M BVofdebt=TotalDebt=$28,360M

Withapre-taxcostofdebtof3%MVofdebt=1,441(PVofannuity,3years,3%)+28,360/(1.03)3=$30,029M

PVofopera6ngleasesat3%767/1.03+519/1.032+382/1.033+300/1.034+202/1.035+259.5/1.036+259.5/1.037=2,187

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Pre-taxReturnoncapital=OperaEngIncome/(BVofDebtlastyear+BVofEquitylastyear–Cashlastyear)=17741/(22,623+55,734-6,361)=24.64%Aver-taxReturnoncapital=Pre-taxReturnoncapital(1-taxrate)=24.64%(1-.4603)=.1330or13.30%Taxrateused:EffecEvetaxrate(fromthispage)34

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ReturnSpreadsGlobally….37

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

Australia,NZandCanada

DevelopedEurope EmergingMarkets Japan UnitedStates Global

ExcessReturn(ROCminusCostofCapital)forfirmswithmarketcapitaliza6on>$50million:Globalin2014

<-5%

-5%-0%

0-5%

5-10%

>10%

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Dividendyieldandpayout40

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NetIncome 12,345+Deprecn&Amortzn +7,742+Chginnon-cashWC +1,748+CapEx -14,642+Inc(Dec)inSTDebt +0+IncreaseinLTDebt +5,794-DecreaseinLTDebt -0=FCFE =9,491M DividendsPaid -3,531Decreasecapitalstock -11,623 Dividends+Buybacks -15,154

EBITDA–OperaEngIncome=DepreciaEon&AmorEzaEon25,443–17,741=7,742M

OperaEngIncome 17,741-Taxes=17741*.4603=-8,166+Deprecn&Amortzn +7,742+Chginnon-cashWC +1,748+CapEx -14,642=FCFF =4,423M

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Post-classAnalysis

¨  Nowthatyouhavethenumbersforyourcompany,youshouldbeinaposiEontomakeanassessmentofwhereyourcompanystandsrightnow,whatitdoeswell,whatitdoesbadlyandwhatyouwouldchangeaboutit.

¨  YourfinalprojectwillthereforecontaineightpartsandanopEonalone,ifyouaresoinclined:I.StockholderAnalysis:WhohasthepowerandwhatarethepotenEalconflictsofinterest?II.RiskandReturn:Howriskyisyourfirmandwhatareitshurdlerates?III.Investments:HowgoodareexisEnginvestmentsandwhatisthepotenEalforthefuture?IV.CapitalStructureChoices:Whatarethecurrentfinancingchoices?V.OpEmalFinancing:WhatistheopEmalmixofdebtandequityforthefirm?VI.FinancingChanges:ShouldfirmmovetoopEmalandwhattypeofdebtshouldituse?VII.DividendPolicy:Howmuchandhowdoesthefirmreturncashtostockholders?VIII.DividendAssessment:Shouldthefirmreturnmoreorlesscashtostockholders?IX:ValuaEon(opEonal):Whatvaluewouldyouaoachtothefirmanditsequity?

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