Corporate Finance
The Project
Aswath Damodaran
Aswath Damodaran 1
What this project involves…
You should consider this project a live lab experiment that you will be doing
in class for the next few sessions. While I will try to apply the principles of
corporate finance to the companies I have chosen - Disney, Bookscape… etc.
- you will be applying the same principles to your company.
Many of the numbers will be worked out in class as you go through the
material.
After the course is over, you should write a corporate financial analysis of
your company, using the numbers that you have generated in class.
Aswath Damodaran 2
I. Stockholder Analysis
Who is the average investor in this stock? (Individual or pension fund, taxable
or tax-exempt, small or large, domestic or foreign)
Who is the marginal investor in this stock?
Applies material from: Session 1
Spreadsheets: -
Useful Data Sets: Insider Holdings by Industry
Quantitative Qualititative
Institutional Holdings by Industry
Aswath Damodaran 3
II. Risk and Return
What is the risk profile of your company? (How much overall risk is there in
this firm? Where is this risk coming from (market, firm, industry or
currency)? How is the risk profile changing?)
What is the performance profile of an investment in this company? What
return would you have earned investing in this company’s stock? Would you
have under or out performed the market? How much of the performance can
be attributed to management?
How risky is this company’s equity? Why? What is its cost of equity?
How risky is this company’s debt? What is its cost of debt?
What is this company’s current cost of capital?
Applies material from: Sessions 1-2
Quantitative Qualititative Spreadsheets:
Useful Data Sets: Betas by Industry
Jensen’s Alpha by Industry
Cost of Debt/Capital by Industry
Aswath Damodaran 4
III. Measuring Investment Returns
Is there a typical project for this firm? If yes, what would it look like in terms
of life(long term or short term), investment needs and cash flow patterns?
How good are the projects that the company has on its books currently?
Are the projects in the future likely to look like the projects in the past? Why
or why not?
Applies material from: Session 2
Quantitative Qualititative Spreadsheets: [Link]
Useful Data Sets: ROE and Equity EVA by Sector
ROC and EVA by Sector
Aswath Damodaran 5
IV. Capital Structure Choices
What are the different kinds or types of financing that this company has used
to raise funds? Where do they fall in the continuum between debt and equity?
How large, in qualitative or quantitative terms, are the advantages to this
company from using debt?
How large, in qualitative or quantitative terms, are the disadvantages to this
company from using debt?
From the qualitative trade off, does this firm look like it has too much or too
little debt?
Applies material from: Session 3
Quantitative Qualititative Spreadsheets: -
Useful Data Sets: Debt Ratios by Industry
Trade-off Variables by Industry
Aswath Damodaran 6
V. Optimal Capital Structure
Based upon the cost of capital approach, what is the optimal debt ratio for your
firm?
Bringing in reasonable constraints into the decision process, what would your
recommended debt ratio be for this firm?
Does your firm have too much or too little debt
• relative to the sector?
• relative to the market?
Applies material from: Session 3 & 4
Spreadsheets: [Link]; [Link]
Quantitative Qualititative
Useful Data Sets: Earnings Variance by Industry
Market Debt ratio Regression
Aswath Damodaran 7
VI. Mechanics of Moving to the Optimal
If your firm’s actual debt ratio is different from its “recommended” debt ratio,
how should they get from the actual to the optimal? In particular,
• should they do it gradually over time or should they do it right now?
• should they alter their existing mix (by buying back stock or retiring debt) or
should they take new projects with debt or equity?
What type of financing should this firm use? In particular,
• should it be short term or long term?
• what currency should it be in?
• what special features should the financing have?
Applies material from: Session 4
Quantitative Qualititative Spreadsheets:
Useful Data Sets: Firm Value Sensitivity by Industry
Aswath Damodaran 8
VII. Dividend Policy
How has this company returned cash to its owners? Has it paid dividends,
bought back stock or spun off assets?
Given this firm’s characteristics today, how would you recommend that they
return cash to stockholders (assuming that they have excess cash)?
Applies material from: Session 5
Quantitative Qualititative
Spreadsheets: -
Useful Data Sets: Yields/Payout by Industry
Tradeoff Variables by Industry
Aswath Damodaran 9
VIII. A Framework for Analyzing Dividends
How much could this firm have returned to its stockholders over the last few
years? How much did it actually return?
Given this dividend policy and the current cash balance of this firm, would
you push the firm to change its dividend policy (return more or less cash to its
owners)?
How does this firm’s dividend policy compare to those of its peer group and to
the rest of the market?
Applies material from: Session 6
Quantitative Qualititative Spreadsheets: [Link]
Useful Data Sets: Cap Ex Ratios by Industry
Working Capital Ratios By Industry
Debt Ratios by Industry
Aswath Damodaran 10
IX. Valuation (Optional)
How fast do you expect operating income to grow at this firm in the immediate
future?
How long do you think it will be before your firm reaches stable growth?
What is your estimate of value of equity in this firm? How does this compare
to the market value?
Applies material from: Session 6
Quantitative Qualititative Spreadsheets: [Link]
Useful Data Sets: Betas by Industry
Growth Fundamentals by Industry
Cap Ex and Wkg Cap by Industry
Aswath Damodaran 11