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Posted on 11/20/17 at 12:51 am to Golfer
I guess there are trolls on TD...a subset of posters definitely got under their skin for whatever reasons.
Posted on 11/20/17 at 8:34 am to lynxcat
Threw an upvote there to offset.
Posted on 11/28/17 at 3:37 pm to RedStickBR
We have a case study due after the final exam and it covers yet another foreign topic: NPVq.
It’s a derivation of valuing European options using a Cumulative Variance adjustment. It’s actually a pretty interesting method that I hadn’t ever seen before. Anyone here familiar with it?
Our case is valuing a real option for a decision three years into the future based on a different but related project at time 0.
It’s a derivation of valuing European options using a Cumulative Variance adjustment. It’s actually a pretty interesting method that I hadn’t ever seen before. Anyone here familiar with it?
Our case is valuing a real option for a decision three years into the future based on a different but related project at time 0.
This post was edited on 11/28/17 at 3:44 pm
Posted on 11/29/17 at 6:07 pm to lynxcat
quote:
Anyone here familiar with it?
No, surprisingly. I had to look it up.
I've dealt with stochastic models that treated corporate investment decisions as real options (American, not European) based on the work of Dixit (Princeton) & Pindyck (MIT Sloan), but it was extremely academic, mathematical, and unrelatable to the real world.
As one Amazon reviewer for their key book on the subject notes: "This is probably the most useless book on real options which I own. The book is extremely difficult to follow and uses academic mathematical notation which is difficult for practitioners to follow. In addition, the authors have largely ignored both the underlying business operations which create real options and the existing operations literature on project management, operations research, petroleum engineering, manufacturing systems engineering, etc. which provide many of the tools necessary for practical evaluation of real options. The bottom line is don't waste your money on this book."
We used academic journal articles rather than books, but I would have to agree with the gist of the sentiment there.
Anyway, I looked up the NPVq stuff, and it looks much more practical and useful. I probably would have enjoyed a course that had it. DCF works for assessing individual business projects against a benchmark IRR, but classical NPV does a better job at prioritizing net value creation. Classical NPV clarifies thinking on net value creation, but NPVq reflects the nuances of timing factors involved with projects that businesses often shelve or re-embrace.
European options would seem to cut out a lot of the real-world nuance on timing, but it's probably a good approximation, and thus a good idea to make that simplification anyway.
Posted on 1/6/18 at 6:30 am to Doc Fenton
I'm late chiming in, but had been meaning to circle back. lynx, I'm not familiar with NPVq but would be curious to review anything you might have on it.
Re: IRR vs NPV, I view them like a flathead and a Phillips - similar in what they are trying to accomplish (aid in an investment decision) but nonetheless different in some key ways that give them different uses for different scenarios.
In the project finance / corporate finance / what I'd call "corporate PE / VC" work that I do, I prefer IRR because it requires one fewer variable (don't have to estimate a discount rate), and it's how PE tends to track our business. For instance, if our business is currently producing a 9.0% levered IRR on a PE owner's original investment, I want new projects to be in excess of that in order to be accretive to their yield. There's some nuance behind why that is so important in my little niche of the world, but IRR definitely reigns supreme. Of course, your analysis would typically include a discussion of NPVs as well with sensitivity provided around the discount rate. I tend not to use a corporate WACC or ROE as my discount rate, because I like the analytical rigor that goes into supplying a different discount rate for each project based on its own individual risk factors.
We should have one mammoth thread on valuation. Having worked in a number of different areas of finance now (both institutional and corporate), it's interesting to think back on and discuss how your views are refined as your knowledge broadens.
Re: IRR vs NPV, I view them like a flathead and a Phillips - similar in what they are trying to accomplish (aid in an investment decision) but nonetheless different in some key ways that give them different uses for different scenarios.
In the project finance / corporate finance / what I'd call "corporate PE / VC" work that I do, I prefer IRR because it requires one fewer variable (don't have to estimate a discount rate), and it's how PE tends to track our business. For instance, if our business is currently producing a 9.0% levered IRR on a PE owner's original investment, I want new projects to be in excess of that in order to be accretive to their yield. There's some nuance behind why that is so important in my little niche of the world, but IRR definitely reigns supreme. Of course, your analysis would typically include a discussion of NPVs as well with sensitivity provided around the discount rate. I tend not to use a corporate WACC or ROE as my discount rate, because I like the analytical rigor that goes into supplying a different discount rate for each project based on its own individual risk factors.
We should have one mammoth thread on valuation. Having worked in a number of different areas of finance now (both institutional and corporate), it's interesting to think back on and discuss how your views are refined as your knowledge broadens.
Posted on 1/6/18 at 9:06 am to RedStickBR
Taking Financial Accounting and Corporate Finance starting Monday. Going to be a long two years
Posted on 1/6/18 at 9:16 am to lynxcat
quote:
For reference, how does this compare to the CFA exam? I assume all of these concepts show up on L2 or L3?
Some do but not all of them. Like many designations, CFA covers lots of ground but less deeply.
Posted on 1/6/18 at 10:27 am to RedStickBR
quote:
We should have one mammoth thread on valuation. Having worked in a number of different areas of finance now (both institutional and corporate), it's interesting to think back on and discuss how your views are refined as your knowledge broadens.
That would be awesome. I just wrapped up internship interviews - one of the firms did the Tesla/Solar City valuation and I got a bunch of questions about it. Would love to learn more from everyone here
Posted on 1/6/18 at 11:51 am to lynxcat
Where are you getting your MBA?
Posted on 1/6/18 at 1:45 pm to Azazello
Those would actually be really interesting valuation discussions.
Posted on 1/6/18 at 3:24 pm to RedStickBR
Granted I am a lowly MBA student but I got the answer. My argument was that Tesla’s comps are closer to google, netflix, facebook than traditional OEMs (the multiples arent even in the same universe). If we did a SotP we could get a bit closer but Tesla is more tech company imo. Who knows, we’ll see if I get the job next week.
Posted on 1/6/18 at 7:24 pm to Azazello
quote:
Azazello
Keep us posted on how it works out!
Last semester is about to kick off so actually headed to do some work. It's a grind to get back into a rhythm after being off the last five weeks for the holidays. Nonetheless, May cannot get here soon enough!
Posted on 1/6/18 at 9:30 pm to RedStickBR
quote:
tend not to use a corporate WACC or ROE as my discount rate, because I like the analytical rigor that goes into supplying a different discount rate for each project based on its own individual risk factors.
Why don't you just use RAROC?
Posted on 1/7/18 at 12:09 pm to RedStickBR
quote:
We should have one mammoth thread on valuation. Having worked in a number of different areas of finance now (both institutional and corporate), it's interesting to think back on and discuss how your views are refined as your knowledge broadens.
Might be a good idea.
I remember during my brief PE days, there was a thread from Nov 2013 where someone was asking about how to value Tile Ship Holdings ( LINK), which had just closed at $22.12/share on 11/1/2013. (It last closed at $10.00/share on 1/5/2018.)
I started to take a stab at outlining the general universe of business valuation techniques...
quote:
Here's the Wikipedia entry on business valuation: LINK.
Here's the Wikipedia entry on stock valuation: LINK.
Here's the Wikipedia entry on DuPont analysis: LINK.
Here's the Wikipedia entry on the First Chicago method:
LINK.
Here's the corporate webpage where you will find annual and quarterly financial reports by TTS: LINK.
But now that I'm a little more experienced, I see how sprawling this subject is. There are so many specialized ways to value things in certain niche industries that you've never heard of before. There are so many different corners in finance that you've never heard of before.
Those Wikipedia entries are so much more built up than they were 4.5 years ago. Google "valuation wikipedia" these days, and you'll get not only "valuation (finance)", "business valuation", and "stock valuation", but also: brand valuation; valuation using multiples; bond valuation; relative valuation; paper valuation; real estate appraisal; pre-money valuation; art valuation; etc.
It all depends on what your particular interests are, but I tend to think that the PE/VC valuation questions are the most interesting.
Posted on 1/7/18 at 2:00 pm to Doc Fenton
Yeah, I feel the only thing that really comes close to "value" in an absolute sense is intrinsic value arrived at by discounting cash flows. And even once you arrive at that for a publicly traded company, is that really value? Is the corporation going to distribute those cash flows to shareholders? Because that's what you're assuming if you're relying on that methodology. What if they reinvest those cash flows but at a lower return than your IRR? What if they reinvest at your IRR, but the market doesn't recognize that value? That's why I think the most conservative way to value a public company is to use a DDM model and then treat any multiple expansion as pure upside. That would be more consistent with how PE values a business, wherein the PE owner both projects cash flows and then sees to it those cash flows actually end up in its pocket at the end of each period. The only way to mimic that in the public markets is to rely on dividends as the primary value driver. That would be the surest way to ensure you're going to hit your target return irrespective of the vicissitudes of the market.
PE is also more pure in the sense that it allows you to use leverage at the HoldCo level to lower your cost of capital and enhance returns in ways that aren't available to most public market investors. You simply have many more tools in your arsenal through which to extract value in the private markets. Sure, you're giving up the liquidity that comes with owning publicly-traded securities, but in exchange you get a more objective source of value (actual cash) than the market-driven factors you're forced to rely on in the public markets. In my opinion, that more than offsets any form of liquidity discount you'd apply to a private security relative to a public security, yet public securities still tend to trade at a premium over private securities. The ultimate form of arbitrage is to extract your base value in the private market from actual cash flows, and then extract your terminal value via some sort of public exit (IPO, etc.). It's the best of both worlds.
PE is also more pure in the sense that it allows you to use leverage at the HoldCo level to lower your cost of capital and enhance returns in ways that aren't available to most public market investors. You simply have many more tools in your arsenal through which to extract value in the private markets. Sure, you're giving up the liquidity that comes with owning publicly-traded securities, but in exchange you get a more objective source of value (actual cash) than the market-driven factors you're forced to rely on in the public markets. In my opinion, that more than offsets any form of liquidity discount you'd apply to a private security relative to a public security, yet public securities still tend to trade at a premium over private securities. The ultimate form of arbitrage is to extract your base value in the private market from actual cash flows, and then extract your terminal value via some sort of public exit (IPO, etc.). It's the best of both worlds.
Posted on 1/7/18 at 2:01 pm to GenesChin
That's basically what I'm referring to, although I'd simply call it a project WACC or project ROE.
Posted on 1/7/18 at 5:13 pm to RedStickBR
quote:
That's basically what I'm referring to, although I'd simply call it a project WACC or project ROE.
I see what your getting at, but calling it WACC/RoE makes it a little confusing even w a "project" in front
Posted on 1/8/18 at 8:30 am to lynxcat
Didn't the class just start?
Posted on 1/10/18 at 8:46 pm to TimeOutdoors
quote:
Didn't the class just start?
Thread started at the end of last semester. I'm about to start my final semester.
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