re: High level finance class is a new level of intense

Threw an upvote there to offset.

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Anyone here familiar with it?

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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.

Taking Financial Accounting and Corporate Finance starting Monday. Going to be a long two years

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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.

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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

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.

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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.

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Why don't you just use RAROC?

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.

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That's basically what I'm referring to, although I'd simply call it a project WACC or project ROE.

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I see what your getting at, but calling it WACC/RoE makes it a little confusing even w a "project" in front

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Didn't the class just start?

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Thread started at the end of last semester. I'm about to start my final semester.