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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
201
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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)
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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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