Session 7: From Discount Rates to Cash Flows
In today’s 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 the Federal Reserve site in St. Louis:
https://fred.stlouisfed.org
These are spreads on indices created by rating, updated daily. Neat, right? 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: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/cftests.ppt
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valspr20/session7slides.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session7test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session7soln.pdf
In today’s 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 the Federal Reserve site in St. Louis:
https://fred.stlouisfed.org
These are spreads on indices created by rating, updated daily. Neat, right? 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: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/cftests.ppt
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valspr20/session7slides.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session7test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session7soln.pdf
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How is the 7.89% country risk premium over and above the 4% equity risk premium calculated in the cost of equity calculation?
Can someone please answer this.
Hi, sir. I think you've miscalculated some values in slides 123 and 124. Since there are 8 years of payments, you should go back to year 0 and start depreciating the asset from there. Also in my opinion, both interest from debt and depreciation from asset should be deducted in recalculation of OI.
Dear Professor, do you include Goodwill in your Return on Capital definition?
Yours sincerely
Could someone explain what is Ignored Tax Benefit while computing Adjusted EBIT in R&D section Slide 129?
Converting Op Lease to Cap Leases – Could you comment why the current year lease amount is not being added to PV of future operating leases?
We got a traitor in. (1 dislike)
What is " Ignored Tax Benefit" while calculating adjusted EBIT after Taxes for R&D on slide 129? Can someone please answer that?
Prof. , Can you please update the link for slides. Looks like they are not associated with lecture.
The link to the slides opens to a "D/E & Optimal Debt" notes professor, It doesn't match with the slides in the lecture.