umuc fin630 all weeks discussion latest november 2015
session 1 discussionYou have just been made a valuation analyst. Before you get training (what else is new!), your boss asks you to value a number of items: 1) a publicly-traded company; 2) a family business; 3) a shopping center; 4) an oil refinery; 5) a patent or trademark; and, by the way, 6) did the local tax assessor correctly value his house? How might you go about these tasks? While the course concentrates on the first two items, we will discuss, at least in passing, the remaining ones. I don’t expect everyone to comment on every situation, but I am looking for a variety of comments to help establish the base from which we are proceeding.session 2Stories in the business press typically comment on a company’s earnings and its price/ earnings ratio as a guide to valuation. What’s right or wrong with this? How does it compare with the Corporate Valuation Model we are using? Is Enron relevant to your view?Return on Invested Capital (ROIC) and Economic Value Added (EVA) are commonly used as measures of division management performance. Are these measures equally useful for, say, a consumer goods company and a natural resources company (oil is the most visible example)? In commenting, you should consider the nature of what goes into the measures (numerators and denominators, e.g.), and that you can assume you have access to internal company data.session 3Alan Greenspan coined the phrase “irrational exuberance” in late 1996 to describe the rapid growth in the stock market. Professor Robert Shiller, an economist at Yale, has written a book by the same title (should I say he’s a bear?). Actually, exuberance, rational or otherwise, is a characteristic of behavioral economics and finance. Daniel Kahneman shared the 2002 Nobel Prize in Economics for his work in the area. Start by reading a short piece from CFO.com (.cfo.com/printable/article.cfm/3014027?f=options”>http://www.cfo.com/printable/article.cfm/3014027?f=options) and look elsewhere as you are interested. My question is: how do behavioral considerations impact the way we are doing valuation?Economic recession of 2008-2009 had several causes, one of which was so called “subprime crisis.” Financial institutions used sophisticated models and simulation techniques to price mortgage-backed securities (MBS) and these securities ended up being severely overpriced. What lessons for the future can we learn from this mispricing of MBS? What precautionary mechanisms would you suggest to avoid the repetition of this crisis in the future?session 4About 25 years ago, when Japanese companies were “eating our lunch”, many analysts noted that those companies had highly leveraged capital structures — lot’s of debt and little equity. Looking at the WACC formula suggests that more debt relative to equity might lower WACC. Is leverage “always” good or “always” bad? If it depends on the industry, please suggest which ones would be expected to have greatest and least leverage.magine two independently owned gas stations standing next to each other and selling gas (and other goods) at about the same price, so they have the same revenues, cost structure and effective tax rate of 35%. Assume that every year they have average EBIT of $ 500,000 (I know, it’s quite optimistic) without any anticipated growth. One owner finances all operations out of own pocket, while another borrows $ 500,000 for five years and refinances this debt every five years without repaying principal.Discuss the difference in value (if any) of these two stations.session 5Some people think that stock prices reflect the present value of future dividends. Does this approach make sense? How does the forecasting of growth rate on future cash flows affect this approach of valuation? Are there implications for interpreting P/ E ratios?session 6How can we revise the FCF model by using market comparables and multiples to make it hit corporate targets we might have? For example, we might want to see what assumptions might justify the market’s value on a stock — how can we use the model consistently for this purpose?session7As we have learned so far into the course that forecasting cash flows into the foreseeable future poses a unique challenge since most enterprises are expected to stay in business for many years. As valuation experts, what we can do in order to come up with a reasonably accurate valuation of a business that is expected to continue for long time? What are the different alternative methodologies that can be applied to meet this challenge?.5em=”” 0px=”” 1em;=”” padding:=”” 0px;=”” border:=”” outline:=”” font-size:=”” 13px;=”” color:=”” rgb(53,=”” 53,=”” 53);=”” font-family:=”” ‘pt=”” sans’,=”” sans-serif;=”” background:=”” rgb(250,=”” 250,=”” 250);”=””>ne of the bigger political “footballs” of early 2005 concerned revising Social Security. Projections abounded — that nobody refuted — that the system would start being in net cash outflow by 2017 (give or take a year or two) and go broke by 2042 (again, give or take a year or two).Politics may have tabled the topic for a while, but it is useful analytically. Let me pose two questions.First, how can we analyze the Social Security situation as a valuation problem?Second, “Stocks are too risky for Social Security” has been one of the arguments against the proposed private accounts. Do you agree or disagree?session 8.5em=”” 0px=”” 1em;=”” padding:=”” 0px;=”” border:=”” outline:=”” font-size:=”” 13px;=”” color:=”” rgb(53,=”” 53,=”” 53);=”” font-family:=”” ‘pt=”” sans’,=”” sans-serif;=”” background:=”” rgb(250,=”” 250,=”” 250);”=””>’ve attached an article from the Wall Street Journal about the performance of the ratings agencies in providing advanced warning about the sub-prime mortgage companies. Does this performance suggest that the investors shouldn’t bother looking at bond ratings or is this situation an isolated incident (as was Enron, incidentally)?What role might the banking regulators have played in protecting banks or investors (or both) from the sub-prime industry’s difficulties?Comment on the following observation: Private equity investments are risky and illiquid and thus require higher rate of return.session 9In many business decision scenarios, managers faces the dilemma, for example, whether to continue the project or to abandon it, whether to finance a project with debt or equity, etc. How can we apply the knowledge of traditional option pricing techniques in such decisions that involve real impact on the cash flows of a business?.5em=”” 0px=”” 1em;=”” padding:=”” 0px;=”” border:=”” outline:=”” font-size:=”” 13px;=”” color:=”” rgb(53,=”” 53,=”” 53);=”” font-family:=”” ‘pt=”” sans’,=”” sans-serif;=”” background:=”” rgb(250,=”” 250,=”” 250);”=””>Many academics strongly advocate using real options in valuation of intangible assets. See, for example, Damodaran’s article attached to the Course Content Session 10 (.ssrn.com/sol3/papers.cfm?abstract_id=1374562″>you can also download it from here). Nevertheless, this method is not used in practice very often. In your opinion, what are the reasons for not seeing real option valuations of intangibles more often?Although attached article does not talk about real options, it shows how tricky it is to value such intangible asset as company’s reputation (or its loss).session 10.5em=”” 0px=”” 1em;=”” padding:=”” 0px;=”” border:=”” outline:=”” font-size:=”” 13px;=”” color:=”” rgb(53,=”” 53,=”” 53);=”” font-family:=”” ‘pt=”” sans’,=”” sans-serif;=”” background:=”” rgb(250,=”” 250,=”” 250);”=””>Please read the attached article. Do you think that there is a conflict of interest here? If the answer is yes, how would you handle it if you were one of the members of the board?Please see the file attached in a speparate thread. The link in this thread is not working.There is some anecdotal evidence that option to abandon does not have as much value as theory predicts, because managers tend to get attached to a project and abandon it later than they should. Can you think of other examples, when behavioral bias affects the value of real options? How would you suggest to adjust the theoretically predicted value?session 11As we know, positive-NPV investment opportunities arise as a result of marriage between opportunity and the firm’s capability to capitalize on those opportunities. What characteristics a firm needs to have in order to achieve the strategic value from those positive NPV projects? How the firm will decide the appropriate investment opportunities that will generate strategic options?