Session 7: Cost of Debt & Capital & First Steps on Cash Flows
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- čas přidán 21. 02. 2023
- In this class, we started with the cost of debt and computing debt ratios for companies and how to deal with hybrid securities.. If you are interested in getting updated default spreads (on the cheap or free), try this site:
content.naic.org/search?q=def...
While that link will give you end spreads, they do update the numbers monthly, but seem to do an awfully poor job of making the spreadsheet findable. You can also try the St. Louis FRED and find updated on seven major ratings classes (AAA, AA, A, BBB, BB, B, C and lower) updated daily. Neat, right? You can get the spreads from Bloomberg as well, using the FIW function, and tweaking the choices to show all corporate spreads.
We then moved on to getting the base year's earnings right and explored several issues:
1. To get updated numbers, you should be using either trailing 12 month numbers or complete the current year with forecasted numbers. In either case, your objective should be to get the most updated numbers you can for each input rather than be consistent about timing.
2. To clean up earnings, you have to correct accounting two biggest problems: the treatment of operating leases as operating (instead of financial) expenses and the categorization of R&D as operating (instead of capital) expenses. The biggest reason for making these corrections is to get a better sense of how much capital has been invested in the business and how much return this capital is generating.
Start of the class test: www.stern.nyu.edu/~adamodar/p...
Slides: www.stern.nyu.edu/~adamodar/p...
Post class test: www.stern.nyu.edu/~adamodar/p...
Post class test solution: www.stern.nyu.edu/~adamodar/p...
What a great observation about reading? Lot of people read into other people dogmas and die for it thinking as if it is theirs. Need to develop thinking. So correct
Thank you Prof for this wonderful session. Be blessed always🙏
This is gold!
Best Professor ever!👍👍👍
A method that I use is to take the average RoE over the past 3-5 years and multiply by the current BV of equity to get current FCFE (calculating RoE on an FCFE basis, not by earnings), or Roc/Inv Cap/NOPAT if doing a firm based valuation. This is also helpful in filtering out year by year fluctuations I find.
So ROE x current BV = FCFE
ROC/Inv cap/NOPTA x current BV = FCFF?
@@davidpagan8559 Now that I look at it, my way of writing that was misleading, in that case the slashes were meant actually as slashes and not division. What I mean is that I get NOPAT by multiplying a 3-5Y ave ROIC (calculated on a NOPAT basis rather than FCFF, but on further thought FCFF is probably the better option) by the current invested capital. Hope that clears things up.
In renewable energy you typically enter into 10-15 year O&M contracts. They make the bulk of your OPEX, would you treat it as debt given tis a contractual arrangement? If so, you will have op. income almost equal to your top line but a crazy high amount of debt from a valuation standpoint.
❤
Prof. Aswath had to use the cost of debt to calculate the market value of debt. But the cost of debt itself was calculated using a book leverage ratio! is this the chicken or the egg problem?
On using market value weights, this goes against McKinsey's advice to use target rates. And I don't understand why we should use the current capital structure as it might change anyway in the coming time? If I were to reverse it to the costs not being costs, but profits, and say I was valuing an investment firm. I could simplify and value it based on what its holdings will return, or I can say "But there's a management in between that could change the allocation at any time". Therefore, my capital structure should be an average, shouldn't it? Where am I going wrong
Reading is vastly overrated 😂
I love Aswath but bro lost me with that statement 😂. I’d love to debate that philosophy.
"Walk your dog if you have one, steal somebody elses if you dont."
That line killed me.
Good morning sir.
Denken ist mühsam.
Darf man das heute noch?
Papageien werden bevorzugt befördert.
Sir we are Startup Company Shallow Waterways Shipping Pvt Ltd based in India. We are very Eager to know our Valuation of our Innovative Bottom-Door Un-Loading HEXAGON Shape CONTAINER. It has potential to Solve Global Supply Chain issues. Helps Agriculture Sector also.