![[Type text] [Type text] [Type text]
Part 1: Native American’s Forced Assimilation
Instructions: Watch the video
( https://www.vox.com/2019/10/14/20913408/us-stole-
thousands-of-native-american-children) to get a history of
assimilation in theUS. Then answer the following questions.
1.What was the purpose for the forced assimilation of Native
Americans?
2.Name two strategies the US used to assimilate Native
Americans and explain how each of these strategies worked.
Part 2: Keywords for Asian American Studie “Assimilation”
(pp. 14-17)
https://books.google.com/books?id=bo_dBwAAQBAJ&printsec
=frontcover&dq=Keywords+for+Asian+American+Studie&hl=e
n&newbks=1&newbks_redir=0&sa=X&ved=2ahUKEwjsrcHi7O
nnAhWnl3IEHeZyDKMQ6AEwAHoECAUQAg#v=onepage&q=](https://image.slidesharecdn.com/typetexttypetexttypetextpart1nativeamericans-230107180059-bf7af0b3/85/type-texttype-texttype-textpart-1-native-americansdocx-1-320.jpg)
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- 1. [Type text] [Type text] [Type text] Part 1: Native American’s Forced Assimilation Instructions: Watch the video ( https://www.vox.com/2019/10/14/20913408/us-stole- thousands-of-native-american-children) to get a history of assimilation in theUS. Then answer the following questions. 1.What was the purpose for the forced assimilation of Native Americans? 2.Name two strategies the US used to assimilate Native Americans and explain how each of these strategies worked. Part 2: Keywords for Asian American Studie “Assimilation” (pp. 14-17) https://books.google.com/books?id=bo_dBwAAQBAJ&printsec =frontcover&dq=Keywords+for+Asian+American+Studie&hl=e n&newbks=1&newbks_redir=0&sa=X&ved=2ahUKEwjsrcHi7O nnAhWnl3IEHeZyDKMQ6AEwAHoECAUQAg#v=onepage&q=
- 2. Keywords%20for%20Asian%20American%20Studie&f=false Instructions: Answer the following questions. Provide a passage from the reading (i.e., “Assimilation”) in addition to your response to support your responses. 1.What are the five different definitions or perspectives on assimilation? As you identify them, note which one you think is most accurate for the contemporary situation of assimilation. 2.According to Lisa Park, how is assimilation enforced in our society? 3.What are the criticism of assimilation?4.What does Lisa Park say is a unique experience of assimilation for Asian Americans? (p. 17) Part 3: Assessing assimilation in our societyAnswer the
- 3. following questions based on your observations, experiences, or insights. 1.Do immigrants have a duty to learn and adopt the local culture, or should they try to retain their native culture? 2.What does successful assimilation look like? What are some results of it? 3.What does unsuccessful assimilation look like? What are some results of it? 4.How does race fact into the process or act of assimilation? Valuation outputBase year12345678910Terminal yearRevenue growth
- 4. rate70.00%70.00%70.00%70.00%70.00%56.55%43.10%29.65% 16.20%2.75%2.75%Revenues$ 1,328.70$ 2,258.78$ 3,839.93$ 6,527.88$ 11,097.40$ 18,865.58$ 29,534.07$ 42,263.25$ 54,794.31$ 63,670.99$ 65,421.94$ 67,221.04EBIT (Operating) margin-1.64%- 0.23%1.18%2.60%4.01%5.43%6.84%8.26%9.67%11.09%12.50 %12.50%EBIT (Operating income)$ (21.86)$ (5.21)$ 45.46$ 169.63$ 445.34$ 1,023.93$ 2,020.72$ 3,489.47$ 5,299.16$ 7,058.25$ 8,177.74$ 8,402.63Tax rate0.00%0.00%0.00%0.00%0.00%0.00%7.00%14.00%21.00%2 8.00%35.00%35.00%EBIT(1-t)$ (21.86)$ (5.21)$ 45.46$ 169.63$ 445.34$ 1,023.93$ 1,879.27$ 3,000.94$ 4,186.33$ 5,081.94$ 5,315.53$ 5,461.71- Reinvestment$ 659.64$ 1,121.38$ 1,906.35$ 3,240.79$ 5,509.35$ 7,566.30$ 9,027.79$ 8,887.27$ 6,295.52$ 1,241.81$ 1,877.46FCFF$ (664.84)$ (1,075.92)$ (1,736.72)$ (2,795.45)$ (4,485.42)$ (5,687.03)$ (6,026.85)$ (4,700.94)$ (1,213.58)$ 4,073.72$ 3,584.25Cost of capital10.03%10.03%10.03%10.03%10.03%9.63%9.22%8.81%8 .41%8.00%8.00%Cumulated discount factor0.90880.82600.75070.68220.62000.56560.51780.47590.43 900.4065PV(FCFF)$ (604.23)$ (888.67)$ (1,303.68)$ (1,907.10)$ (2,781.02)$ (3,216.43)$ (3,120.90)$ (2,237.14)$ (532.75)$ 1,655.85Terminal cash flow$ 3,584.25Terminal cost of capital8.00%Terminal value$ 68,271.37PV(Terminal value)$ 27,750.37PV (CF over next 10 years)$ (14,936.06)Sum of PV$ 12,814.31- Debt$ 578.74+ Cash$ 201.89Value of equity in common stock$ 12,437.46Number of shares121.45Estimated value /share$ 102.41Price$ 168.76Price as % of value164.79%Implied variablesAfter year 10Sales to capital ratio1.411.411.411.411.411.411.411.411.411.41Invested capital$ 1,698$ 2,358$ 3,479$ 5,385$ 8,626$ 14,136$ 21,702$ 30,730$ 39,617$ 45,913$ 47,154ROIC-1.29%- 0.22%1.31%3.15%5.16%7.24%8.66%9.77%10.57%11.07%11.27 %8.00%
- 5. Input sheetDate of valuationAug-09Important: Before you run this spreadsheet, go into preferences in Excel and check under Calculation optionsCompany nameTeslaThere should be a check against the iteration box. If there is not, you will get circular reasoning errors.Numbers from your base year below ( in consistent units)This yearLast yearCountry of incorporationUnited States of America-0.163109545Industry (US)AutomotiveIndustry (Global)Auto & TruckRevenues$ 1,328.70$ 413.26Operating income or EBIT$ (216.72)$ (394.28)Don't adjust operating income for leases or R&D, if you plan to use the spreadsheet option to do so. (see below)Interest expense$ 19.83$ (0.25)Book value of equity$ 629.43$ 124.70Book value of debt$ 578.74$ 452.34Do you have R&D expenses to capitalize?YesIf you want to capitalize R&D, you have to input the numbers into the R&D worksheet.Do you have operating lease commitments?NoIf you have operating leases, please enter your lease commitments in the lease worksheet below and I will convert to debtCash and cross holdings$ 201.89$ 746.06Non-operating assets$ - 0$ - 0Minority interests$ - 0$ - 0Number of shares outstanding =121.45Current stock price =$ 168.76Computed numbers: Here is what your company's numbers look like, relative to industry.Effective tax rate =0.00%If you are not working in US dollars, you should add the inflation differential to the industry averages.Marginal tax rate =35.00%CompanyIndustry (US data)Industry (Global data)The value drivers below:Revenue growth in the most recent year =221.52%42.35%78.00%Compounded annual revenue growth rate over next 5 years =70.00%Target Porsche revenuesPre-tax operating margin in the most recent year =- 1.64%5.80%5.98%Target pre-tax operating margin (EBIT as % of sales in year 10) =12.50%95th percentile: Auto industrySales to capital ratio in most recent year =1.321.411.49Sales to capital ratio (for computing reinvestment) =1.41Average for USReturn on invested capital in most recent year=128.22%5.77%7.83%Market numbersYear 10 ROC=
- 6. 11.34%Standard deviation in stock prices =59.23%Riskfree rate2.75%Cost of capital =6.79%Initial cost of capital =10.03%See cost of capital worksheetOther inputsTreated it as 60% auto, 40% technology company for the momentDo you have employee options outstanding?YesNumber of options outstanding =25.01From last 10KAverage strike price =$21.20From last 10KAverage maturity =3.50From last 10KStandard deviation on stock price =50.00%Used 80th percentile of US stock standard deviatonsDefault assumptions.In stable growth, I will assume that your firm will have a cost of capital similar to that of typical mature companies (riskfree rate + 4.5%)Do you want to override this assumption =YesMature companies generally see their risk levels approach the averageIf yes, enter the cost of capital after year 10 =8%Though some sectors, even in stable growth, may have higher risk.I will assume that your firm will earn a return on capital equal to its cost of capital after year 10. I am assuming that whatever competitive advantages you have today will fade over time.Do you want to override this assumption =NoMature companies find it difficult to generate returns that exceed the cost of capitalIf yes, enter the return on capital you expect after year 1012%But there are significant exceptions among companies with long-lasting competitive advantages.I will assume that your firm has no chance of failure over the foreseeable future.Do you want to override this assumption =YesMany young, growth companies fail, especially if they have trouble raising cash. Many distressed companies fail, because they have trouble making debt payments.If yes, enter the probability of failure =10%Tough to estimate but a key input.What do you want to tie your proceeds in failure to?VB: Book value of capital, V= Estimated fair value for the companyEnter the distress proceeds as percentage of book or fair value50%This can be zero, if the assets will be worth nothing if the firm fails.I will assume that your effective tax rate will adjust to your marginal tax rate by your terminal year. If you override this assumption, I will leave the tax rate at your
- 7. effective tax rate.Do you want to override this assumption =NoI will assume that you have no losses carried forward from prior years ( NOL) coming into the valuation. If you have a money losing company, you may want to override tis.Do you want to override this assumption =YesCheck the financial statements.If yes, enter the NOL that you are carrying over into year 1$1,070.00From last 10K Aswath Damodaran: Enter the revenues from the most recent period (you can either use annual or the trailing 12 months). If your company had no revenues, enter a very small positive number. (You need a base for your growth rate) Aswath Damodaran: Enter the operating income or EBIT from the most recent time period, even if that number is negative. If you have operating leases, enter the adjusted operating income (see the operating lease worksheet for the amount you have to adjust operating income by). Aswath Damodaran: Enter the book value of equity (total) from the end of the most recent time period (i.e. the most recent balance sheet). This book equity will include everything - paid in capital, retained earnings etc. and may even be negative for companies that have been losing money for a while. Aswath Damodaran: Enter the book value of interest bearing debt (short and long term) at your company from the most recent balance sheet. (Do not include accounts payable, supplier credit or other non- interest bearing liabilities.) Aswath Damodaran: Enter the cash balance from the most recent balance sheet. This should include marketable securities. Aswath Damodaran: Enter the most recent update you have on the number of shares. If you have different classes of shares, aggregate them all and enter one number. Count restricted stock units (RSUs) as shares
- 8. but don't count shares underlying employee options. Aswath Damodaran: Enter the most recent stock price (how about today's?) in here. Aswath Damodaran: Enter your effective (not marginal) tax rate for your firm. You will find this in your company's annual report. If you cannot, you can compute it as follows, from the income statement: Effective tax rate = Taxes paid/ Taxable income If your effective tax rate varies across years, you can use an average. Aswath Damodaran: I don't have a crystal ball but you should look at a. Revenue growth in your company in recent years b. Your company's revenues, relative to the overall market size and larger players in the sector. Suggestion: Check your revenues in year 10 against the overall market and see what market share are you giving your company. Check your company's revenues against other companies in the sector. Note that this number can be negative for a declining firm. Aswath Damodaran: You should start by looking at your company's current pre-tax operating margin but also look at the average for your industry. (You can check my estimates of industry averages in the last worksheet on this spreadsheet.) Aswath Damodaran: You are probably wondering what this is but it is how I compute how much you are going to reinvest to keep your business growing in future years. The higher you set this number, the more efficiently you are growing and the higher the value of your growth. Again, look at your company's current number (divide cell B3 by the sum of cells B5 and B6). Look at the industry averages as well in the worksheet. Aswath Damodaran: This should be today's long term riskfree rate. If you are working with a currency where the government has default risk,
- 9. clean up the government bond rate to make it riskfree (by subtracting the default spread for the government). Aswath Damodaran: Enter the current cost of capital for your firm. If you don't know what it is, you can use the worksheet to compute it. Aswath Damodaran: Check your company's annual report or 10K. If it does have options outstanding, enter the total number here (vested and non vested, in the money and out…) Aswath Damodaran: Enter the weighted average strike price of your options. (Should be in your 10K or annual report.) Aswath Damodaran: The weighted average maturity of your options should be reported in your financial statements. Aswath Damodaran: If you have a standard deviation for your stock, enter that number. If not, use the industry average standard deviation from the worksheet. Aswath Damodaran: Mature companies tend to have costs of capital closer to the market average. While the riskfree rate + 4.5% is a close approximation of the average, you can use a slightly higher number (riskfree rate + 6%) for mature companies in riskier businesses and a slightly lower number (risfree rate + 4%) for safer companies. Aswath Damodaran: The default assumption is that competitive advantages will fade to zero over time. While this is a good assumption for many firms (about 7 in 10), there are some firms with sustainable competitive advantages (brand name, for instance), where the excess returns may continue beyond year 10. If your firm is one of those, you can enter a return on capital higher than your cost of capital in the cell below. Just don't get carried away. At the maximum, the excess return should not exceed 5% for a mature firm.
- 10. Aswath Damodaran: This is a really difficult business to generate excess returns in, especially for mature companies. So, I will assume that the excess returns will converge to zero in year 10. Aswath Damodaran: Companies at either end of the life cycle - young, growth and old, declining firms have a significant likelihood of failure. While we tend to ignore this in conventional DCF, it is worth thinking about whether you want to estimate a probability of failure. It is not easy to do but it can be done by looking at either history (with young, growth companies) or the debt market (with distressed companies). Aswath Damodaran While the company is doing well right now and has little debt, it is still a money losing company that is one big shock (legal, financial, macro) from disaster. I have attached a 10% probability that this will happen and an estimate that the business will have to be sold at a substantial discount (50%) on fair value in that event. Aswath Damodaran: If the firm fail and has to liquidate its assets, you need to specify what the liquidation proceeds will be tied to. For young growth companies, I would tie it to value and with distressed firms (especially ones with significant assets in place), I would use book value. Aswath Damodaran: You will generally not get 100% of fair value. How much less than 100% you get will depend on whether there are lots of potential buyers for your assets and how much of a hurry you are in to liquidate. It may well be zero for a young growth company with no tangible assets. Aswath Damodaran: Companies generally pay less than the marginal tax rate on their income. Some of that is due to tax deferral and others to quirks in the tax law. Over time, the conservative assumption is to require the tax rate to move towards the marginal tax rate.
- 11. However, if you believe that your firm's tax benefits are permanent, you can override this assumption. Aswath Damodaran: If your company has been losing money for a while, there will be accumulated losses from prior periods. Check your financial statements. Aswath Damodaran: This is the NOL from prior years carried forward into this year. Aswath Damodaran: This is a statutory tax rate. I use the tax rate of the country the company is domiciled in. See worksheet embedded in this spreadshseet for country tax rates. Aswath Damodaran: If you are using trailing 12-month data, it is best if the last year is the 12-month period just prior to the one that you are using. Thus, if you are looking at June 2011-June 2012, your trailing 12 month for the income statement numbers will be June 2010- June 2011 and your balance sheet numbers should be as of June 2011. Aswath Damodaran: Enter the market value of those non-cash assets whose earnings are (and will never) show up as part of operating income. The most common non-operating assets are minority holdings in other companies (which are not consoldiated). You can find the book value of these holdings on the balance sheet, but see if you can convert to market value. (I apply a price to book ratio, based on the sector that the company is in to the book value). Aswath Damodaran: Enter the "market" value of minority interests. This is a uniquely accounting item and will be on the liability side of your company's balance sheet. It reflects the requirement that if you own more than 50% of another company or have effective control of it, you have to consolidate that company's statements with yours. Thus, you count 100% of that subsidiaries assets, revenues and operating income with your company, even if you own only 60%. The minority interest reflects the book value of
- 12. the 40% of the equity in the subsidiary that does not belong to you. Again, it is best if you can convert the book value to a market value by applying the price to book ratio for the sector in which the subsidiary operates Aswath Damodaran: If you are in multiple businesses, you can construct your own weighted averages using the industry average table from this spreadsheet and your company's business breakdown. Aswath Damodaran: Assuming that the cyclical nature of this business will result in a higher cost of capital. Option valueValuing Options or WarrantsEnter the current stock price =$ 168.76Enter the strike price on the option =$ 21.20Enter the expiration of the option =3.50Enter the standard deviation in stock prices =50.00%(volatility)Enter the annualized dividend yield on stock =0.00%Enter the treasury bond rate =2.75%Enter the number of warrants (options) outstanding =25.01Enter the number of shares outstanding =121.45Do not input any numbers below this lineVALUING WARRANTS WHEN THERE IS DILUTIONStock Price=168.76# Warrants issued=25.008Strike Price=21.2# Shares outstanding=121Adjusted S =164.8313566835T.Bond rate=2.75%Adjusted K =21.2Variance=0.2500Expiration (in years) =3.495Annualized dividend yield=0.00%Div. Adj. interest rate=2.75%d1 =2.764290314N (d1) =0.997147662d2 =1.8295443592N (d2) =0.9663409498Value per option =$ 145.75Value of all options outstanding =$3,644.97 DiagnosticsVALUATION DIAGNOSTICSInvested capital at start of valuation$ 1,698.11Invested capital at end of valuation$ 47,154.31Change in invested capital over 10 years$ 45,456.20Change in EBIT*(1–t) (after-tax operating income) over 10 years$ 8,199.60Marginal ROIC over 10 years18.04%ROIC at end of valuation11.27%Average WACC over the 10 years (compounded)9.42%Your calculated value as a percent of current price60.68%InputsIf calculated value is negative or looks too lowIf calculated value looks too
- 13. highRevenue growth rate (input cell B3)Increase revenue growth rateDecrease revenue growth rateLast period EBIT as % of revenue (Input cell B14)Increase the target pre-tax operating marginDecrease the target pre-tax operating marginSales to Capital Ratio or reinvestment (Input cell B15)Decrease the sales/capital ratioIncrease the sales/capital ratioReturn on capital in perpetuity (B30 & B31)Increase relative to your cost of capitalIf higher than your cost of capital, lower towards your cost of capitalT R& D converterR & D ConverterThis spreadsheet converts R&D expenses from operating to capital expenses. It makes the appropriate adjustments to operating income, netincome, the book value of assets and the book value of equity.InputsOver how many years do you want to amortize R&D expenses5! If in doubt, use the lookup table belowEnter the current year's R&D expense =$ 310.06The maximum allowed is ten yearsEnter R& D expenses for past years: the number of years that you will need to enter will be determined by the amortization periodDo not input numbers in the first column (Year). It will get automatically updated based on the input above.YearR& D Expenses-1273.98! Year -1 is the year prior to the current year- 2208.98! Year -2 is the two years prior to the current year- 393.00-4-500000OutputYearR&D ExpenseUnamortized portionAmortization this yearCurrent310.061.00310.06- 1273.980.80219.18$ 54.80-2208.980.60125.39$ 41.80- 393.000.4037.20$ 18.60-40.000.200.00$ - 0-50.000.000.00$ - 000.000.000.00$ - 000.000.000.00$ - 000.000.000.00$ - 000.000.000.00$ - 000.000.000.00$ - 0Value of Research Asset =$691.83$ 115.19Amortization of asset for current year =$115.19Adjustment to Operating Income =$194.87! A positive number indicates an increase in operating income (add to reported EBIT)Tax Effect of R&D Expensing$68 Aswath Damodaran: By expensing R&D rather than capitalizing it, the firm gets a tax benefit. This is the dollar value of that tax benefit. Operating lease converterOperating Lease ConverterThe yellow
- 14. cells are input cells. Please enter them.InputsOperating lease expense in current year =$ 380.00Operating Lease Commitments (From footnote to financials)YearCommitment! Year 1 is next year, ….1$56.002$47.003$39.004$35.005$31.006 and beyond$93.00OutputPre-tax Cost of Debt =7.00%! If you do not have a cost of debt, use the synthetic rating estimatorNumber of years embedded in yr 6 estimate =2! I use the average lease expense over the first five yearsto estimate the number of years of expenses in yr 6Converting Operating Leases into debtYearCommitmentPresent Value1$ 56.00$ 52.342$ 47.00$ 41.053$ 39.00$ 31.844$ 35.00$ 26.705$ 31.00$ 22.106 and beyond$ 46.50$ 59.94! Commitment beyond year 6 converted into an annuity for ten yearsDebt Value of leases =$ 233.97Restated FinancialsDepreciation on Operating Lease Asset =$ 33.42! I use straight line depreciationAdjustment to Operating Earnings =$346.58! Add this amount to pre-tax operating incomeAdjustment to Total Debt outstanding =$ 233.97! Add this amount to debt Cost of capital worksheetEstimation of Current Cost of CapitalYour inputsOperating Regions ERP calculatorInputsComputed numberCountryRevenuesERPWeightWeighted ERPEquityArgentina1914.80%9.31%1.38%Number of Shares outstanding =121.45Bolivia410.68%1.96%0.21%Current Market Price per share =$ 168.76Brazil1308.43%63.73%5.37%Canada235.80%11.27%0.65 %Approach for estimating betaMultibusiness(US)If direct input, enter levered beta (or regression beta)1.20Chile76.85%3.43%0.24%Unlevered beta =1.26Ecuador616.30%2.94%0.48%Riskfree Rate =2.75%Paraguay311.80%1.47%0.17%What approach do you want to use to input ERP?Country of incorporationPeru128.43%5.88%0.50%Direct input for ERP (if you choose "will input"5.75%0.00%0.00%0.00%Equity Risk Premium used in cost of equity =5.80%0.00%0.00%0.00%Total204100.00%9.00%DebtOperatin
- 15. g Regions ERP calculatorBook Value of Straight Debt =$ 578.74RegionRevenuesERPWeightWeighted ERPInterest Expense on Debt =$ 19.83Africa010.09%0.00%0.0000%Average Maturity =2Australia & New Zealand565.80%4.21%0.2444%Approach for estimating pre-tax cost of debtDirect inputCaribbean12.57%0.00%0.0000%If direct input, input the pre-tax cost of debt7.000%Central and South America1009.18%7.52%0.6907%If actual rating, input the ratingBaa2/BBBEastern Europe & Russia8.48%0.00%0.0000%If synethetic rating, input the type of company1Middle East6.96%0.00%0.0000%Pre-tax Cost of Debt =7.00%North America6315.80%47.48%2.7538%Tax Rate =35%Western Europe3746.85%28.14%1.9277%Asia without Japan1687.58%12.64%0.9582%Book Value of Convertible Debt =0Japan06.85%0.00%0.0000%Interest Expense on Convertible =0Total1329100.00%6.5748%Maturity of Convertible Bond =0Market Value of Convertible =0Multi Business (US Industry Averages)BusinessRevenuesEV/SalesEstimated ValueUnlevered BetaDebt value of operating leases =$ - 0Automotive$ 60.000.8100$ 48.601.1100Computers/Peripherals$ 40.001.3800$ 55.201.3900Preferred Stock0.0000$ - 00.0000Number of Preferred Shares =00.0000$ - 00.0000Current Market Price per Share=700.0000$ - 00.0000Annual Dividend per Share =50.0000$ - 00.00000.0000$ - 00.0000Output0.0000$ - 00.0000Estimating Market Value of Straight Debt =$ 541.340.0000$ - 00.0000Estimated Value of Straight Debt in Convertible =$ - 00.0000$ - 00.0000Value of Debt in Operating leases =$ - 00.0000$ - 00.0000Estimated Value of Equity in Convertible =$ - 00.0000$ - 00.0000Levered Beta for equity =1.28Company$ 100.00$ 103.801.2589EquityDebtPreferred StockCapitalMulti Business (Global Industry Averages)Market Value$ 20,495.90$ 541.34$ - 0$ 21,037.24BusinessRevenuesEV/SalesEstimated ValueUnlevered BetaWeight in Cost of
- 16. Capital97.43%2.57%0.00%100.00%Advertising$ 84.000.9383$ 78.820.9813Cost of Component10.18%4.55%7.14%10.03%Internet software and services$ 16.004.3369$ 69.391.21640.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.00000.0000$ - 00.0000Company$ 100.00$ 148.211.0914 Aswath Damodaran: Use a sector average beta, if need be. Aswath Damodaran: If your company has risk exposure in emergiing markets, incorporate that risk premiums here. See worksheet on country risk premiums. Aswath Damodaran: Interest expense (gross) from most recent financial statement. Aswath Damodaran: Generally found in footnotes to financial statements. Aswath Damodaran: Current, long term cost of borrowing money. If you have a rating use it, if not use a synthetic rating. See the worksheet attached. Aswath Damodaran: If you pick operating regions or countries, please input the revenues by country or region in the table to the right. Aswath Damodaran: 1: Large market cap (>$5 billion) and safe. 2: Small market cap (<$5 billion) or risky. If company has volatile earnings or is in risky business, use 2, even if large market cap. Synthetic ratingInputs for synthetic rating estimationPlease read the special cases worksheet (see below) before you use this spreadsheet.Before you use this spreadsheet, make sure that the iteration box (under calculation options in excel) is checked.Enter the type of firm =1Enter current Earnings before interest and taxes (EBIT) =$ (216.72)(Add back only long
- 17. term interest expense for financial firms)Enter current interest expenses =$19.83(Use only long term interest expense for financial firms)Enter long term risk free rate =2.75%OutputInterest coverage ratio =-100000.00Estimated Bond Rating =D2/DNote: If you get REF! All over the place, set the operating lease commitment question in cell F5Estimated Company Default Spread =12.00%to No, and then reset it to Yes. It should work.Estimated County Default Spread (if any) =0.00%Estimated Cost of Debt =14.75%If you want to update the spreads listed below, please visit http://www.bondsonline.comFor large manufacturing firmsRatings and Default spreads (reordered from highest to lowest)If interest coverage ratio isIf long term interest coverage ratio is>≤ toRating isSpread isgreater than≤ toRating isSpread is- 1000000.199999D2/D12.00%3100000Aaa/AAA0.40%0.20.6499 99Caa/CCC10.50%2.52.99999Aa2/AA0.70%0.650.799999Ca2/C C9.50%22.49999A1/A+0.85%0.81.249999C2/C8.75%1.51.9999 9A2/A1.00%1.251.499999B3/B-7.25%1.21.49999A3/A- 1.30%1.51.749999B2/B6.50%0.91.199999Baa2/BBB2.00%1.751 .999999B1/B+5.50%0.750.899999Ba1/BB+3.00%22.2499999Ba 2/BB4.00%0.60.749999Ba2/BB4.00%2.252.49999Ba1/BB+3.00 %0.50.599999B1/B+5.50%2.52.999999Baa2/BBB2.00%0.40.49 9999B2/B6.50%34.249999A3/A-1.30%0.30.399999B3/B- 7.25%4.255.499999A2/A1.00%0.20.299999C2/C8.75%5.56.499 999A1/A+0.85%0.10.199999Ca2/CC9.50%6.58.499999Aa2/AA 0.70%0.050.099999Caa/CCC10.50%8.50100000Aaa/AAA0.40% -1000000.049999D2/D12.00%For smaller and riskier firmsIf interest coverage ratio isgreater than≤ toRating isSpread is- 1000000.499999D2/D12.00%Rating isSpread is0.50.799999Caa/CCC10.50%A1/A+0.85%0.81.249999Ca2/CC 9.50%A2/A1.00%1.251.499999C2/C8.75%A3/A- 1.30%1.51.999999B3/B- 7.25%Aa2/AA0.70%22.499999B2/B6.50%Aaa/AAA0.40%2.52. 999999B1/B+5.50%B1/B+5.50%33.499999Ba2/BB4.00%B2/B6. 50%3.53.9999999Ba1/BB+3.00%B3/B-
- 18. 7.25%44.499999Baa2/BBB2.00%Ba1/BB+3.00%4.55.999999A3 /A- 1.30%Ba2/BB4.00%67.499999A2/A1.00%Baa2/BBB2.00%7.59. 499999A1/A+0.85%C2/C8.75%9.512.499999Aa2/AA0.70%Ca2/ CC9.50%12.5100000Aaa/AAA0.40%Caa/CCC10.50%D2/D12.0 0% Aswath Damodaran: If your most recent year's operating income is unusually low or high, you can use the average operating income from the last few years. Aswath Damodaran: Enter the interest expense from the most recent income statement. Aswath Damodaran: I use a 10 year government bond rate. Industry Averages(US)Industry NameNumber of firmsAnnual Average Revenue growth - Last 5 yearsPre-tax Operating MarginAfter-tax ROCAverage effective tax rateUnlevered BetaEquity (Levered) BetaCost of equityStd deviation in stock pricesPre-tax cost of debtMarket Debt/CapitalCost of capitalSales/CapitalEV/SalesEV/EBITDAEV/EBITPrice/BookTr ailing PEAdvertising328.67%11.77%11.49%16.02%1.441.6811.51%97 .40%4.76%29.00%9.00%1.401.227.7710.402.0431.25Aerospace/ Defense6612.56%10.24%19.40%20.08%0.920.987.45%44.98%2 .76%21.03%6.23%2.710.947.429.153.1115.79Air Transport3613.21%8.38%17.97%21.35%0.821.037.73%64.94%3 .26%37.14%5.59%2.740.786.009.32… Iv o W el
- 169. 20 17 . 12 Perfect and Efficient Markets, and Classical and Behavioral Finance How Trustworthy are Market Prices? This chapter explains the concept of an efficient market, which is not as strict as but closely linked to that of a perfect market. A market is said to be efficient if it does not ignore available information. To illuminate perfect and efficient markets, this chapter also explains arbitrage, an essential concept of finance, without which no study of finance would be complete. We then discuss the consequences of the concepts: What do efficient and/or perfect markets mean for predicting stock performance? How should you interpret the success of famous investors? And how can you use the concept of efficient markets to run an event study to help assess the valuation impact of big corporate events? 12.1 Market Efficiency A perfect market sets up stiff competition among many investors. This forces them to use all Market efficiency means the market uses all available information in setting the
- 170. price. available information as well as they possibly can. This is called market efficiency: a situation in which prices reflect all available information. In a fully efficient market, you should not be able to use any available information to predict future returns better than the market can. IMPORTANTA price is called efficient if the market has set the price correctly as if it were using all available information. (PS: It is not necessary that any investor has all the information.) Warning: Market efficiency is a different concept from mean- variance efficiency (the efficient frontier), which was used in the context of portfolio optimization. Economists love “efficiency” and thus use the term in many contexts. ä Mean-variance efficiency, Sect. 8.2, Pg.171. Exhibit 12.1 illustrates an efficient market. Suppose the market considers an expected rate of An example: ABC’s price today is based on the best estimate of future characteristics, obtained from a model like the CAPM. return of 10% on ABC stock to be a fair rate of return, given ABC’s characteristics. This figure of 10% could come, for instance, from the CAPM. Market efficiency then pins down the relationship
- 171. between the best estimate of the price next year and the price today. In our example, if the market expects ABC to trade for $55 next year, it should set the price today at $50. The market would not be efficient if it had set today’s price at $49 or $51. You can turn this around, too. You should not be able to locate information that tells you today when/if/that the true expected 277 Iv o W el ch , C or po ra te Fi na nc e (4 th
- 321. Fi na nc e (4 th Ed iti on ), Ju ly 20 17 . 278 Perfect and Efficient Markets, and Classical and Behavioral Finance value tomorrow is really $60 (for an expected rate of return of 20%) or $50 next year (for an expected rate of return of 0%). If you could find information telling you authoritatively that a better estimate of next year’s price is $60 (or $50), then ABC’s stock would be mispriced. A market that has overlooked your information would not be efficient. Efficient Market
- 322. Pricing Model Today’s Price The General Case The financial markets estimate the statis- tical distribution of future cash flows, in- cluding their expected cash flow values, covariances, liquidity, and anything else possibly of interest. The financial market determines the ap- propriate expected rate of return, given all value-relevant characteristics. The market sets today’s price, so that the expected rate of return is as the model states. ? ? ? ? A Specific Example: ABC The market estimates ABC’s expected value next year to be $55 per share. It also estimates all other interesting charac- teristics, such as cash flows, market-betas, covariances, liquidity, etc.
- 323. Say the CAPM is the correct pricing model. Then the financial market looks at ABC’s market beta, the risk-free rate, and the expected rate of return on the market, and sets ABC’s expected rate of return. Say this CAPM expected rate of return is 10%. The price today is $55/1.1 = $50 per share. Exhibit 12.1: Market Efficiency and Pricing Model. The critical question is If you saw a price of, say, $45.83 today, what would you conclude has gone wrong? Is it the market or the model? The practical use of the “efficient markets” concept begs two questions: What is the model? What is the information set? 1. Where does the figure of 10% come from? It has to come … Basis Point Simple MathMEAN (DRIFT)STANDARD DEVIATION (VARIATIONS AROUND THE DRIFT)bp per dayRateYearlybp per dayRateYearly10.00010.025518912500.0050.079372539320.000 20.05168638911000.010.158745078730.00030.07851884741500 .0150.23811761840.00040.10603311672000.020.317490157350. 00050.13424645092500.0250.396862696760.00060.1631765389 3000.030.47623523670.00070.19284151533500.0350.55560777 5380.00080.22325997174000.040.634980314790.00090.254450 9684500.0450.714352854100.0010.28643404445000.050.79372 53933110.00110.31922923315500.0550.8730979327120.00120. 3528570716000.060.952470472130.00130.38733861226500.065 1.0318430113Assume drift of 5bp per day and noise 200bp per
- 324. dayYEARDAYArithmetic 0.13424645090.0005Noise0.15874507870.02Geometric0.121646 45090.0003Note: we assume here only 252 trading days. That's the number of distinct observations per year.Stock prices, however, should be compounded over the entire year, that is, 365 year Drift NoiseEnter values for the drift and the noise in green cellsFor example 2bp per day is about 5.17% year (1.0517=1.0002^252)Noise (standard dev.) should be about 20- 50 times larger than driftDaydrift bp/daynoise bp/day10.00520.0002-0.00530.0002- 0.00540.00020.00550.00020.00560.00020.00570.00020.00580.0 002-0.00590.0002-0.005100.0002- 0.005110.00020.005120.00020.005130.00020.005140.0002- 0.005150.00020.005160.00020.005170.00020.005180.0002- 0.005190.00020.005200.0002-0.005210.00020.005220.0002- 0.005230.00020.005240.00020.005250.0002-0.005260.0002- 0.005270.00020.005280.0002- 0.005290.00020.005300.00020.005310.00020.005320.00020.005 330.00020.005340.00020.005350.00020.005360.0002- 0.005370.0002- 0.005380.00020.005390.00020.005400.00020.005410.0002- 0.005420.00020.005430.00020.005440.0002-0.005450.0002- 0.005460.0002- 0.005470.00020.005480.00020.005490.00020.005500.00020.005 510.00020.005520.0002-0.005530.00020.005540.0002- 0.005550.00020.005560.0002-0.005570.0002-0.005580.0002- 0.005590.00020.005600.0002-0.005610.00020.005620.0002- 0.005630.0002-0.005640.0002- 0.005650.00020.005660.00020.005670.0002- 0.005680.00020.005690.0002-0.005700.0002- 0.005710.00020.005720.00020.005730.0002- 0.005740.00020.005750.0002-0.005760.0002- 0.005770.00020.005780.00020.005790.00020.005800.00020.005 810.0002-0.005820.0002- 0.005830.00020.005840.00020.005850.0002-0.005860.0002-
- 338. Account at end of T if Work TildeK(T+1)=Saving Account at the end of T if withdraw $5000 at beginning of T and do not work Does saving account decrease if stop working in T? TildeK(T+1)<K(T) 1 10000 5000 0.0 5000.0 2 10000 5000 5000.0 10250.0 0.0 1 3 10000 5000 10250.0 15762.5 5512.5 1 4 10000 5000 15762.5 21550.6 11300.6 1 5 10000 5000 21550.6 27628.2 17378.2 1 6 10000 5000 27628.2 34009.6 23759.6 1 7 10000 5000 34009.6 40710.0 30460.0 1 8 10000 5000 40710.0 47745.5 37495.5 1 9 10000 5000 47745.5 55132.8 44882.8 1 10 10000 5000 55132.8 62889.5 52639.5 1 11 10000 5000 62889.5 71033.9 60783.9 1 12 10000 5000 71033.9 79585.6 69335.6 1 13 10000 5000 79585.6 88564.9 78314.9 1
- 339. 14 10000 5000 88564.9 97993.2 87743.2 1 15 10000 5000 97993.2 107892.8 97642.8 1 16 10000 5000 107892.8 118287.5 108037.5 0 17 10000 5000 118287.5 129201.8 118951.8 0 18 10000 5000 129201.8 140661.9 130411.9 0 19 10000 5000 140661.9 152695.0 142445.0 0 20 10000 5000 152695.0 165329.8 155079.8 0 21 10000 5000 165329.8 178596.3 168346.3 0 r 0.05 s 0.6 T 10.87572 NPV of current and future consumption (5K(1+1/r)) 105000 14.7128 Excel Journal Format due Monday February 24th IT MAY NOT BE CLEAR TO EVERYONE SO LET ME REPEAT: YOU HAVE TO ANSWER ALL QUESTIONS IN THIS 'BOOK' (SESSION 1 TO SESSION 5) IN YOUR EXCEL JOURNAL Your Excel journal should be composed of a text part and an excel file. You should submit at most two documents. The text
- 340. part should contain a one page answer for each session that explains your work, and makes clear reference to the excel file. The excel file should be (as much as reasonable) self- explanatory. That is, try to include comments that help the reader to follow your steps and understand how you derive your results. You are restricted to one page of text (500 words maximum) per session (5 pages max) and one excel file that should contain 5 sheet (one per session). The last Excel Session will be before the reading break and your journal is due after the reading break. I encourage you to use this forum to post questions about your assignment and to answer others' questions. You will be graded on the basis of: the clarity of your explanations; the logic of your calculations; the accuracy of your results; and whether your excel file is easy to follow and self-explanatory.
- 341. Session 2: Extreme Early Retirement Part 1: The goal of this part of your journal is to re-create this Excel sheet, but using the following assumptions: you earn 100K each year, consume 30% of your earnings, and the interest rate is 4%. a. Replicate the Excel sheet and explain what each column mean. b. How do you derive the earliest year you can retire such that your consumption remains constant forever after? What year do you obtain? Part 2: The goal of that part of your journal is to derive a formula that delivers your earliest possible retirement year as a function of your saving rate. Say you earn E each year, you save share alpha of E and consume the rest, and the interest rate is r. c. Assume for now that you always work. How much capital you have in your saving account at the end of the first and second years? Derive the formula that gives your capital at the end of year T. d. How much do you have in your saving account at the end of year 2 if you stop working in year 2? At the end of year 3 if you stop working in year 3 ? At the end of year T if you stop working in T? e. How many years do you have to work before you can stop working and maintain your consumption constant forever after? Plug the values from Part I and check that you obtain the same answer.
- 342. Session 3: Arithmetic and Geometric Rates of Return Part A We want to check the statement on p.141 that “the arithmetic mean is higher than the geometric mean by about half the variance.” 1-Use the Rand() function to generate 400 random rate of return with mean 10.7% and variance 3.2%%. 2-Assume these 400 rates correspond to 400 consecutive years. Compute the arithmetic rate of return, the variance over 400 years, and the geometric rate of return. 3-Resample several times using F9. Would you say that the statement on p.141 holds? Discuss. Part B We want to check the statement ‘Risk grows approximately with the square root of time’ on p. 171. 1-Draw two rates of returns as you did above. Say the first draw is the rate of return over period 1, call it r_01, and the second is the rate of return over period 2, call it r_12. Compute the holding rate over two periods, call it r_02. Repeat this 400 times to obtain 400 draws for each rate of returns (1200 numbers total). 2-Using your three sets of 400 draws, compute the variance of r_01, r_12 and r_02. What should be the relationship between the these variances according to the statement on p.171? Check that this is the case.
- 343. 5. Session 4: Signal-to-noise ratio The purpose of this simulation is to get some intuition for Ivo’s statistical answer to the question of whether it is possible to detect an extra signal of 2bp per day with noise 50bp if one observes 5000 realizations of this signal (See section 12.3 of the textbook and in particular p.289-290). We want to get a sense of what this means using simulations and graphs. You should use the excel sheet supplied. 1-According to Ivo’s N-day statistics, how many days would it take to reach a conclusion about this signal (assuming that you want a T-stat around 2). 2-Check that the function IF(RAND()<0.5,-1,1) draws a random variable that take value +1 and -1 with equal probability. To do so explain what you would expect to see when you draw 1000 independent realizations. Check that this is the case. 3-Explain how the formulas in the excel sheet use this function to draw a signal with 2bp drift and noise 50bp. 4-Compute two 5000-days time series: (a) the realized compounded rate of return (an approximation of a Brownian motion), (b) the compounded rate of return from a 2bp drift alone. Plot these two time series. 5-Using the notion of arithmetic and geometric rate, would you expect the realized return after 5000 days to be on average equal to the compounded rate? If not, what would be a good guess for what you should expect to earn after 1, 2,...5000 days. Add that time series to your chart. 6-Say you draw many samples of 5000 realizations (using the F9 function). According to your answer to question 1, what property would you expect these samples to have? How would you use the chart you produced to check this? 7-Repeat your analysis for a signal with 1bp drift and 100bp noise? Is the difference between the two signals sensible?
- 344. Note: You’ll have to learn how to draw a ‘scatter XY chart in Excel’. This is a great tool to know to visualize data. You’ll find many online tutorials under that search entry. Session 5: A DCF approach to Tesla valuation The purpose of this session is to: (a) retrace the main steps taken by A. Damodaran to value Tesla; and (b) replicate the analysis with updated numbers. You should read Chapter 3 from "The Little Book of Valuation" by A. Damodaran to understand the big picture. Your answers should try to make reference to that reading when relevant. Question 2 and 3 refer to sheet 'valuation output' in this simplified Excel file. (There are many sheets in this file but you have to look only at the first two. Note also that I have simplified the Excel file so the final valuation is not the same as the ones reported in the paper you read for RN2.) Limit your answers to 100 words per question. 1-Briefly summarize the 4 steps taken in Chapter 3 to value a company. 2-Write a simple (math) formula that summarizes how Damodaran obtains the FCFF in line 13. Your formula should highlight the key inputs and assumptions that go in that formula. Explain. 3-Write a formula that explains how A. Damodaran combines the FCFF with other inputs to obtain the valuation in B25. Explain. The purpose of the next two questions is to update the Tesla valuation using the latest available information following the same methodology as above. You will have to do some research to find the values you need to update the Excel file. 4-Say you update only the 'base year' revenue. What valuation
- 345. do you obtain? Compare the result with the corresponding market valuation. If you had to change just one other input in the Excel file to get a more accurate and current valuation, what would it be? When you make that change, what impact it has on your valuation? 5-How has the Tesla stock performed over the last year? In your opinion, can the valuation model explain this performance? Discuss. 1ABCInterest Rate:0.03YearDiscount RateDiscount Factor(i)Cash FlowPV(ii)PVFull Market Value:$33.33Rent:$10110.970873786430.8605$30.86011.030.9 7087378640.9425959091D21.06090.94259590910.9151416594L ease YearsSold %31.0927270.91514165940.888487047988$30.86050.92581361 2141.125508810.88848704790.862608784422$15.93690.478107 499151.15927407430.86260878440.837484256710$8.53020.255 906085161.19405229650.83748425670.813091511371.2298738 6540.81309151130.7894092343E81.26677008140.78940923430. 7664167323Lease Years%Interest Rate:91.30477318380.76641673230.7440939149880.970.04065 18013101.34391637930.74409391490.7224212766111.3842338 7070.72242127660.7013798802121.42576088680.70137988020. 68095134131.46853371350.680951340.6611178058141.512589 72490.66111780580.6418619474151.55796741660.6418619474 0.6231669392161.60470643910.62316693920.6050164458171.6 5284763230.60501644580.5873946076181.70243306120.58739 460760.5702860268191.75350605310.57028602680.553675754 2201.80611123470.55367575420.5375492759211.86029457170. 53754927590.5218925009221.91610340890.52189250090.5066 917484231.97358651110.50669174840.4919337363242.032794 10650.49193373630.4776055693252.09377792970.4776055693 0.4636947274262.15659126750.46369472740.4501890558272.2