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CORPORATEFINANCESYLLABUSANDOUTLINESPRING2016
AswathDamodaran
Aswath Damodaran 1
2
GeneralInformaDon
Aswath Damodaran
2
¨ Office:Room9-96¨ Phone:998-0340¨ E-mail:[email protected]¨ OfficeHours
¤ Monday9.45-10.20,1-2.30¤ Wednesday9.45-10.20,1-2.30¤ The“fairgame”principleapplies.
¨ TeachingAssistants¨ TherewillbethreeTFsfortheclass.
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Classstructure
Aswath Damodaran
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Monday-Class-Followup
Tuesday-CorporateFinancestoryoftheweek
Wednesday-Class-Followup
Thursday-Projectupdateemail
Friday-InpracDcewebcast
Saturday-WeeklyNewsle\er
Sunday-Weekaheadpreview
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Foreachclass,pleasetryto..
Aswath Damodaran
4
¨ BehereandonDme:EachclasswillstartonDme.Iwilltrytogethereafewminutesahead.
¨ Announcements:IknowthatthisisoneofthefewchancesyougettotalktoalmosttheenDreclass.Ifyouwanttomakeanannouncement,pleaseletmeknowaheadofDmeandtrytokeepittounder2minutes
¨ Bringyourlecturenotepacketwithyou:Theseareavailableinthreeparts.Theycanbeboughtatthebookstoreordownloadedfrommywebsitebygoingto:h\p://www.stern.nyu.edu/~adamodar/New_Home_Page/cflect.html
¨ Ifyoudomissaclass,pleasecatchup:Allclasseswillbewebcast.Thewebcastswillbeonline(usually)withinafewhoursoftheclass.Thewebcastswillbeavailableinfourformats:¤ asastream(withahigh-speedinternetconnecDon)¤ asaYouTubevideo(ifyouhavealower-speedconnecDonorsmallscreendevice)¤ asadownloadablevideofile(foracomputer,atabletorasmartphone)¤ asadownloadableaudiofile.
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InformaDonHubs
Aswath Damodaran
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¨ TheWebsite:ThecentrallocaDonforeverythingrelatedtothisclassisonthehomepagefortheclassonmywebsite:¤ h\p://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.htmlIwilltrytoalsokeepthematerialonNYUClasses,butIdon’tlikeclosedsystems.Enoughsaid!
¨ TheAppleiTunesUversion:TheclasswillbecarriedonAppleiTunesU.IfyouhaveanAppledevice(aniPadorevenaniPhone),youcanwatchthewebcastsandgettheclassmaterialhere.Togettheclass,downloadtheiTunesUapptoyourdeviceandthenclickonthelinkfortheclass.CominginJanuaryIfyouhaveanAndroid(whatpossessedyoutocommitsuchamortalsin?),youcanwatchiTunesU,ifyouhavetheTunesviewerapponyourAndroid.Youcangetitbygoingtoh\p://sourceforge.net/projects/tunesviewer/
¤ YouTubeChannel:ThereisafinalopDon,ifyourbroadbandconnecDonisnotthatgreatandyouarewatchingonaTablet/smartphone.ThereisaYouTubeplaylistforthisclass,whereallclasssessionswillbeloaded.CominginJanuaryWhenyougetachance,checkitout.
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MorewaysthatIcanharassyou!!
Aswath Damodaran
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¨ TheGooglecalendar:TheGooglecalendarfortheclassisavailableat¨ h\p://bit.ly/1k0xT2t
¨ Blog:IpostonfinanceandvaluaDononmyblog.IfyouhaveDmeonyourhands:h\p://aswathdamodaran.blogspot.com/
¨ Twi\er:Ihaveatwi\erfeed(@AswathDamodaran).Idon’ttweetmuchandyouwilllearnnothingaboutmypersonallife,butIhopetokeepyoupostedoncorporatefinanceandvaluaDon.
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Whatiscorporatefinance?
Aswath Damodaran
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¨ EverydecisionthatabusinessmakeshasfinancialimplicaDons,andanydecisionwhichaffectsthefinancesofabusinessisacorporatefinancedecision.
¨ Definedbroadly,everythingthatabusinessdoesfitsundertherubricofcorporatefinance.
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CourseObjecDves
Aswath Damodaran
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¨ Togiveyouthecapacitytounderstandthetheoryandapply,inrealworldsituaDons,thetechniquesthathavebeendevelopedincorporatefinance.¤ Mo\oforclass:Ifitcannotbeapplied,whocares?.
¨ Togiveyouthebigpictureofcorporatefinancesothatyoucanunderstandhowthingsfittogether.¤ Mo\oforclass:Youcanforgetthedetails,butdon’tmissthestoryline.
¨ Toshowyouthatcorporatefinanceisfun.¤ Mo\oforclass:Arewehavingfunyet?
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TheTradiDonalAccounDngBalanceSheet
Aswath Damodaran
9
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
12
¨ Thereisnothingearthsha\eringaboutanyofthefirstprinciplesthatgoverncorporatefinance.Anerall,arguingthattakinginvestmentsthatmake9%withfundsthatcost10%toraiseseemstobestaDngtheobvious(theinvestmentdecision),asisnoDngthatitisbe\ertofindafundingmixwhichcosts10%insteadof11%(thefinancingdecision)orposiDngthatifmostofyourinvestmentopportuniDesgeneratereturnslessthanyourcostoffunding,itisbesttoreturnthecashtotheownersofthebusinessandshrinkthebusiness.
¨ Shrewdbusinesspeople,notwithstandingtheirlackofexposuretocorporatefinancetheory,havealwaysrecognizedthesefundamentalsandputthemintopracDce.
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Theme2:Corporatefinanceisfocused…
Aswath Damodaran
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¨ Itisthefocusonmaximizingthevalueofthebusinessthatgivescorporatefinanceitsfocus.AsaresultofthissingularobjecDve,wecan¤ Choosethe“right”investmentdecisionruletouse,givenamenuofsuchrules.
¤ Determinethe“right”mixofdebtandequityforaspecificbusiness
¤ Examinethe“right”amountofcashthatshouldbereturnedtotheownersofabusinessandthe“right”amounttoholdbackasacashbalance.
¨ ThiscerDtudedoescomeatacost.TotheextentthatyouaccepttheobjecDveofmaximizingfirmvalue,everythingincorporatefinancemakescompletesense.Ifyoudonot,nothingwill.
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Theme3:Thefocusincorporatefinancechangesacrossthelifecycle…
Aswath Damodaran
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Assets Liabilities
Investments alreadymade
Debt
Equity
$ 7 billion
$ 11 billionInvestments yet tobe made
$ 15 billion
$ 3 billion
Con Ed’s Financial Balance Sheet
$ 13.6 billion
$ 0.00 billion
13.35 billion
$0.25 billion
Assets Liabilities
Investments alreadymade
Debt
EquityInvestments yet tobe made
Linkedin's Financial Balance Sheet
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Theme4:Corporatefinanceisuniversal…
Aswath Damodaran
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¨ Everybusiness,smallorlarge,publicorprivate,USoremergingmarket,hastomakeinvestment,financinganddividenddecisions.
¨ TheobjecDveincorporatefinanceforallofthesebusinessesremainsthesame:maximizingvalue.
¨ WhiletheconstraintsandchallengesthatfirmsfacecanvarydramaDcallyacrossfirms,thefirstprinciplesdonotchange.¤ Apubliclytradedfirm,withitsgreateraccesstocapitalmarketsandmore
diversifiedinvestorbase,mayhavemuchlowercostsofdebtandequitythanaprivatebusiness,buttheybothshouldlookforthefinancingmixthatminimizestheircostsofcapital.
¤ Afirminanemergingmarketsmayfacegreateruncertainty,whenassessingnewinvestments,thanafirminadevelopedmarket,butbothfirmsshouldinvestonlyiftheybelievetheycangeneratehigherreturnsontheirinvestmentsthantheyfaceastheirrespecDve(andverydifferent)hurdlerates.
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Theme5:Ifyouviolatefirstprinciples,youwillpayaprice(noma\erwhoyouare..)
Aswath Damodaran
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¨ Therearesomeinvestors/analysts/managerswhoconvincethemselvesthatthefirstprinciplesdon’tapplytothembecauseoftheirsuperioreducaDon,standingorpastsuccesses,andthenproceedtoputintoplacestrategiesorschemesthatviolatefirstprinciples.
¨ Soonerorlater,thesestrategieswillblowupandcreatehugecosts.
¨ AlmosteverycorporatedisasterorbubblehasitsoriginsinaviolaDonoffirstprinciples.
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RequiredMaterial
Aswath Damodaran
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I.Text:LectureNotes;Theyaresoldinthebookstoreintwoparts.Thelecturenotesarealsoavailableinpdfformatontheweb:
h\p://www.stern.nyu.edu/~adamodar/New_Home_Page/cflect.htm
II.SupplementaryText:AppliedCorporateFinance:AUser’sManual(ThirdEdiDon)byAswathDamodaranh\p://www.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htmAppliedCorporateFinance:AUser’sManual(FourthEdiDon)byAswathDamodaran:ThisisabetaversionandIamsurethatthereareroughendsandtypos.Ifyouwanttouseitinstead,doso.Itisfreebutinreturn,Iwouldlikeyoutodrawmya\enDontotyposandpartsthatareconfusing.
III.PracDceProblems/Exams:EveryquizandfinalexamthatIhaveevergivenisonline,withsoluDons.h\p://www.stern.nyu.edu/~adamodar/New_Home_Page/cfprob0.htmlTherearealsoproblemsinthesupplementarybook,andsoluDons.h\p://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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GradingDistribuDon
Aswath Damodaran
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GradingBasis
Aswath Damodaran
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¨ GroupWork:Eachgroupwillberequiredtoworkononecase(youwillgetitinclassinthefourthweek)andonecomprehensiveproject(Seea\acheddescripDon).¤ Case:Duesession15(March30beforeclass) 10%¤ GroupProject:DueSession26(May9at5pm) 30%
¨ IndividualWork:¤ Quizzes:Therewillbethreeopen-bookandopen-notesquizzesworth10%each.n Quiz1:Session10-Coverssessions1-9(March7)n Quiz2:Session17-Coverssessions10-16April6)n Quiz3:Session23-Coverssession17-22(April27)
¤ FinalExam:Thiswillalsobeanopen-bookandopen-notescumulaDveexamworth30%.ItisscheduledforTBAfrom10-12.
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ExamGroundRules
Aswath Damodaran
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1.Quizzeswillbeonthedesignateddaysinthefirst30minutesoftheclass.2.Examswillbeopenbook,opennotes.YoucanbringinasmuchsupporDngmaterialasyoucancarry.3.ExamsareNOTgroupwork.Youcannotconsultwith,talkto,communicatewithorpasstelepathic(ortext)messagestoanyoneelseinoroutoftheclassroom.TherearenoculturalexcepDons.4.WhenDmeiscalledonthequiz,pleasestopwriDng.5.Eachquizisworth10%.6.Ifyouhavetomissaquizforgoodreason,youwillhavetoletmeknow(byemail)atleast15minutesbeforethequizthatyouwillbemissingthequiz.7.Ifyoumissaquizforgoodreason,the10%weightonthatquizwillbereallocatedacrossyourremainingexams(quizzesandfinal).Youcannotweightpriorquizzesmore.8.Ifyoutakeallthreequizzes,thescoreonyourworstquizwillbepusheduptotheaveragescoreacrossallofyourotherexams(theothertwoquizzesandthefinalexam)(Note:Itwillnotbethrownout).Ifyoumissaquiz,youwillnothavethisopDon,evenifyoumissthequizforgoodreason.9.IgradeallofyourquizzesandIgiveparDalcredit.So,pleaseshowallwork.Ifyouhaveabeefwiththegrading(andIdomakemistakes),pleasecometome10.Youcanbringcalculatorstothequizbutyoucannotuseyourlaptop(yet).Goodreasonsformissingquiz:Physicalormentalsickness(you,spouseorchild),Stalledsubwaytrain,Importantinterview(andyoucannotchangeBme),TicketstoYankeeOpeningday.Notgoodreasonsformissingquiz:DidnothaveBmetoprepare,Feelingoverwhelmed,Notquiteready,TicketstoRedSoxorMetsopeningday.
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RulesofEngagementforclassandgroupwork
Aswath Damodaran
23
¨ Rulesofgroupwork¤ Pickyourowngroups.(Ifyouhavetroublegeungpicked,Iwillhelp)
¤ Allgroupworkwillbeselfpoliced,exceptinextremecircumstances.
¤ Therewillbeonegradepergroup,noma\erhowtheworkloadisdistributedamongthegroupmembers
¨ Rulesforclass¤ Idonotenforcea\endance,butIwouldreallylikeyoutobehere.Ofcourse,ifyouhavetomissaclass,youcanalwaysusethewebcastasafallback.
¤ Cellphones…(Please,needIsaymore..)¤ AllparDcipaDoniswelcome.