Aswath Damodaran (AD), 1994, Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, John Wiley and Sons.
F. Reilly and K. Brown (RB), 1997, Investment Analysis and Portfolio Management, 5th Edition, Dryden Press.
Class Packets: Available at the NYU Main Bookstore located at 18 Washington Place.
n Lecture Handouts
Packet
n Finance Project
Packet
n Three Examples of
a Student Reports:
Ś Himanshu Patel, Student
Analyst, Fall 96 (JP Morgan, Equity Analyst)
Ť Justin Pollack,
Student Analyst, Fall 97 (Bear Stearns, Equity Analyst)
Ž Andrea Felicio,
Student Analyst, Fall 97 (Periba, Equity Analyst)
Grading Policy:
| Class Participation/ Turning Assignments in OnTime and of high Quality |
|
| Case Project: Due April 27, 1998 (late projects are not accepted) |
|
| Midterm Exam: March 23, 1998 |
|
| Final Exam: |
|
Grading is based on the class curve rather
than the total number of points and adheres to the grading curve set by
the Finance department. The professor has no control over this curve.
What is Expected of Students:
Ś Students are expected to ask another student for lecture notes or make other arrangements if he or she is unable to attend class e.g., religious holidays.
Ť No makeup exams are given without a signed medical excuse from a doctor.
Ž Students are required
to possess a calculator with financial functions.
« « WARNING: This is a labor intensive class. The philosophy that we use is to talk about it, read about it, and then JUST DO IT! No incompletes will be given.
• The Investment Setting Ch.
1, RB
• Organization/Functioning of Securities
Markets Ch. 4, RB
• Security Market Indicator Series Ch.
5, RB
• Industry Analysis Ch. 19, RB
Company Analysis (Ratio Analysis)
• Analysis of Financial Statements Ch.
12, RB
• Understanding Financial Statements Ch.
5, AD
Prelude to Valuation Analysis
• Introduction to Valuation Ch. 1, AD
• Approaches to Valuation Ch. 2, AD
• Overview and Conclusions Ch. 17, AD
• Stock Market Analysis Ch. 18, RB
• Company Analysis and Stock Selection Ch. 20, RB
Dividend Discount Model
• Estimation of Discount Rates Ch. 3, AD
• Estimation of Cashflows Ch. 4, AD
• Estimation of Growth Rates Ch. 5, AD
• Dividend-Discount Models Ch. 6, AD
Free Cashflow to Equity Model
• Free Cashflow to Equity Discount Models Ch. 7,
AD
• Valuing a Firm-The Free Cashflow to Firm Ch. 8,
AD
Economic Value Added (EVA)/MVA
No readings
Price-Earnings Ratio
• Price-Earnings Ratio Ch. 10, AD
Variations to the Price-Earnings Approach
• Price-Book Value Ratios Ch. 11, AD
• Price-Sales Ratios Ch. 12, AD
Review for Midterm Exam
Students can bring 2 pages of formulas written on
only 1 side of the paper (not front and back)
• Technical Analysis Ch. 21, RB
• Efficient Capital Markets Ch. 7, RB
• Market Efficiency-Definition and Tests
Ch. 8, AD
• Market Efficiency-The Evidence Ch. 9,
AD
• Introduction to Asset Pricing Models Ch. 9, RB
• Extensions and Testing of Asset Pricing Theories
Ch. 10, RB
• Jensen’s Alpha (pp. 1000-1005) Ch. 27, RB
• Option Contracts Ch. 24, RB
• Option Pricing Theory Ch. 17, AD
• Special Cases in DCF Valuation Ch. 13, AD
• Applications of Option Pricing to Equity Valuation
Ch. 18, AD
• Equity Portfolio Management Strategies Ch. 22, RB
• Asset Allocation Ch. 2, RB
• Introduction to Portfolio Management Ch. 8, RB
• Evaluation of Portfolio Performance Ch. 27, RB
• The Global Asset Allocation Decision Ch. 14, RB
Purpose: The purpose of this paper is to
Ś acquaint you with
various investment information
Ť enhance your understanding
of various analytical topics covered during the semester
Ž get you a
job by showing this project to an employer in a job interview
Due Date: April 27, 1998
Format: The paper must be laser printed. References to outside sources should be footnoted at the end of the paper (this includes any class handouts). In the Appendix to each section, be sure to explain the technique(s) used/description of model, the assumptions and limitations of the model, and also put all intermediate calculations here.
Individual Work: Each student is responsible for 1 stock in a given industry. Each individual in the class will not be allowed to choose a stock that another individual has selected or a stock used in the prior semester.
Outline:
I. Executive Summary: Final Stock Recommendation
II. Company Overview and Recent News about Company
III. Industry Analysis and Relationship to Compan
1. Your packet at the bookstore contains 3 typical student reports from prior semesters. Each report has certain weaknesses and therefore you should treat these prior reports only as a starting point or point of departure in doing your analysis.
2. Unfortunately, due to administrative decisions to increase the size of this class, there will not be any resubmissions of the project allowed prior to the final submission. This policy may change if the class size is reduced to roughly 35 students.
Staying On Course: You
are required to submit your preliminary drafts to me at the end of each
time period listed below so that I know you are keeping up. The grade on
your preliminary drafts are preliminary.
The grade on your final project is final. There will be no incompletes given in this course.
Submit data packet on stock from Internet (e.g www.wsrn.com),
Bloomberg, Lexis-Nexus, Dow Jones News Retrieval, Investext, etc.
(i) be publicly listed
(ii) have prices, dividends(preferably), and positive
earnings for all 5 years
(iii) have information on it in either the S&P
Stock Reports, Value Line Investment Survey, or Moody's Handbook of Common
Stocks.
Your data packet should include the following:
þ Bloomberg:
Earnings estimates; historical ratios for company and industry (if any)
þ Dow Jones
New Retrieval: Complete printout of information on your company
þ Investext:
Analysts writeups on your stock (the 2 "best" reports)
þ Lexis-Nexus:
News articles on your company and industry for past 6 months
þ Internet:
From www.wsrn.com (among other sites) annual report/ 10K for your company
and your company’s major(s) competitors. Also the fact sheet on your company,
company/industry ratios, industry reports, etc.
þ Value Line
(preferably), Moody’s or S&P fact sheet on your company
Sources: RMA Annual Statement Studies (Robert Morris Associates), Industry Norms and Key Business Ratios (Dun & Bradstreet), Almanac of Business and Industrial Financial Ratios (Troy), and Trade Publications. For certain industries such as banking and insurance, the appropriate ratios will be found in tradebooks such as Shesnouff (banks) which compiles information in the call reports and the Best Reports (Insurance). Also
check the Internet (e.g. www.wsrn.com).
Sources: Bloomberg, Compustat and CRSP on
srds, ValueLine, First Call on America Online, Dow Jones News Retrieval,
www.wsrn.com
Perform a relative valuation analysis using firms
that are "comparable" to your subject firm and using variables that are
appropriate to your particular industry to adjust the industry P/E to arrive
at the justified P/E for your stock and stocks of your comparables. Address
questions at the end of this section in the finance project handbook.
Do some simple sensitivity analysis on the number of days to use in the short term/long term moving averages. Construct a matrix showing the profit from varying the number of days in the short/long term series. Also perform some simple sensitivity analysis on the significance level to use as the appropriate Z score in the earnings surprise model e.g. 90%, 95%, etc. Construct a matrix showing the profit from varying the Z-score (significance level).
Calculate your profit margin if you had relied on each of these alternative systems. In addition to this, calculate profits if you had used a buy and hold strategy. Address the issues in the technical analysis handout.
Sources: Historical Price Quotes and First
Call on America OnLine, Bloomberg, CRSP on srds.
Sources: CRSP on srds, Bloomberg.
Executive Summary: Summarize your analysis and recommendations regarding your stock. The summary should briefly highlight the reasons for your final recommendation. These reasons should be based not only on quantitative considerations but also qualitative factors. Include a discussion of whether your stock "beat" the S&P500.
Your executive summary should be placed at the front
of your report.