tag:blogger.com,1999:blog-16440843241763669972024-02-19T01:12:43.172-08:00The Fat Left TailA post-as-motivated blog about finance, current events, and good timesUnknownnoreply@blogger.comBlogger47125tag:blogger.com,1999:blog-1644084324176366997.post-81307626896837297662011-10-28T21:40:00.000-07:002011-10-28T21:40:40.138-07:00Company Overview Components - Oil & GasIt's one of the first tasks you learn on the job, and even when your engaged on something live many analysts will roll out one or two snapshots a week. Although an actual template doesn't add much value, I think discussing what the most important topics in oil and gas does - and that's exactly what the overview is supposed to do.<br />
<br />
<b>The obvious</b><br />
Parts of the overview are a no brainer. Usually the upper left quadrant discusses the basics of the company, like: name, ticker, headquarters, total enterprise value, average boe or cfe (barrels of oil equivalent for the more liquid [oil based] companies and cubic feet equivalent for the more gassy companies), net acreages (net as in net of working interest, oil and gas companies joint venture a lot of their land), and most recent guidance on the years capital budget and exit production. <br />
<br />
<b>The financials</b><br />
Nearly every front page will have a "cap table" or a capitalization of the company. The flow of most capital tables goes something like: most recent stock price, fully diluted shares outstanding (getting this number right takes some carefully reading through the most recent Q and new releases since), market capitalization, net debt, and total enterprise value. Then come the optionals, if they pay a good dividend, include a dividend yield, if you want them to look cheap cherry pick the right multiples ($/acre if they have a lot of land but little resource, etc.) Credit stories need credit multiples, buyside stories need low metrics, sellside stories need high metrics, every company will have some of each depending on how you cut it. Rarely would you ever see a balance sheet, income statement or cash flow statement in any part of the presentation, although sometimes you see EBITDA and CFPS.<br />
<br />
<b>Resources</b><br />
The resources are the meat of any natural resources company discussion. Oil and gas companies let these numbers slip in 3 main areas, the Annual Information Form that is disclosed every year end, the MD&A for each quarterly report, and the latest Investor Presentation. You can also add to the story through press release disclosure, quarterly transcripts and additional disclosure you can find in the annual report. Generally you want to find net acres by play and all the resource stats by play (Proved, Probable, Possible, Best Estimate Contingent). You also want % liquids, the average EUR (Estimated Ultimate Recovery) of the wells by formation, supply cost of the play (the break even gas price at 9% discount rate typically). <br />
<br />
That's the first page usually, next you focus more on the story. You might profile each individual play they have, some merger metrics, etc.<br />
<br />
Generally if you know how to talk to each of these points, you are ready to participate at some level in conversations with the client - and that's the first step to associate level banking.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-1644084324176366997.post-46024742616284416692011-09-18T17:01:00.000-07:002011-09-18T17:01:52.336-07:00Valuation practices in a Natural Resources Coverage Group<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> It has been interesting to see the similarities and differences between classroom methodology and industry practices when valuing oil and gas companies. Here are some key differences.<br />
<br />
<b>Discount Rates</b><br />
CAPM is out, PV10 is in. On a cash flow basis there are two main techniques in valuing resource assets. One is a haircut technique where all Proven and Probable (2P) reserve cash flows (output * price - expenses)<b> </b>are discounted at 10%, and Contingent resources and Undiscovered resources (2C) (but owned acreage) cash flows are hair cut at 10 to 20%, and then they too are discounted at 10% - hence "PV10". The other methodology discounted 2P reserves at 10% and then contingent reserves at 12% or higher depending on the play.<br />
<br />
<b>Terminal Value</b><br />
Mention a terminal value in an interview for a Natural Resource group and you've immediately put your landing possibilities in jeopardy. Gas wells produce at very predictable rates, which can be delineated into "type curves". For going forward assumptions you just have to know what type curve can be reasonably expected out of the play and package. After this you can model out production for the next 100 years if you want to; many of our models stretch beyond 2080.<br />
<br />
<b>Assumptions</b><br />
Because PV10 is a fairly industry standard valuation method the real assumptions come into the model with prices, classifications between contingent, probable, and possible, and what Tcf values are given to land that haven't been risked (drilled with exploratory wells) yet.<br />
<br />
Price decks generally come from 3 sources: brokerage consensus, engineer forecast, and forward contracts. To get the best value for their research everyone generally spends a lot of effort forecasting the major contracts (HHUB Gas, WTI Crude, Brent Crude), and then every other selling price is based off a differential to these contracts going forward. For instance a major Canadian gas selling price is at AECO, which generally trades at a C$0.50 discount to HHUB, thus if you have a decent idea of the expectations for HHUB, you also have a decent expectation for your local price point.<br />
<br />
The engineers add a lot of value to the model. They provide you independent type curve estimates, price expectations, and reserve estimates that include 2P and 2C values.<br />
<br />
<b>Comparables</b><br />
The comparable universe works much like it did in class, just the multiples are different. EV over reserves (1P, 2P, 2P + 2C), <b> </b>acreage, and production are very common.<br />
<br />
<b>Wrinkles</b><br />
An area of the model that are more complex than I had originally expected is the royalty calculation. Oil and gas firms are taxed twice, once on income after expenses, and once on production through complex royalty rate calculations. As an investment bank understanding and strategically advising our client through royalty rates is a big part of the business and after all the due diligence homework we often know more about the credit and rate reduction plans than major oil and gas companies who face these costs daily.<br />
<br />
More to come.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1644084324176366997.post-45760355654530868022011-07-16T18:57:00.000-07:002011-07-17T08:45:03.614-07:00What is Analyst Investment Banking Training Like?<b>Who is there?</b><br />
Many banks have stretched the net of who's included to global or nearly global. Having the Americas and APAC train in NYC and EMEA train in London is common but some bring everyone to the NYC headquarters. Analysts coming from APAC may have already worked several months because the school cycle is so different.<br />
<br />
After spending some time with the analyst class there are some definite trends that become obvious. It is very rare to have analysts going to NYC who have not summered with the bank before, or at least with an IB of similar caliber. Most of the Ivy League school students end up going to NYC, which although geographically makes sense, is still interesting because many of these students exit with liberal art degrees. Many of the regional analysts would have summered before with the firm but that is not as strong a rule, most of these analysts come out of the less recruited schools, and many of them have econ or business backgrounds.<br />
<br />
<b>What is it like?</b><br />
Training is generally a rehash of your average 4 year commerce program with a focus on applied skills (very little theory is taught), and familiarization of the tools needed to do the job. The NYC analysts may not be placed in their coverage groups yet, and so they are still networking for the job. Most of the regional analysts will have group placement and so training for them is less focused on performance, and more focused on getting the needed skills and having a good time in NYC and London. <b> </b>Most firms in NYC will use one of two providers, wall street prep or AMT. The classes are very involved, you are constantly doing excel questions and creating output, which makes what is for many review a much less painful than it could be. The hours per day average between 8 and 12, with one or two all nighter's through the month.<br />
<br />
<b>Bottom Line</b><br />
Analysts should take two things out of training: a network, and tool skills, in that order. Coverage groups will all treat projects fairly uniquely, so the modeling, valuation, and accounting fundamentals you<b> </b>have out of any business program are more than enough. You will however never have the chance to see the whole analyst class at the same time again, and you may need them in the future. Calling for information between groups happens and a friend is much more likely to carve out 15 minutes for your needs. Also when the analyst class looks to move on from the firm, the IB analyst pool can have great benefits when looking for exit ops.<br />
<br />
After 4-6 weeks school is out, and the work begins. Enjoy your evenings while you have them!Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-1644084324176366997.post-88221782384967243572011-05-15T20:23:00.000-07:002011-05-15T20:23:24.346-07:00A simple merger analysis and the MVBS method of discount rates<!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> There is little less inspiring than studying foreign exchange finance that has managed to permeate the economics, derivatives, accounting, and equity sections of the CFA 2 exam, so a road map to M&A transactions and firm valuation with excess cash sounds like the perfect distraction.<br />
<br />
<b>What's in the title?</b><br />
What is the difference between a merger, an acquisition, and a consolidation? Simply, a merger is a transaction where an acquirer buys the target and the target dissolves as a legal entity (A + B = A). An Acquisition is a transaction where the acquirer buys a majority stake in the target, but the target remains a legal entity (A + B = Ab). Lastly a consolidation is when two similar firms merge and form a new entity, (A + B = C). <b> </b><br />
<br />
<b>What's a firm worth?</b><br />
In mergers the acquirer is buying the whole company, not just its equity. Thus when they make an offer for the firm they must take into account the equity holders and the premium they will require, in addition to buying out or assuming the target’s debt holders. This combination can be summed up with the term Enterprise Value (EV), where EV = Equity + Debt - Excess Cash. This is visually displayed in a market value balance sheet.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7TG6VmjamLaqwOTOErlI-_pCfa0ATnNQ9o6jcrEEog5M3rIt-KBGZbsxi6bEhhLCXmagM61-vLGnXS6Z49F8m67GvA5Tno8VtnB0bSEMi54czMOAJX9J8BHR0vTJ3RiqDu21HFBWxdA/s1600/MVBS.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7TG6VmjamLaqwOTOErlI-_pCfa0ATnNQ9o6jcrEEog5M3rIt-KBGZbsxi6bEhhLCXmagM61-vLGnXS6Z49F8m67GvA5Tno8VtnB0bSEMi54czMOAJX9J8BHR0vTJ3RiqDu21HFBWxdA/s1600/MVBS.jpg" /> </a></div><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> <div align="center" class="separator" style="text-align: center;">Liabilities are thought of as economic liabilities, or stakeholders of the company’s assets, not accounting liabilities which are by definition distinctly separate from equity. </div><div align="center" class="separator" style="text-align: center;"><br />
</div><div class="separator">There are some interesting identities that result from this economic model. One of the largest outside the M&A frame work is a surprising valuation result. The cost of capital of a firm is thought to be the weighted average of the cost of debt and the cost of equity. This "WACC" is a very well excepted method of discounting a firm’s cash flows to arrive at its total value, aka its enterprise value. This is true, however it is only true given a key assumption; the firm holds an immaterial amount of excess cash. Excess can loosely be determined as the cash balance that is above what would be needed for operations, or cash that is not called on through either the longer of a calendar year or a product cycle (make to sell). Most firms don't have this kind of cash, but some do, think Microsoft and Google. I'll do Google as an example below. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB9Qd44BNLgw4pMRBfSMLbQ24z9BCJujacYWU9PmV97FFmit_mN1H_gqIIQoDviOJ3GG0ksH8SOuIAKzawjb912L6IWZuyvMa2xsL38lGF1J1hJ-uG4jNSl40aWy4PvAuiGoWebNFetw/s1600/MVBS+of+google.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgB9Qd44BNLgw4pMRBfSMLbQ24z9BCJujacYWU9PmV97FFmit_mN1H_gqIIQoDviOJ3GG0ksH8SOuIAKzawjb912L6IWZuyvMa2xsL38lGF1J1hJ-uG4jNSl40aWy4PvAuiGoWebNFetw/s1600/MVBS+of+google.jpg" /> </a></div><div class="separator" style="clear: both; text-align: left;"><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> </div><div class="separator">Excess cash was assumed to be the balance in their marketable securities account (they have another $3 billion in their cash account) and equity was their May 15th share price close multiplied by the current shares outstanding. Look at that $24 billion in cash. Now look at what it implies about the firms Beta's. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEDfWoo9T5Rq-kfvEGLhwJjbs7ZNaAQBze68kpFiinQmowFT_uAGaXffKWw7jGLzpFT2oqDHTZqzvWMSv-kR3nroInKm2C23VU4oFRdas21RlrMbv-iVogohHkhCjlRcjUvDSu9HnYQg/s1600/MVBS+of+google+beta.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEDfWoo9T5Rq-kfvEGLhwJjbs7ZNaAQBze68kpFiinQmowFT_uAGaXffKWw7jGLzpFT2oqDHTZqzvWMSv-kR3nroInKm2C23VU4oFRdas21RlrMbv-iVogohHkhCjlRcjUvDSu9HnYQg/s1600/MVBS+of+google+beta.jpg" /> </a></div><div class="separator" style="clear: both; text-align: left;"><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> </div><div class="separator">I grabbed the equity beta off of google finance, (ideally I would have taken the time to personally regress it because google finance is known to normalize it's beta using the 1/3 2/3 rule, but the point will still come across) and I assumed the debt beta to be 0.2 which is roughly what it could be. Note this is not the cost of debt, it’s a view of the value of debt in perspective of its credit rating and its relationship with the market. The beta of the firms liabilities corresponds to the risk that would be captured in a WACC discount rate (I do a clarifying example below). The punch line is this: cash has no beta. The beta of the enterprise (beta of the operation assets net of excess cash) can be backed into by the following identity. Beta of Liabilities = Beta of Total Assets. Beta of operation assets = Beta of Total Assets * Market Value of Assets / Enterprise Value. This is why the enterprise has a high beta; the excess cash is having a huge stabilization effect on the beta of debt and equity. Practitioners who simply use WACC to discount the firm’s cash flows grossly overestimate the firm’s value. The same example using discount rates is below. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMDR90lQQ53XpG8BdGUWigOSHtC3uVvGZ4w2UrNgFU9VYWfxNGBRhmP7qeyenblMko8LPWj2Vrb8v_X8WlkKDbucl4UtEeA7YFjy2H-fDBWYaPFiV8kU02cewdPU3aXkNIdeCHUnRrbA/s1600/MVBS+of+google+wacc.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMDR90lQQ53XpG8BdGUWigOSHtC3uVvGZ4w2UrNgFU9VYWfxNGBRhmP7qeyenblMko8LPWj2Vrb8v_X8WlkKDbucl4UtEeA7YFjy2H-fDBWYaPFiV8kU02cewdPU3aXkNIdeCHUnRrbA/s1600/MVBS+of+google+wacc.jpg" /> </a></div><div class="separator" style="clear: both; text-align: left;"><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> </div><div class="separator">Excess Cash will not return 0%, it will return ~ 0.5% with today's rate, but this table doesn't concern itself with return, that is something to be modeled into the cash flows. This table concerns itself with the cost of capital and the appropriate discount rate for Google's projects. Practitioners not imbedding the leverage effect of cash, with incorrectly discount Google's project cash flows by a value 1.88% too low. In the terminal calculation, every dollar terminalized will result in a present value that is roughly $53 to high (1/1.88%). </div><div class="separator" style="clear: both; text-align: left;"><br />
</div><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> <div class="separator"><b>Back to Mergers</b></div><div class="separator">I digress. Back to valuing a merger. Using the market value balance sheet discussed above, the acquirer has a pretty good idea of what they will have to pay. They can use the targets excess cash to help pay off the acquisition, (unlike patents and products, a target can't argue for a premium on its mountains of cash) and after a careful study of the bond covenants they will be able to determine what debt can be assumed, and what debt must be paid off with either its own cash or debt it issues itself. </div><div class="separator"><br />
</div><div class="separator">I recently did a case competition that looked at the merger of Bank of New York, and Bank of Mellon. Here is how their MVBS's lined up. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdF-1rWCjpMp6Clb9EfVoPyYxL6ii4VDobzY6xx5Mw-ObsWYzbKkQ9HaavtEM_ZzL8v7zFl4GZP7vRRQkoIR1VKMgwoNRNZff16O3Xq1tWnbK-83xjKNgsivfcSzeBMkjaGz5OEzPqKQ/s1600/MVBS+of+Mellon.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdF-1rWCjpMp6Clb9EfVoPyYxL6ii4VDobzY6xx5Mw-ObsWYzbKkQ9HaavtEM_ZzL8v7zFl4GZP7vRRQkoIR1VKMgwoNRNZff16O3Xq1tWnbK-83xjKNgsivfcSzeBMkjaGz5OEzPqKQ/s1600/MVBS+of+Mellon.jpg" /> </a></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXLlyUtNislQ6Cqvax4CxF3K91uLziXhD_wQ4bBuqSVy9iKN5hmRIjcYR7apZyIwCCLub-IbgDyQkTzjx-LNIS5GFPRL-1dZP7C_jxZR5KEvbR51X_zo_dOu9cIXG5zYCDAlKD8aAiJw/s1600/MVBS+of+BNY.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXLlyUtNislQ6Cqvax4CxF3K91uLziXhD_wQ4bBuqSVy9iKN5hmRIjcYR7apZyIwCCLub-IbgDyQkTzjx-LNIS5GFPRL-1dZP7C_jxZR5KEvbR51X_zo_dOu9cIXG5zYCDAlKD8aAiJw/s1600/MVBS+of+BNY.jpg" /></a></div><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> <div class="separator">Again the equity is calculated stock price * shares outstanding. Debt is from the balance sheet, and both firms were assumed to have an immaterial amount of excess cash, so enterprise was the simple sum. When the merger took place BNY bought Mellon with an all stock offer, but the exchange ratio was a bit odd, BNY shares would be exchanged at 0.9434 (a large part of our case was arguing why this was too high and how they could bargain it down) and Mellon shares would convert at a 1:1 basis. Because of this quirk it is easier to think of Mellon buying BNY. </div><div class="separator"><br />
</div><div class="separator">Let’s assume both firms think synergies will be $7.5 billion present valued. Let's also assume synergies will be split in proportion to equity 'brought to the table.' What does the new firm look like? If the market values the synergies at the same value, what should the efficient share price be? </div><div class="separator"><br />
</div><div class="separator">The easiest way to tackle this is to pretend the merger was an all cash offer. If Mellon bought BNY for all cash, they would need to pay $100 billion for the company plus $4.63 billion for their share of the synergies (7.5*26/(16+26)). This would produce a company looking something like this. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDbtelKMVNcO6U3kwj316H2l21teM198CORx9oCcgi_M8nm5Dky_dm4AVcHrn_UPVCTI90IR1i1gmQZOyreJsT1BVogq8W69gNSTRHG8zHkW2aCPe9V5z5A-oebSzdEkbI3mBynWpflg/s1600/MVBS+of+mellon+all+cash.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDbtelKMVNcO6U3kwj316H2l21teM198CORx9oCcgi_M8nm5Dky_dm4AVcHrn_UPVCTI90IR1i1gmQZOyreJsT1BVogq8W69gNSTRHG8zHkW2aCPe9V5z5A-oebSzdEkbI3mBynWpflg/s1600/MVBS+of+mellon+all+cash.jpg" /></a></div><div class="separator" style="clear: both; text-align: left;"><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> </div><div class="separator">Woohoo $7 share price bump! The enterprise value is now the sum of the two companies plus the $7.5b in synergy and the debt is the debt of Mellon, the debt of BNY and $4.63b in BNY's synergy payout. Equity is simply Assets minus Debt, and then we call solve for share price by dividing by the number of shares outstanding. Obviously the firm is far to levered (7 times debt to equity, yikes!) so we need to look at the all stock merger. This is easy to do because we have not yet impounded the markets expected heavy discount on the stock due to our extreme leverage. Leaving this step out (we would need to do it if the merger was indeed all cash), we simply drop the cash payout from debt, and figure out how many shares need to be issued to solve for the same price per share. This is because, economically, the all stock and all cash deal involve the exact same payoffs, and so if we want to reward BNY with the same split of synergy, we simply just need to issue them enough stock to replicate the split they are getting under the current deal. This is how it looks. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRn7hdrlsuMHJy46Bz2NJqnP1tFD8RS619pUu-lLlb3BF-geASSqWY6Aa_D04hAbktZw_-ffckOfl3Y3O-IJ2dtcJ-qTcPNBcO2owNFvR6bJ-NOVNAgy-qbcsCPjIMi43xPiIG_W8grQ/s1600/MVBS+of+mellon+all+stock.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRn7hdrlsuMHJy46Bz2NJqnP1tFD8RS619pUu-lLlb3BF-geASSqWY6Aa_D04hAbktZw_-ffckOfl3Y3O-IJ2dtcJ-qTcPNBcO2owNFvR6bJ-NOVNAgy-qbcsCPjIMi43xPiIG_W8grQ/s1600/MVBS+of+mellon+all+stock.jpg" /></a></div><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves/> <w:TrackFormatting/> <w:PunctuationKerning/> <w:ValidateAgainstSchemas/> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:DoNotPromoteQF/> <w:LidThemeOther>EN-US</w:LidThemeOther> <w:LidThemeAsian>X-NONE</w:LidThemeAsian> <w:LidThemeComplexScript>X-NONE</w:LidThemeComplexScript> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> <w:DontGrowAutofit/> <w:SplitPgBreakAndParaMark/> <w:DontVertAlignCellWithSp/> <w:DontBreakConstrainedForcedTables/> <w:DontVertAlignInTxbx/> <w:Word11KerningPairs/> <w:CachedColBalance/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> <m:mathPr> <m:mathFont m:val="Cambria Math"/> <m:brkBin m:val="before"/> <m:brkBinSub m:val="--"/> <m:smallFrac m:val="off"/> <m:dispDef/> <m:lMargin m:val="0"/> <m:rMargin m:val="0"/> <m:defJc m:val="centerGroup"/> <m:wrapIndent m:val="1440"/> <m:intLim m:val="subSup"/> <m:naryLim m:val="undOvr"/> </m:mathPr></w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" DefUnhideWhenUsed="true"
DefSemiHidden="true" DefQFormat="false" DefPriority="99"
LatentStyleCount="267"> <w:LsdException Locked="false" Priority="0" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Normal"/> <w:LsdException Locked="false" Priority="9" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="heading 1"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 2"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 3"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 4"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 5"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 6"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 7"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 8"/> <w:LsdException Locked="false" Priority="9" QFormat="true" Name="heading 9"/> <w:LsdException Locked="false" Priority="39" Name="toc 1"/> <w:LsdException Locked="false" Priority="39" Name="toc 2"/> <w:LsdException Locked="false" Priority="39" Name="toc 3"/> <w:LsdException Locked="false" Priority="39" Name="toc 4"/> <w:LsdException Locked="false" Priority="39" Name="toc 5"/> <w:LsdException Locked="false" Priority="39" Name="toc 6"/> <w:LsdException Locked="false" Priority="39" Name="toc 7"/> <w:LsdException Locked="false" Priority="39" Name="toc 8"/> <w:LsdException Locked="false" Priority="39" Name="toc 9"/> <w:LsdException Locked="false" Priority="35" QFormat="true" Name="caption"/> <w:LsdException Locked="false" Priority="10" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Title"/> <w:LsdException Locked="false" Priority="1" Name="Default Paragraph Font"/> <w:LsdException Locked="false" Priority="11" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtitle"/> <w:LsdException Locked="false" Priority="22" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Strong"/> <w:LsdException Locked="false" Priority="20" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Emphasis"/> <w:LsdException Locked="false" Priority="59" SemiHidden="false"
UnhideWhenUsed="false" Name="Table Grid"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Placeholder Text"/> <w:LsdException Locked="false" Priority="1" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="No Spacing"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 1"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 1"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 1"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 1"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 1"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 1"/> <w:LsdException Locked="false" UnhideWhenUsed="false" Name="Revision"/> <w:LsdException Locked="false" Priority="34" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="List Paragraph"/> <w:LsdException Locked="false" Priority="29" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Quote"/> <w:LsdException Locked="false" Priority="30" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Quote"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 1"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 1"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 1"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 1"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 1"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 1"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 1"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 1"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 2"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 2"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 2"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 2"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 2"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 2"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 2"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 2"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 2"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 2"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 2"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 2"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 2"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 2"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 3"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 3"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 3"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 3"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 3"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 3"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 3"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 3"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 3"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 3"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 3"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 3"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 3"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 3"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 4"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 4"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 4"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 4"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 4"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 4"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 4"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 4"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 4"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 4"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 4"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 4"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 4"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 4"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 5"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 5"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 5"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 5"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 5"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 5"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 5"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 5"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 5"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 5"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 5"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 5"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 5"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 5"/> <w:LsdException Locked="false" Priority="60" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Shading Accent 6"/> <w:LsdException Locked="false" Priority="61" SemiHidden="false"
UnhideWhenUsed="false" Name="Light List Accent 6"/> <w:LsdException Locked="false" Priority="62" SemiHidden="false"
UnhideWhenUsed="false" Name="Light Grid Accent 6"/> <w:LsdException Locked="false" Priority="63" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 1 Accent 6"/> <w:LsdException Locked="false" Priority="64" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Shading 2 Accent 6"/> <w:LsdException Locked="false" Priority="65" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 1 Accent 6"/> <w:LsdException Locked="false" Priority="66" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium List 2 Accent 6"/> <w:LsdException Locked="false" Priority="67" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 1 Accent 6"/> <w:LsdException Locked="false" Priority="68" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> <w:LsdException Locked="false" Priority="69" SemiHidden="false"
UnhideWhenUsed="false" Name="Medium Grid 3 Accent 6"/> <w:LsdException Locked="false" Priority="70" SemiHidden="false"
UnhideWhenUsed="false" Name="Dark List Accent 6"/> <w:LsdException Locked="false" Priority="71" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Shading Accent 6"/> <w:LsdException Locked="false" Priority="72" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful List Accent 6"/> <w:LsdException Locked="false" Priority="73" SemiHidden="false"
UnhideWhenUsed="false" Name="Colorful Grid Accent 6"/> <w:LsdException Locked="false" Priority="19" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Emphasis"/> <w:LsdException Locked="false" Priority="21" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Emphasis"/> <w:LsdException Locked="false" Priority="31" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Subtle Reference"/> <w:LsdException Locked="false" Priority="32" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Intense Reference"/> <w:LsdException Locked="false" Priority="33" SemiHidden="false"
UnhideWhenUsed="false" QFormat="true" Name="Book Title"/> <w:LsdException Locked="false" Priority="37" Name="Bibliography"/> <w:LsdException Locked="false" Priority="39" QFormat="true" Name="TOC Heading"/> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]--> <div class="separator">Now the debt equity ratio is a much more reasonable 2 (for a bank), and we have another 666 million shares outstanding that belong to BNY. It's that simple. From here you can play with any stock cash mix you want, and figure out all sorts of cool things like ownership stake, what stock payout is needed to keep within covenant restraints, and the sensitivity to each party in the event that synergy is less or more than expected. </div><div class="separator"><br />
</div><div class="separator">Oh and that exchange ratio, it’s 666/751.8=0.8858. BNY was arguing speculation had gotten out that the firms were going to merge and so they wanted to use the 6 month average stock prices. Unfortunately over the last 6 months Mellon had experienced a great rally where BNY had underperformed. The lower the equity value pre merger, the less stake you get in the synergies.</div><div class="separator"><br />
</div><div class="separator"><b>Accretion and Dilution</b></div><div class="separator">Will the EPS after the merger be higher or lower than it was before? Wither the merger is accretive or dilutive is a very common question from management, because they are used to thinking in terms of earnings per share, and have an expectation that their stock price will trade at a similar P/E multiple after the merger as it did before. The accretion dilution debate is basically economically irrelevant, but for the sake of the interview questions under the above assumptions plus the assumption that synergies are realized evenly, if the acquiring firms P/E multiple is higher than the (offer price)/E_target, the merger will be accretive. In reality it is not this simple; if there are high merger costs up front the merger will be dilutive at first and then can become accretive when synergies overwhelm integration costs later on. Also the reasoning behind the question is flawed, if a high P/E company buys a low P/E company of similar size, the market will adjust the price to a multiple that sits roughly between the two, <i>unless</i> there is good reason to believe that the high growth firm can make the low growth firms assets achieve high growth. </div><b> </b>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-84201741942308021312011-05-11T20:09:00.000-07:002011-05-13T13:27:13.253-07:00CFA Level II Formulas, Hardest to RememberHere is what I've been compiling as the hardest to learn formulas for the memorization phase. Not surprisingly Derivatives accounts for over 50% of the formulas, but after 3 days of writing them out between class homework I think I finally have FRA's, Swaps, and continuous or discrete forwards/futures correct and mechanical. There are some very long formulas that I haven't included in this list (like the high low DDM model), there are also nearly 150 'extremely' important formulas to know (aggregate accruals, FCFF, ect) not included only because they are easy and usually quickly derivable. So here is the abridged list of the hardest of the hard, but still worth knowing. (Click to enlarge).<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqrMBCN54ytBiqBz53Op57ltuj_n-TNs8Uza6ilffFE9iYpBR49Hex0OBEE8LmBYuMVpcD3vL3mRjXHut8lSddyHJjQAbXi8AmcC4n_vJIp_N59zLLXKxfmI5pLrC_Ev22vuXrbyJrOQ/s1600/cfa+level+2+formulas+to+know.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqrMBCN54ytBiqBz53Op57ltuj_n-TNs8Uza6ilffFE9iYpBR49Hex0OBEE8LmBYuMVpcD3vL3mRjXHut8lSddyHJjQAbXi8AmcC4n_vJIp_N59zLLXKxfmI5pLrC_Ev22vuXrbyJrOQ/s640/cfa+level+2+formulas+to+know.jpg" width="382" /></a></div>Shorthand, top to bottom:<br />
D=Dividend Yield<br />
Rxnew=The Xdate yield that is now known at time t<br />
+...+ = repeat first operation for all time periods until last (k) time period<br />
RM=Market Risk Premium, not to be confused with Rm which is market return. This is a academic notation standard that is very important to catch before you start writing corporate finance exams.<br />
rce= Cost of common equity<br />
inf = inflation<br />
FLT = flowthrough of inflation<br />
rr= retention rate (in my opinion much more descriptive than "b" which all the text books use)Unknownnoreply@blogger.com8tag:blogger.com,1999:blog-1644084324176366997.post-56948863174501713692011-05-04T22:49:00.000-07:002011-05-04T22:49:49.498-07:00CFA exam, thoughts on the last 30 day sprintHot dog, here we go! Whether you're way behind or way ahead the last month before the exam is always a rush. Here is my 30 day game plan.<br />
<br />
First week of May: Made a detailed formula sheet, started the 4th and final pass of the material using Stalla notes. I've been doing half a practice exam every Friday since the middle of April to help gauge where my time should be spent, and this Friday will be no exception. I'm also finishing the exams nearly an hour early so I'll start to work on slowing my pace down this week. By the end of this week I will have done my last pass of Ethics and Quant, my strongest subjects.<br />
<br />
Second week of May: Running through as many CFA issued questions as possible, after studying Stalla so long it is good to see where the question styles are different. Spending most of my time on the core subjects, Accounting, Equity, and Fixed Income. Starting to ramp up on the formula memorization work, hope to have 150 of the 200 key formulas memorized by Sunday.<br />
<br />
Third week of May: Focusing on the rote memorization aspects of the exam; committing the derivative forward equations to memory as well as the buckets of equity formulas. Spend the weekend covering every single question I got wrong on the CFA questions attempted this month, and the practice exams I have been taking since April.<br />
<br />
Fourth week of May: 30 minutes on each subject per day, write out the formula sheet once in the morning and once in the evening. Start to study for 4th quarter finals so I can graduate b-school.<br />
<br />
First week of June: Build confidence through well hashed questions, now's not the time to tackle the hardest of the hard.<br />
<br />
Step 6: Pass exam<br />
Step 7: ???<br />
Step 8: Profit!<br />
<br />
Here are the stats I have coming in to May, I hope to really put down some good hours (60+) this month, and I think it's well within reach because reviewing and memorizing is a lot less taxing in the late hours than learning from scratch. Good luck to all the writers!<br />
<br />
Hours per day since November<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibuVfRdomgy0i3-pmYBQz7ZfdeVQ9M46gZLFSqDloLQHvr2kA4t1IydsbAHHiSOsz3fkkQOaP6qv0-PEHV7v8bMJgCZNWhYEhPRy7toV5d-9sg1GAzPKlOsmaAASYXIdCEdJljRIkUIA/s1600/total+hours.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="258" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibuVfRdomgy0i3-pmYBQz7ZfdeVQ9M46gZLFSqDloLQHvr2kA4t1IydsbAHHiSOsz3fkkQOaP6qv0-PEHV7v8bMJgCZNWhYEhPRy7toV5d-9sg1GAzPKlOsmaAASYXIdCEdJljRIkUIA/s640/total+hours.jpg" width="640" /></a></div>If things don't go well, it's all January's fault.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAulangmSbjCLY3U8G-NM8suJr3r_hiy1AygMFfPzRNa6Jzxo7lbVoP0UGaRr_wNHd2Mn-vGXREBEQTlV8B8MwXKhJxlCunOjui1vDbJKUK3AbN-gU7E41rA7HAk7-UyyKjLpeb0MB3Q/s1600/months+in+aggrigate.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAulangmSbjCLY3U8G-NM8suJr3r_hiy1AygMFfPzRNa6Jzxo7lbVoP0UGaRr_wNHd2Mn-vGXREBEQTlV8B8MwXKhJxlCunOjui1vDbJKUK3AbN-gU7E41rA7HAk7-UyyKjLpeb0MB3Q/s1600/months+in+aggrigate.jpg" /></a></div><br />
Hours Per Subject (Blue) & Average Score Per Subject (Red)<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXOKBOYui9E6G_C6MsPj3-CtZNCmj-Zsdh4IXNV-rD_AUCfEcUmX0QGOyGW2G10VRZ3eyqv-qXbAlkieUOqEkfyrGntG3RBoP7bfsv59nPzFEtAoWLQYUl7cs3BO9JTy08Px6igBcSPQ/s1600/hours+per+subject.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjXOKBOYui9E6G_C6MsPj3-CtZNCmj-Zsdh4IXNV-rD_AUCfEcUmX0QGOyGW2G10VRZ3eyqv-qXbAlkieUOqEkfyrGntG3RBoP7bfsv59nPzFEtAoWLQYUl7cs3BO9JTy08Px6igBcSPQ/s1600/hours+per+subject.jpg" /> </a></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: left;">It was definitely not all gravy the first pass. </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjX8_85e49Y1l9EqCXxtNo6Nx_YkOD_9lTEjiBJqe3HIRZphZwGRGvNYSvTXak37WTm972rXoROR9AZg0ssVd8lV_z6STdV6i5KOQSUZWWwXBO6syZdbGdobdwHiNs_guaHKoTUaNQetw/s1600/test+scores.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="146" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjX8_85e49Y1l9EqCXxtNo6Nx_YkOD_9lTEjiBJqe3HIRZphZwGRGvNYSvTXak37WTm972rXoROR9AZg0ssVd8lV_z6STdV6i5KOQSUZWWwXBO6syZdbGdobdwHiNs_guaHKoTUaNQetw/s640/test+scores.jpg" width="640" /></a></div>The black border indicates I've also done the stalla software practice problems for that chapter.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-17931668731107019902011-04-16T11:30:00.000-07:002011-04-16T11:30:45.276-07:00CFA 2, Business Combinations MindmapI'm never sure why, but accounting seems to always take the longest to absorb. Here is a the business combinations chapter in one slide. The only thing not included is goodwill impairment, and for that all you have to remember is IFRS takes the Recoverable Amount from the cash generating unit (IF<b>R</b>S = <b>R</b>ecoverable) as its' baseline, and GAAP uses the Implied Fair Value of the Reporting Unit <b>G</b>oodwill.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg862q9qXzvHPbIJysqby1bbEege1R0f282sJNW0ecBeA9xixFN7JDxfB2A9iNwSJ-2TXnZhyphenhyphenbnCuUX7U-pvYSdNluZEHPlBXcY3h4EG9VDazLdVuyppMR8fJEoS9_mt5As4R5vwCNUog/s1600/business+combinations.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="476" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg862q9qXzvHPbIJysqby1bbEege1R0f282sJNW0ecBeA9xixFN7JDxfB2A9iNwSJ-2TXnZhyphenhyphenbnCuUX7U-pvYSdNluZEHPlBXcY3h4EG9VDazLdVuyppMR8fJEoS9_mt5As4R5vwCNUog/s640/business+combinations.jpg" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTPvjaAVaHBKNcU5bx0L-BgtaTmLetxZi7c9Eev7iy1KmdwSlEQyCNkg_T5w63cNz3FBLOE34w346PGvCV_JaWylBGGG6FTenplQa3O7dB7gUma37nbSk4dF_3zfwc_5F1tULj1NdZyA/s1600/business+combinations.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><br />
</a></div>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1644084324176366997.post-47758438777594249602011-03-22T15:33:00.000-07:002011-03-22T15:33:57.470-07:00CFA Level II Foreign Currency TranslationAs usual the accounting portion of the CFA is taking me the longest to learn. In fact it currently accounts for 38% of the hours I've studied so far and I'm still having trouble consistently scoring over 70% on Stalla's tests.<br />
<br />
In an effort to hammer some of the concepts home I've decided to mind map some of the decision rules, so here is the Foreign Currency Translation section in 3 slides.<br />
<br />
<b>Choosing the right method</b> <br />
<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgA7lQ625XIhSQEl-K4sHDhCG8wQQXmNc01DyOfPUZGrCGnksqSmtVsvnHSd23AQG3wh1SmiDPgwBzaHpMyzPxIa6gdPu8awx7YnYEOcKuVPD9Ed39R3C5kFok-OToj-Oa4eRVjOh6_3g/s1600/Translation+Guide.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="478" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgA7lQ625XIhSQEl-K4sHDhCG8wQQXmNc01DyOfPUZGrCGnksqSmtVsvnHSd23AQG3wh1SmiDPgwBzaHpMyzPxIa6gdPu8awx7YnYEOcKuVPD9Ed39R3C5kFok-OToj-Oa4eRVjOh6_3g/s640/Translation+Guide.jpg" width="640" /></a> </div><br />
<b>Differentiating between Current and Temporal</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgohyphenhyphenq-S2raQdmsSFxctUicnmmXoifg4jONIn9ukI5HMspgctbOCMAPr3RNiGvnaim2hF1U1UMY7zo58Afe6uwfwuBJ9rQh9HsLh5i4iVCNYkxLoyllo6WPy67b26I3wj9iJx8Ax64rcg/s1600/temp+curr+guide.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="314" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgohyphenhyphenq-S2raQdmsSFxctUicnmmXoifg4jONIn9ukI5HMspgctbOCMAPr3RNiGvnaim2hF1U1UMY7zo58Afe6uwfwuBJ9rQh9HsLh5i4iVCNYkxLoyllo6WPy67b26I3wj9iJx8Ax64rcg/s640/temp+curr+guide.jpg" width="640" /></a></div><div class="separator" style="clear: both; text-align: left;"><b> How to balance (what to plug)</b> </div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitPjJENGCATwVHRrkUyxgWU-IcOgdzc4hyphenhyphenbLMQCoDAWF1qFksDXIYSZl2cr07jjyJSE9aT1fIokFPWm4QaRAT7bDedr5PYLduJPDMcWuQNXiSERW8XiMOBYagXha_RRRz76Ku6RxDBmA/s1600/plug+help.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="284" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitPjJENGCATwVHRrkUyxgWU-IcOgdzc4hyphenhyphenbLMQCoDAWF1qFksDXIYSZl2cr07jjyJSE9aT1fIokFPWm4QaRAT7bDedr5PYLduJPDMcWuQNXiSERW8XiMOBYagXha_RRRz76Ku6RxDBmA/s640/plug+help.jpg" width="640" /></a></div><b><br />
</b>Guide to my shorthand.<br />
BS = Balance Sheet<br />
IS = Income Statement<br />
DNE = Does Not Exist<br />
NI = Net Income<br />
REb = Retained Earnings Beginning<br />
Div = Dividend<br />
Dep = Depreciation<br />
MV = Market Value<br />
G/L = Gain or Loss<br />
Inf = Inflation<br />
CHG = Change inUnknownnoreply@blogger.com3tag:blogger.com,1999:blog-1644084324176366997.post-33932144969515001262011-03-20T12:22:00.000-07:002011-03-20T12:22:33.965-07:00Common Financial Modeling Mistakes<!--[if gte mso 10]> <style>
/* Style Definitions */
table.MsoNormalTable
{mso-style-name:"Table Normal";
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:"";
mso-padding-alt:0cm 5.4pt 0cm 5.4pt;
mso-para-margin-top:0cm;
mso-para-margin-right:0cm;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0cm;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:"Calibri","sans-serif";
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:"Times New Roman";
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;
mso-bidi-font-family:"Times New Roman";
mso-bidi-theme-font:minor-bidi;}
</style> <![endif]-->A working list of things that everyone assumes right, that is actually wrong.<br />
<br />
<b>Beta Lever / Unlever</b><br />
Right out of the gate students are taught about the perils of leverage. M&M one - leverage irrelevance, M&M two - full leverage is optimal, M&M three - optimal leverage rests on earnings volatility assumptions (ie bankruptcy risk). Let's focus on M&M three, as this is closest to reality.<br />
<br />
Theory suggests the optimal capital structure should be found by taking the limit of WACC, where Ke changes with respect to D/A via beta, and that debt should get more expensive under higher leverage ratios. Bankrupcy costs are nonlinear, changing from 1% debt to 2% debt has no effect, going from 90% debt to 91% debt has material effect. The graph below outlines what theory might expect a typical optimal capital structure curve to look like.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWYtEXqAPG28KOCZyjwdWcGdUKlgqkc44XjY5WTKt7hNW75VO9ek1UjzmEa_dhhgZXNX17tPm-VJazgYbmTzstpA6h-yPnM_mPqRayO3ZfhK0teEGYqi8Tu1HIXOCjLiNGsvwlq11itw/s1600/hockey+stick.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="355" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWYtEXqAPG28KOCZyjwdWcGdUKlgqkc44XjY5WTKt7hNW75VO9ek1UjzmEa_dhhgZXNX17tPm-VJazgYbmTzstpA6h-yPnM_mPqRayO3ZfhK0teEGYqi8Tu1HIXOCjLiNGsvwlq11itw/s640/hockey+stick.jpg" width="640" /></a></div>Here my bankruptcy multiplier would be suitable for a pretty stable firm, perhaps a utility company. Riskier firms would have higher multiples, and the minimum would be found closer to the left axis. <br />
<br />
Now here is the catch<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSzlFsyPASag5EaejCFgMa28qoH5NUi-iYJ-c5D3pvoWHFvBvCuMLIDgd8nsa4v_Kr0sN1uFm-QXPOFsGnTSCTFXx2LmAkIfbU1ujn_UvMIbFSBvuEXah2RGf4UD2DKQ3OiMHFIcWJ8Q/s1600/m%2526m+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="356" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSzlFsyPASag5EaejCFgMa28qoH5NUi-iYJ-c5D3pvoWHFvBvCuMLIDgd8nsa4v_Kr0sN1uFm-QXPOFsGnTSCTFXx2LmAkIfbU1ujn_UvMIbFSBvuEXah2RGf4UD2DKQ3OiMHFIcWJ8Q/s640/m%2526m+2.jpg" width="640" /></a></div><br />
This is what is approximated by the beta unlever, lever formula (that is based off of M&M <i>two</i>) where Beta_levered = Beta_Unlevered*(1+(D/E)(1-t)). Notice this is a linear relationship.<br />
<br />
Now look at this.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisKygnJa9Sa0_1SwAdbgzVfQKRVAOICPONKT8YBUozKOGB1njlOUoob0eoKWkSPxw3sYyBYC_kzP6Ni7w7NZIMpq-bMZTcgchJWBXUYBdxRNdmccF9_zBkyzIN4hfxBl2pDTc3zrO65Q/s1600/Wacc+opt+capt+structure.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisKygnJa9Sa0_1SwAdbgzVfQKRVAOICPONKT8YBUozKOGB1njlOUoob0eoKWkSPxw3sYyBYC_kzP6Ni7w7NZIMpq-bMZTcgchJWBXUYBdxRNdmccF9_zBkyzIN4hfxBl2pDTc3zrO65Q/s1600/Wacc+opt+capt+structure.jpg" /></a></div>This is what my finance professor suggests is found in practice (highly recommend taking Prof. Jarrell, his class is where the bulk of this post comes from). The main takeaway from above is that bankruptcy costs seem only to kick in at the end, and that firms actually have a wide region of leverage ratios in which to achieve their minimal WACC.<br />
<br />
So what's the problem? Analysts are <i>constantly</i> using the lever unlever formula to adjust a firms beta and thus their WACC in comparable analysis. This crops up in all sorts of places, but nowhere is it worse than WACC estimation for private firms. Private firms looking to IPO will usually have very different capital structures than the firms in the industry they are about to enter. IB analysts don't have a cost of equity because the firm has no publicly traded stock, so the discount rate for the company comes nearly entirely from peers. Trouble is they adjust for the different leverage using the beta unlever, lever formula. Relatively debt light firms will be heavily penalized and relatively debt heavy firms will get a unwarranted premium. Analysts also do this in relative valuation when firms have different leverage ratios.<br />
<br />
The simple rule should be, when it's close don't adjust, when it's not close, try not to use it. I am very interested to see if these horror stories pan out in reality when I enter the industry. My hope is that a PhD has taken the time to develop a more robust leverage adjustment ratio that accounts for bankruptcy costs, just like the CAPM now is commonly used with add-on's like size risk, liquidity risk, and country risk.<br />
<br />
<br />
<b>Terminal CapEx and Depreciation Assumptions</b><br />
A firm must build faster than it falls apart right? It's funny how many DCF's assume this not to be the case with implied depreciation larger than CapEx in perpetuity.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNasTF9aRtcGc5trQOMJvqt7ipwax9W5GgW1tyunQvZ_JNp75un287LavRaAj3VR2jMdXQz6eFc78ilQvrHWi1tNoMK82v1RivUft1jU1XPYGoNGMPlLnPcCA_Dowzb5ulW1iUBsHpZw/s1600/dcf.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNasTF9aRtcGc5trQOMJvqt7ipwax9W5GgW1tyunQvZ_JNp75un287LavRaAj3VR2jMdXQz6eFc78ilQvrHWi1tNoMK82v1RivUft1jU1XPYGoNGMPlLnPcCA_Dowzb5ulW1iUBsHpZw/s1600/dcf.jpg" /></a></div>This is what I take to be the best DCF framework, (again it is also what is taught by Jarrell). When you have granular information about specific revenues and expenses doing cash flows by division or product definitely has value, however the general spirit of the valuation should be as above.<br />
<u> </u><br />
I have also had some success with the CFO - Chng in Op Cash + CFI(usually negative) - Pref Divs + Pref issuance + Debt = Free Cash Flow to Equity. The major downside with this method is how much information is impounded into CFO and CFI, here the burden really lies on your economic intuition in your pro forma statements you are pulling from. The trouble with the terminal forecast is it often sticks out as unreasonable when put next to the year that proceeds it, because it needs to encompass <i>all years</i> after forecasting, not just the "steady state" year after the growth phase. The CFO model lends itself to be a function of projection, with a black box effect on many crucial assumptions. This is what the forecast period is for, the terminal period is altogether a different beast and needs to be delt with appropriately.<br />
<br />
In the forecast period your margins will lie heavily on company guidance and the extension of historical trends. Your CapEx and Depreciation assumptions can be stripped out the footnotes and MD&A. Getting the forecast period right is not rocket science and most practitioners will end up with similar results.<br />
<br />
The terminal period however sees some interesting solutions and some very wrong solutions. <br />
<br />
<u>Error 1</u><br />
The real egregious error that can be made is to forecast NCF in the terminal period as simply the NCF of the last year in the forecast period times the perpetuity growth assumption. Here you imbed all of the forecast assumptions into the terminal period, including assuming all terminal years will have the <i>exact </i>CapEx/Depreciation relationship as the last year.<br />
<br />
<u>Error 2</u><br />
Some will crawl up to NOPAT and multiply it by the perpetuity growth and then use the plowback method. The plowback method is derived from economics. A firm will need to spend it's steady state growth (real) divided by its return on investment (real also) on PPE, and the rest of its NOPAT income can be returned to shareholders. The exact derivation of the formula can be found on the internet, or in Jarrell's class notes. The reason why forecasting off of NOPAT is wrong is because you imbed the profitability and efficiency assumptions from the forecast period into the terminal period. <br />
<br />
<u>Solution 1</u><br />
The above solution works by forecasting revenue to grow at perpetuity and then making purposeful assumptions all the way down to NCF. COGS and SG&A margin can be gleaned by looking at mature firms in the industry. Change in working capital is forecasted the same way it was in the forecast period; steady state ((A/R+Inv-A/P)/Rev) multiplied by the change in Revenue from year to year. Finally the plowback ratio is used to end at NCF and then you find perpetuity figure through the Gordon Growth Model using a <i>mature</i> discount assumption.<br />
<br />
<u>Solution 2</u><br />
Not shown above, but often used is to simply forecast the terminal cash flow using multiples valuation. (NCF of the firm * AveNCF of industry/Average MVE = Terminal MVE). The trouble here is the quality of the peer multiple (quality = standard deviation within the peer group), and its propensity to change overtime (volatility or the standard deviation of the median over time). Of course as with most things in finance, it is usually a good idea to do them both, and do a sensitivity analysis on top of each method.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-36346626493139426982011-03-17T12:07:00.000-07:002011-03-17T15:36:34.141-07:00Trading Size<div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Check out<a href="http://stocksthatpay.com/?p=12857"><span style="color: blue;"> this video</span></a>, I was reminded of it while studying for my trading exam this Saturday. After taking Burnside's class I have a lot more appreciation for what this teddy bear does, and the hurdles he faces. </span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Types of Traders</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Traders come in three main types (so say the academics), Noise, Informed, or Liquidity. Informed traders trade because they have valuable information about a security that isn't impounded in the price yet, and they place the position accordingly. Noise traders are traders who think they are informed, but are mistaken and are actually taking a bet against the true price. Liquidity providers are traders who step in and buy and sell a security with the goal to only make a spread between their buys and sells, or they are traders who place limit orders to buy or sell at certain prices. The former liquidity trader is usually a market maker, and the latter can be anybody,. </span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">The size trading teddy say's he's a liquidity trader, but what he really means is that he is a informed trader. Chances are most of his orders are "market orders" and so he is actually liquidity taking, not liquidity providing. </span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Motivations to Trade</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">There are five main reasons people trade in the market.</span></div><ul type="disc"><li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Information: Investors may have "slow ideas" based on fundamental analysis that suggest the stock is mispriced, and they will buy or sell hoping it reverts to the true price over a period of time. Traders may have "fast ideas" based on a wide variety of methods that may suggest the stock is either temporarily mispriced, or is about to move in a certain direction, and they will buy or sell hoping to catch that move.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Liquidity: Most liquidity trades are made for reasons that have nothing to do with future outlook of the stock. Index’s that track a benchmark need to trade to avoid tracking error, mutual funds need to rebalance holdings, hedge funds need to adjust their holdings to keep certain risks neutral. Any trade that is of this nature can be labeled a liquidity trade.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Noise: As mentioned above the market is full of traders who think they know something but actually don't. Their volume helps informed traders move size, and so they are an essential part of the markets efforts to decrease transaction costs. </span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Tax: Many individuals and funds sell at strategic times to push capital gains taxes around or to avoid dividends.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Agency Conflict: Mutual funds hate to show their holder's stocks that have had big negative returns, and so before the report goes out many funds sell their losers. This is called "window dressing"</span></li>
</ul><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Transaction Costs</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">I had always thought of transaction costs as that commission fee I pay every time I buy or sell a stock. Turns out that is part of it, but there are two other costs that can be much harder to see that also play a role. The total transaction cost or "implementation shortfall" is made up of commissions and fees, the execution cost, and the opportunity cost. Execution cost can be thought of the difference between the average price per share you receive and the midpoint between the bid and ask right before you traded, and opportunity cost can be thought of the difference between the midpoint when you decided you wanted to trade the stock, and the midpoint right before you started trading. For small traders these extra costs are small, but they can be enormous for large traders, and the trouble with trading is that if you do well you get bigger.</span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Think of it this way. Let's say you have decided to spend a lot of time researching oil junior stocks to look for mispricing’s, you figure (correctly) that this small cap sector of the market won't have as much coverage and the chance to find a mispriced stock will be easier. Let's say you find a stock that is priced at $1.00/$1.05 (bid/ask) and you think it should be priced at $1.25. You want to buy 10000 shares of it. On paper you expect to make (1.25-1.025)*10000=$2250, but how much might trading cost you? As an oil junior the stock is thinly traded, average volume of 10000 per day, so you know there is no way you can buy all 10,000 shares at once. Let's say you decide to break it into 4 blocks, and trade in 4 consecutive days. Possible trades could go as follows:</span></div><ul type="disc"><li class="MsoNormal" style="line-height: normal; mso-list: l2 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Day 1 Stock at 1.00/1.05, Buy 2500 @ 1.075</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l2 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Day 2 Stock at 1.05/1.10, Buy 2500 @ 1.10</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l2 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Day 3 Stock at 1.12/1.17 Buy 2500 @ 1.20</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l2 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Day 4 Stock at 1.15/1.20 Buy 2500 @ 1.20</span></li>
</ul><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">On day 2 and 4 I assume enough liquidity that you can fill at the ask, but on days 1 and 3 you need to eat into the limit order book to fill the entire order. The spread is assumed at 0.05 which is a bit wide, but definitely not unheard of for small thinly traded securities. The costs break down as follows, your average price is $1.14375 and so the total implementation shortfall (assuming no commission) is (1.14375-1.025)*10000 = $1187.5. This is more than half of your expected profit, and we have only gotten half way through the transaction, we still have to sell! The opportunity cost is captured by how the security moved up as you scaled in over 4 days (very typical with heavy buying), and the execution cost is captured by the difference between the execution price and the midpoint. </span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Problems with Trading Size</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span></div><ul type="disc"><li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Latent Demand Problem - When you are trading a significant portion of a stocks average daily volume, it can be tough to find enough counterparties to fill your trade. In searching for these parties you are forced to show the market your intended order size, or experience 'order exposure'.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Order Exposure - Leakage about your order causes the market to move away from you because traders expect your liquidity needs to creep through the limit order book and they want the best price, and traders may think you are informed (what do you know that makes you want to take such a large position). </span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Price Discrimination - Traders will assume that because you are trading a large block of stock, you will trade another block shortly afterwards. This is very common in sell orders, panicking investors (informed or noise) will try to hide their costs by breaking up huge sell orders into smaller blocks, so traders learn to treat a block of any size with suspicion.</span></li>
<li class="MsoNormal" style="line-height: normal; mso-list: l1 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 36.0pt;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">Asymetric Information - If you know you will suffer the costs described above and you are still willing to trade size, you must know something (or so the market assumes). Even before doing their own homework, the market will side with your bet and the price will move away from you, because traders will assumed you are informed. </span></li>
</ul><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">The Winners Curse and Where Trading Still Works</span></b><span style="font-family: "Times New Roman","serif"; font-size: 12pt;"></span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">As you can see from above, if you are a successful trader transactions costs will quickly become the nemesis of your strategy. As you get larger you will have trouble with your block orders, and if you start to gain a reputation of being successful the market will move as soon as you place your first order. This winners curse has an interesting selection aspect to it, if you are too good you kill your strategy, if you are bad you go bankrupt, if you are just okay you might be able to float along undetected at a reasonable size and scratch a living. </span></div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><br />
</div><div class="MsoNormal" style="line-height: normal; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;"><span style="font-family: "Times New Roman","serif"; font-size: 12pt;">There are ways to trade size, and a huge mutual find called <a href="http://www.dfaus.com/"><span style="color: blue;">Dimensional Fund Advisers</span></a> manages to do it in the toughest of markets. Talking about how they do it is a blog within itself, but the essence is simple. They invest entirely on a passive strategy that rests on the principles on the Fama-French 4 factor model; assets have risk that is characterized by beta, size, value, and momentum. Small companies are riskier than large companies, and value is riskier than growth. The genius of the strategy from a trading sense, is they are proudly uninformed. They don't care what they buy (to a certain extent) and so they happily take hard to trade small cap stocks off active investors hands for a small haircut, when otherwise the market would fleece both with transaction costs. DFA gets the stock with negative transaction costs (profit), and the active investor saves a bundle on shortfall. The real interesting part is that through the 90's DFA made more money on this trading strategy, than it make on its investment strategy - and it's a passive fund! </span></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-40185777577695001602011-03-15T14:36:00.000-07:002011-03-15T14:36:58.120-07:00What schools have traction with i-banks?I ran across this graph for recent analyst hiring by a major BB IBD for North America. It's interesting how much of a chance the 'little guys' actually have.<br />
<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3ne9ixSdp39IWpA6hb7H2FMi1y3K83rVgOETW3MDMkGz8f3cWPve-afP93DLoJ3snIeVeVyLvC2XiNQ5I-FT4vn8lSyFIpV8MUPM7xY9xTW7V3A7kr6_-xCP-NRVHBREQgRfpE-Vszw/s1600/Hires.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3ne9ixSdp39IWpA6hb7H2FMi1y3K83rVgOETW3MDMkGz8f3cWPve-afP93DLoJ3snIeVeVyLvC2XiNQ5I-FT4vn8lSyFIpV8MUPM7xY9xTW7V3A7kr6_-xCP-NRVHBREQgRfpE-Vszw/s1600/Hires.jpg" /></a></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-64248105656825648922011-03-05T11:56:00.000-08:002011-03-13T12:58:44.560-07:00Connecting Valuation with Entrance TimingMy Investment Management and Trading Strategies class has moved into the trading strategies portion of the curriculum, and we have been talking a lot about the tradeoff between execution costs and opportunity costs. This discussion has helped flesh out some of the classic arbitrage examples behavioral investors like to point out, as we quantify the frictions in the efficient market system which can give rise to these mispricings. While the big mispricings are interesting to study, I think the magic lies in all of the small mispricings.<br />
<br />
It struck me in class that the biggest weakness of any valuation activity is the time period of applicability. On one had you have the trade-off every science deals with. The more exact the measurement, the more time the measurement takes, and thus the staler it gets. But finance struggles with another application hurdle; even if you can solve for the 'true' price of an asset instantaneously, you have no idea when the market price will move to that value or if in fact it ever will. You are subject to two independent risks, the market can stay wrong or get 'wronger' (move against you), or your true price estimate becomes untrue as information enters the market about the asset and the valuation changes.<br />
<br />
You might say, sure but we do know that the market moves to the true price in the long run. I'd agree, but that true price is always changing. If the market price of X is higher than you think it should be, you might short X. Let’s say X is trading at 15, and you think it's worth 12. Your expectation is that X will drop from 15 to 12. You might even hedge your short with a long on the S&P to protect from systematic changes in the stock’s value, and only short the 'firm specific' valuation of the stock. What is to say the following doesn't happen: positive idiosyncratic information enters the market, and the market and true price rise to 17. The S&P doesn't change (by much) because only the stock reacted to the firm specific information, your short is a loss of $2, and your hedge didn't protect you. Even with absolute knowledge about the true price, you can lose money.<br />
<br />
I think this is why some very successful asset managers seem to know very little about valuation, or sometimes even seem to care about it. Successful investment seems to be much more about the interaction between the market price and the true price over time. Decent money managers can get by with only knowing how one of the sides works. Traders only focus how the market price changes over time, 'deep value' investors focus intently on the derivation of the true price and somewhat haphazardly jump in when they feel the spread between the market price and the true price is big enough to warrant the risk of jumping in. A true master of investments should know both.<br />
<br />
I'm trying to develop a checklist for investments that will focus my efforts on balancing these two fields. It will need to balance both fundamental and behavioral considerations. As luck would have it some <a href="http://aswathdamodaran.blogspot.com/2011/03/behavioral-economics-thoughts-on-value.html">much brighter minds</a> are working on accomplishing exactly that!Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-39927081813616438752011-02-12T22:02:00.000-08:002011-06-17T08:13:38.624-07:00MSF Class Quality, Simon Graduate School of Business, University of RochesterI'm going to detail these as it applied to my interests and background. I am a direct from undergrad applicant, where I did a Bachelors of Commerce, and I am heading into Investment Banking. Thus I am biased against foundation courses as they are repeats for me, and I selected more banking courses than modeling courses.<br />
<br />
All ranks are out of 5. <br />
Content - Is the content itself interesting and at a masters level of comprehension.<br />
Pace - How fast do you move through the material.<br />
Real World Applicability - How likely will this class prepare you for your interviews and job.<br />
Workload - Is it a 7 day a week grind?<br />
Difficulty - How much re-tracing do you do on homework. How often do you not 'get it'.<br />
Exams - How hard are the exams.<br />
Cohort - How good are the classmates you are competing on the curve with.<br />
Engagement - How pumped was I to be in class. <br />
Professor: Who taught me. <br />
<br />
<b>Summer: 5 weeks, August to September</b><br />
<u>Corporate Budgeting - Mandatory</u><br />
Content 3<br />
Pace 5<br />
Real World Applicability 3<br />
Workload 4<br />
Difficulty 2<br />
Exams 3<br />
Cohort 4<br />
Engagement 5<br />
Professor: Irfan Safdar<br />
Bottom line: A good warm up for a challenging year ahead, it takes some getting used to Sunday nights at Simon!<br />
<br />
This course is a total review of 2nd and 3rd year undergrad finance taught at breakneck speed. Although nothing's new it is useful to have it all put together in a short period, and is an excellent refresher for anyone doing a the fall banking recruitment push. The exams were challenging primarily because the midterm was a take home and several students grouped up so the curve was extremely competitive. <br />
<br />
<u>Core Statistics - Mandatory</u><br />
Content 2 <br />
Pace 2<br />
Real World Applicability 1 <br />
Workload 1<br />
Difficulty 1<br />
Exams 2<br />
Cohort 2<br />
Engagement 2<br />
Professor: PhD Student <br />
Bottom line: A baseline 'to little to fast' stats course that is mind numbing for ex stats grads and too fast for first timer's.<br />
<br />
All the basics, t tests, regressions, binomial distributions, bayes theorem. It was almost comical to be taught time series econometrics in 5 slides after taking two entire courses on it in undergrad. This course is the vegetables you have to eat before the steak is brought out.<br />
<br />
<u>Core Economics - Mandatory</u><br />
Content 3 <br />
Pace 1<br />
Real World Applicability 1 <br />
Workload 1<br />
Difficulty 1<br />
Exams 3 <br />
Cohort 2<br />
Engagement 3<br />
Professor: PhD Student <br />
Bottom line: Micro, Macro in 5 weeks.<br />
<br />
A five week course somehow still felt painfully slow. However economics is always interesting, and these exams were surprisingly challenging, they really spread the curve out. <br />
<br />
<u>Communications - Mandatory Continues Until Spring</u><br />
Content 1<br />
Pace 1<br />
Real World Applicability 4 <br />
Workload 1<br />
Difficulty 1<br />
Exams Nil <br />
Cohort 1<br />
Engagement 3 <br />
Professor: Dan Struble, Bob M.<br />
Bottom line: Public speaking, business writing, leadership.<br />
<br />
It seems fruitless but being video taped and critiqued on your presenting skills is an activity that can only happen in school.<br />
<br />
<b>Fall, 10 weeks, September to December</b><br />
<u>Investments - Mandatory</u><br />
Content 3<br />
Pace 2<br />
Real World Applicability 3 <br />
Workload 3<br />
Difficulty 3<br />
Exams 3 <br />
Cohort 4<br />
Engagement 3<br />
Professor: Anzhela Knyazeva <br />
Bottom line: It's Rochester so Investments means EMH.<br />
<br />
This investments class does not extend beyond undergrad investments, but has some useful case based homework. Beware the Knyazeva sisters can get pretty tricky on their exams. <br />
<br />
<u>Institutional Finance - Mandatory</u><br />
Content 4 <br />
Pace 3 <br />
Real World Applicability 5 <br />
Workload 4<br />
Difficulty 3<br />
Exams 3 <br />
Cohort 4<br />
Engagement 5<br />
Professor: Diana Knyazeva <br />
Bottom line: Banking<br />
<br />
I really enjoyed this class because it was the first departure from curriculum I had already received in my undergrad, and it cowed very closely to real world applications. <br />
<br />
<u>Corporate Financial Accounting - Or Financial Accounting 1</u><br />
Content 2 <br />
Pace 1 <br />
Real World Applicability 2 <br />
Workload 1<br />
Difficulty 1<br />
Exams 1 <br />
Cohort 2<br />
Engagement 2<br />
Professor: Heidi Tribunella<br />
Bottom line: Intro accounting.<br />
<br />
Taking this class was a mistake. If you have any undergraduate accounting you definitely need to switch into the upper accounting course. This course does intro accounting, intermediate 1 and intermediate 2 at a surface level. <br />
<br />
<u>Corporate Finance - Mandatory</u><br />
Content 3 <br />
Pace 2 <br />
Real World Applicability 2 <br />
Workload 4 <br />
Difficulty 3<br />
Exams 3 <br />
Cohort 4<br />
Engagement 4<br />
Professor: Wei Yang<br />
Bottom line: Stakeholder Game theory<br />
<br />
This is Corporate Finance as you probably haven't been taught it before. You discuss all the different stakeholders, things like bankruptcy costs and debt overhang, but you do it all in a game theory framework. Homework, exams, and lectures are all structured around multistep games, with payoffs and NPV's. This added complexity makes the tuggle war between debt holders, shareholders, and management more interesting as you can quantify their actions and then the firms value as a result.<br />
<br />
<b>Winter, 10 weeks, January to March</b><br />
<u>Economic Theory of Organizations - Mandatory</u><br />
Content 3 <br />
Pace 3<br />
Real World Applicability 3 <br />
Workload 2<br />
Difficulty 2<br />
Exams TBD <br />
Cohort 3<br />
Engagement 3<br />
Professor: Michael Raith<br />
Bottom line: MBA course in an MS degree<br />
<br />
I'm not entirely sure why we are learning this material in an MSF degree, but I think it's because Simon has been a research powerhouse in this area. It's all about incentive plans, intrinsic motivators, and org structure, all through economic maximization's. <br />
<br />
<u>Cases In Finance - Optional</u><br />
Content 4 <br />
Pace 3<br />
Real World Applicability 5 <br />
Workload 3<br />
Difficulty 3<br />
Exams 3<br />
Cohort 3<br />
Engagement 5<br />
Professor: Gregg Jarrell<br />
Bottom line: Story time with some investment banking and cut throat 'negotiations'<br />
<br />
The prof for this class is a riot, lots of great finance stories about half of which have a useful takeaway message. So far I've learned: never mess with the government, the best clients are billionaire's facing jail time, always act innocent even if your not, and bankers aren't really financiers, they are salesmen. Aside for the war stories, I have picked up some great 'things to remember' nuggets on the major valuation models. Jarrell is full of pointers on what mistakes professionals always make in their modeling and how to avoid them. For instance the much loved, beta unlever-lever technique for comparable valuation is flawed at it's core because it ignores the bankruptcy effect on the cost of equity. The negotiations are a great game theory experiment, grades from 60 to 100 need to go out, and it all depends on what 'deal' you get from your peers. Every winner is matched with a loser, great class politics!<br />
<br />
The test's are not hard however any mistakes are costly. Jarrell drops many useful hints in class, and non-Finance MBA's are nice to have on the curve come test time, because negotiations can be bloody and indiscriminant in their grade split ups.<br />
<br />
<u>Investment Management & Trading Strategies - Optional</u><br />
Content 4 <br />
Pace 4<br />
Real World Applicability 5 <br />
Workload 4 <br />
Difficulty 3<br />
Exams 2<br />
Cohort 3<br />
Engagement 5<br />
Professor: Daniel Burnside<br />
Bottom line: A current mutual fund chief economist shows where EMH bends and where it breaks.<br />
<br />
The prof for this course is very good. Down to earth, but extremely bright, lots of class engagement. The course starts a bit slow as you rehash EMH, but soon you are talking about anomalies, alpha creation, and I think the last half of the course is market structure and trading strategies. You are worked, but its mostly qualitative assignments.<br />
<br />
The midterm is very similar to the practice midterm. <br />
<br />
<u>Financial Statement Analysis - Optional</u><br />
Content 5 <br />
Pace 5<br />
Real World Applicability 5 <br />
Workload 5 <br />
Difficulty 5<br />
Exams 5<br />
Cohort 4<br />
Engagement 5<br />
Professor: Charles Wasley<br />
Bottom line: The hardest and most worthwhile course I have ever taken in my university career. <br />
<br />
Do yourself a favor and sign up in the evening class with MBA's to make the curve a little easier because this class will punish you. The prof is a slave driver, and extremely strict (extra case assignment for anyone whose cell phone rings). I write the exam tomorrow morning, and after studying all week for it I can easily say it will be very difficult. The takeaways are huge though, FSA is an absolutely crucial skill for anyone who wishes to be an analyst, and this guy is the best I've seen. If you come to Simon for one course, make this it.<br />
<br />
Be very weary as to how Wasley answers his qualitative questions on practice solutions, if you are not giving his 'right answer' on the exam to qualitative questions credit is very hard to come by. <br />
<br />
<b>Spring, 10 weeks, March to June</b><br />
<u>Fixed Income - Optional</u><br />
Content 4 <br />
Pace 3<br />
Real World Applicability 3 <br />
Workload 3 <br />
Difficulty 3<br />
Exams 4<br />
Cohort 3<br />
Engagement 4<br />
Professor: Wei Yang<br />
Bottom line: A Fixed Income class that quickly moves beyond bonds and into structured products. Yang's exams always extend beyond the material and can have some very challenging questions. <br />
<br />
<u>Accounting For Management and Control - Required</u><br />
Content 3 <br />
Pace 2<br />
Real World Applicability 3 <br />
Workload 3 <br />
Difficulty 3<br />
Exams 3<br />
Cohort 2<br />
Engagement 2<br />
Professor: Jerold Zimmerman<span class="fnt0"><span style="font-family: times new roman,times,serif;"><span style="font-weight: bold;"><span style="font-size: medium;"></span></span></span></span> <br />
Bottom line: A required managerial accounting class that can easily be switched out for another elective if the student wishes. The prof is good, but the class is almost entirely geared towards corporate management problems.<br />
<br />
<u>Entrepreneurial Finance - Optional</u> <br />
Content 5 <br />
Pace 4<br />
Real World Applicability 4<br />
Workload 3 <br />
Difficulty 3<br />
Exams 3<br />
Cohort 4<br />
Engagement 5<br />
Professor: Boris Nikolov<span class="fnt0"><span style="font-family: times new roman,times,serif;"><span style="font-weight: bold;"></span></span></span> <br />
Bottom line: A very good follow up to Cases in Finance. The prof is young and the content covered in class is refreshingly technical. The class picks up after the business plan has been completed and goes all the way to IPO, focusing on forecasting and financing stages.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-90460343724550826372011-02-11T18:16:00.000-08:002011-02-13T12:43:51.227-08:00Thinking about Market Timing StrategiesIn my 4th year undergrad I tried to create a crash predicting model based off of asset correlations. The idea was that as markets crash, unrelated securities correlate. The model failed for two reasons, by the time correlations really got underway the market had lost a lot, and markets correlate on the way up too.<br />
<br />
But now that it's mid term week, I have a lot of "free time" on my hands and the bug bit again. This time I was going to make a much simpler model, based off of only variance. If I wasn't in the market I would be investing at the risk free rate, but as soon as I hit my buy signal I would plow everything I had in marketable securities into the market and keep it there. When my buy signal was tripped off I wouldn't sell any securities, but any new cash would be invested at the risk free rate until I hit a buy signal again.<br />
<br />
<b>Thesis</b><br />
I predict that I can accurately enter market bottoms, by buying only on occasions where volatility is at its highest. I predict that these timed buys will yield profits that outweigh the opportunity cost of not investing in the market at all times. <br />
<br />
<b>Methodology</b><br />
I have two time periods, from 1955 to present, and from 2000 to present. I have monthly S&P 500 and risk free rate data. I assume no transaction costs (or that I have a lot of capital). For presentation purposes I assume I have $1 of capital to invest each month, it can either be invested at the risk free rate, or buy a $1 stake of the S&P 500.<br />
<b> </b><br />
Variance has been calculated at the 6 month average Z score (average S&P value over last 6 months / standard deviation of S&P over last 6 months). The Z score is needed to standardize the non-randomly dispersed sample data (the index increases over the time period). <br />
<br />
The buy signal is the manipulated variable, and is compared against the ratio (current 6 month Z score / average 6 month Z score for entire period). For instance if [buy signal] < Zcurrent/Z_ave then buy the market. Note that when markets are volatile the ratio is small, and when calm the ratio is large, bounded at 0. Also note that because we use the average 6 month Z from the whole period this is an ex post study, although it wouldn't be hard to estimate ex ante.<br />
<br />
As stated above, if we don't have a buy signal we put $1 in a risk free investment. This $1 will be compounded monthly and receive additional $1 investments each month until a buy signal is reached. When a buy signal is reached the entire money market balance is invested in the S&P never to be sold. If the following month is also a buy signal, $1 is invested in the index at that months value, never to be sold. The first period that there is no buy signal, we invest $1 into a now empty money market account and the process starts again.<br />
<br />
<b>Results</b><br />
<br />
1955 to Present<br />
Before we get to the model results it is useful to look at the comparative returns between the S&P and the risk free rate.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggvgiHdCgEVin3dcnDlOMOkw4sMgbfvhjVmGn32UtV9l-woPW-VtmrUr97C69ZonIXBwR4FtPnjnNbFvuLKVL-O0q-y5Pbi2SOnPupA8UdAmRdS2z-JFxP34kNFcSSS75J7gFr2IALxw/s1600/ret+on+dollar+inv.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggvgiHdCgEVin3dcnDlOMOkw4sMgbfvhjVmGn32UtV9l-woPW-VtmrUr97C69ZonIXBwR4FtPnjnNbFvuLKVL-O0q-y5Pbi2SOnPupA8UdAmRdS2z-JFxP34kNFcSSS75J7gFr2IALxw/s1600/ret+on+dollar+inv.jpg" /></a></div>This graph shows what dollar return you would get if you invested in either the S&P or the risk free rate some time in history. For instance in 1965 you would actually make more money on a dollar invested at the risk free, than you would in the S&P if you held them both to today. Thus although it is clear equity returns trump risk free return, there are exceptions, and abstaining from the market may provide good returns if timed correctly.<br />
<br />
So let's put the strategy to work.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZqFRL9nACgzWdQs-f8pihwwOs0KscokcvWhdVMU4UNdOWx8fNcxOA6sjFPno8DqjAnYC7JIyJ7yGhPKwx0trzHJHmXfIaX1BYr-J6UEjnQhsM1Mbyrr20-0nmCFWmlfhoZHKxllDf5A/s1600/it+sucked.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZqFRL9nACgzWdQs-f8pihwwOs0KscokcvWhdVMU4UNdOWx8fNcxOA6sjFPno8DqjAnYC7JIyJ7yGhPKwx0trzHJHmXfIaX1BYr-J6UEjnQhsM1Mbyrr20-0nmCFWmlfhoZHKxllDf5A/s640/it+sucked.jpg" width="640" /></a></div>It sucked. The red line shows the number of trades, the blue line shows the return minus what you would make if you bought and held from 1955 ($6645 when investing a dollar a month). This is what a lot of the literature says, you can't beat the market, you need to be in it all the time. The horizontal access shows the buy signal value; because we only buy when the market is risky, the far left returns are when we hardly buy at all, and the far right returns are when we are almost always in the market (buy signal almost always on). <br />
<br />
Just for fun I flipped the buy signal methodology. Now I want to buy when the market is at it's stablest, and invest in the risk free rate when it's at it's riskiest. Theoretically this doesn't make sense, risk should bring reward; but sometimes investments is about being contrarian so let's see what happens.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi186KKBWWV2YseAbYutS0HQwvMsO6FWPA9Rq3Xix3zCF2wa9uTsiZBD8APvMocPGcU545wbVRCx4OhoqwO5vkiFkoJQpQQ7bQWLufrpU6UMbeiTHiT_fexV1NDZOh64EzRuaYlizoqnA/s1600/low+var.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi186KKBWWV2YseAbYutS0HQwvMsO6FWPA9Rq3Xix3zCF2wa9uTsiZBD8APvMocPGcU545wbVRCx4OhoqwO5vkiFkoJQpQQ7bQWLufrpU6UMbeiTHiT_fexV1NDZOh64EzRuaYlizoqnA/s640/low+var.jpg" width="640" /></a></div>Would you look at that. It works! This graph works backwards to the one above, results on the left are when we are in the market the most, and the results on the right are when we are in the market the least. It looks like somewhere on the right hand side we hold off till an optimal moment, and then invest making an extra $3351 over the market return of $6645. I dug into it and below we see where that transaction actually takes place.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzI3SzbJThQue5hdelxcCThIPxfnKvSiVVFUEzFTjcYbyoH-nrHHCrctdF3jviK8tPGlpR9kBZoCukFRKBPSFkoNIcFW-CJXJL2NOaByhQgBftZ3oX2UhnCgjiDsYoo2pEpSiasx6sCQ/s1600/one+buy+low+var.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="298" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzI3SzbJThQue5hdelxcCThIPxfnKvSiVVFUEzFTjcYbyoH-nrHHCrctdF3jviK8tPGlpR9kBZoCukFRKBPSFkoNIcFW-CJXJL2NOaByhQgBftZ3oX2UhnCgjiDsYoo2pEpSiasx6sCQ/s640/one+buy+low+var.jpg" width="640" /></a></div>It just so happened that the last 6 months of 1983 were incredibly stable, Z/Z_ave peaked at 131, and we hit a buy signal in January of 1984 after investing only in risk free securities for 29 years. We dumped $1208 of compounded assets into the S&P, invested a further $1 in the S&P the next month, and then stuck to the money markets for the next 27 years to get a total return of $9995. This looks great but it is a data mining result in my opinion. If we drop our buy signal for 3.6 to 3.0 we make a $10 loss as shown below. It's to jumpy to be predictable.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDR1_oRCQYkly52eDOv9XZkoPZF8kJ4fMYr-ZAd5gaqnDsqlLqRKfvo7-uORsuR1Yi4wUa6AfQB8465RgQVwwFxIDa7FNJbiHTqCiDHjWzFgXglcPw1b5RNeSCtQLnr8qGlwQTWJCh1A/s1600/3+low+vol.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDR1_oRCQYkly52eDOv9XZkoPZF8kJ4fMYr-ZAd5gaqnDsqlLqRKfvo7-uORsuR1Yi4wUa6AfQB8465RgQVwwFxIDa7FNJbiHTqCiDHjWzFgXglcPw1b5RNeSCtQLnr8qGlwQTWJCh1A/s640/3+low+vol.jpg" width="640" /></a></div>We see here that buying earlier, in 1974, and later in 1993, although visually benign, totally wreaks the return profile with a slightly negative abnormal return.<br />
<br />
2000 to 2011<br />
So if it doesn't work in the last 55 years, how about the last 11?<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGsjSQ5KiW-_SLWx1kz0nar30XOPbkzxWXolgQ87ZKN_lLV4oCUc6fooOerUO-dgeO1gC2RJm3Yw8JuB8m9ML3dZGhMF4gzPS0Of7k4Vw7pbaEyEvTPvxUKfQhfgbthx9_4lxjHv9hbg/s1600/high+low.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGsjSQ5KiW-_SLWx1kz0nar30XOPbkzxWXolgQ87ZKN_lLV4oCUc6fooOerUO-dgeO1gC2RJm3Yw8JuB8m9ML3dZGhMF4gzPS0Of7k4Vw7pbaEyEvTPvxUKfQhfgbthx9_4lxjHv9hbg/s640/high+low.jpg" width="640" /></a></div>Expected results this time, the low volatility strategy that worked above never significantly outperforms and the high volatility strategy that didn't work above, does create major positive returns with buy signal thresholds between 0.1 and 0.5. On the graph this looks like a very narrow window of opportunity, but we must remind ourselves that ratios compress outcomes between 1 and 0 and so there is a fair bit of room to work with.(As the numerator shrinks the marginal change in the ratio is less per unit change in the numerator.)<br />
<br />
So what does the buy timing look like.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2Bmv_CoVhk2vukTHD2WRko-2i2Vt-2kZ3j-Vr7DU3smskpJUrb_M_IfTvSf8rXF9fK0kEKWA8pC9FDMlsuxNzQ0pOResvfMpepgLScFD8Kl3MHROfV-HCU72jWb-Ecd_kchx7jWJhNg/s1600/high+vol+best.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2Bmv_CoVhk2vukTHD2WRko-2i2Vt-2kZ3j-Vr7DU3smskpJUrb_M_IfTvSf8rXF9fK0kEKWA8pC9FDMlsuxNzQ0pOResvfMpepgLScFD8Kl3MHROfV-HCU72jWb-Ecd_kchx7jWJhNg/s640/high+vol+best.jpg" width="640" /></a></div><div style="text-align: center;">Graph error here and below. It should be "less than" and it's not 3.5% is 3.3%</div><div style="text-align: center;"></div>We see in this strategy we abstained from the market up until volatility reached it's peak in the crash of 2009. The 6 month window worked in our favor here, if we were using a shorter window we would have likely bought in higher. This resulted in a $53 dollar over performance against the buy and hold which yielded $146 after 11 years of $1 monthly investments. This works out to a cumulative annual return of ~3% over the benchmark, not bad at all. However again this is a pretty optimal data set. It is surprising how much return we have to give up in order to grab 2002 as well. <br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQzELBFhOxB7TkJzOyR4dXwVtxDIJ7aLeWtThBeolFE5RaDYjAKvik1Vy4Y4HJjqNl-e1HZNaHSIsDPI94nWJXsHoHAqSxOeFdhaYSwpZgPH73hy00zrUbXPPsXJaUrCVbEIauq9Fo3w/s1600/high+vol+okay.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQzELBFhOxB7TkJzOyR4dXwVtxDIJ7aLeWtThBeolFE5RaDYjAKvik1Vy4Y4HJjqNl-e1HZNaHSIsDPI94nWJXsHoHAqSxOeFdhaYSwpZgPH73hy00zrUbXPPsXJaUrCVbEIauq9Fo3w/s640/high+vol+okay.jpg" width="640" /></a></div>We lose more than 1% in annual return, by grabbing both dips (which is what we want in an ex ante mindset). This loss is of course the direct result of the 2009 crash, even the best market timer was behind in 09; risk free would have been better. <br />
<br />
<b>Takeaways</b><br />
It's not time to set up a hedge fund, the results are mined and ex post. It is however an interesting result that we can think about in the future. When the 6 month Z score is 3 times smaller than the historical Z score (30.74) we have a historical suggestion that we have reached a bottom.<br />
<br />
Timing strategies - when they work - are chunky, you fall from a winning position to a losing position with small deviations of your buy signal. Considering this buy signal will need to be derived from ex ante data, the margin for estimation error is very slim. <b> </b><br />
<br />
Contrarian strategies may work. Surprisingly a 1955 investor who waited for extremely stable markets to invest, and avoided rocky markets, could have done extremely well if their buy signals were just right.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-28459272399372307232011-02-08T17:01:00.000-08:002011-02-08T17:01:04.481-08:00Implied Distribution Option Model - Project StalledIt was fun to try, but I don't think I will be finishing the Implied Distribution Model. There are several practical constraints; the biggest being the lack of liquidity in far out of the money options, and significant breaks in implied volatility when switching from the put smile to the call smile. With huge bid ask spreads and a chunky Z=0 switch, the model lost predictability in both extreme return likelihoods, and expected returns.<br />
<br />
I still find the idea interesting, and I will be quick to pester future quant side co-workers to see what they use for their distribution assumptions.<br />
<br />
For now I'll just keep to drawing it free hand, and just this once, in MS paint.<br />
<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcydC9awg4-00jBVSEPEf2bqkHIPUg4T5XBABmjLTv8oKE9wdEQ1zQzaYCobSEwcm7EH9KKSmD4PYkGzOkmqJiLW7MeFQMepVHa7QcuUxJduIstd13ZZODX5vphVnlvSwwHkszSlxXbA/s1600/surface+distribution.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="412" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcydC9awg4-00jBVSEPEf2bqkHIPUg4T5XBABmjLTv8oKE9wdEQ1zQzaYCobSEwcm7EH9KKSmD4PYkGzOkmqJiLW7MeFQMepVHa7QcuUxJduIstd13ZZODX5vphVnlvSwwHkszSlxXbA/s640/surface+distribution.jpg" width="640" /></a></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-29561005505001509182011-02-07T19:36:00.000-08:002011-02-07T19:36:17.544-08:00Think you know Financial Statements?I'm currently studying for my Financial Statements Analysis class and I'm having more trouble than I thought I would one particular type of question. It has to do with Common Size Analysis, where both the balance sheet and income statement of a company are common sized with respect to revenue. The prof puts a whole bunch of different companies from different industries in a spreadsheet, and you need to figure out which firm matches which common size column in the sheet. Some are easy, but differentiating a tobacco company from a brewery really tests your understanding of how exactly each type of business works.<br />
<br />
I've designed an easy version for you to try. It has (in no particular order) a grocery firm, a bank, an auto company, a pharmaceutical company, a oil company, and a telecommunications company. Try it. (Blank means N/A)<br />
<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDUmGJogb6xcv9qOEAcb5ZBsK04WNR8pquO8GmHz2pSgGBI_4JFmjRpLs3ukAuwtHvoEeI3An9Ahrk-yYiIWR5Ie8IzdYRkx0SO2_Bhdqj79a7xoFziyhYsCm2IHwk7pcjMbvqjSXQKw/s1600/Jamies+FSA+test.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDUmGJogb6xcv9qOEAcb5ZBsK04WNR8pquO8GmHz2pSgGBI_4JFmjRpLs3ukAuwtHvoEeI3An9Ahrk-yYiIWR5Ie8IzdYRkx0SO2_Bhdqj79a7xoFziyhYsCm2IHwk7pcjMbvqjSXQKw/s1600/Jamies+FSA+test.jpg" /></a></div><br />
I'll put the results at the end of this post in backwards typing. First some tips I've learned from class:<br />
<ul><li>Look for outliers. Think about why a firms line item might be 0 or very large.</li>
<li>Group 'like companies', find them on the table and then pull out all the differences and think about which might belong to whom. This is especially important when the table has several companies from the same industry, the above table is much more straight forward. </li>
<li>When in doubt to your ratios, D/E, Days A/R A/P and Inventory, ROE decomposition.</li>
<li>Think about GAAP. Who gets to record R&D, who uses the other assets accounts.</li>
</ul>And the results. In backwards type to keep you from getting it at a glance<br />
Firm 1 - knab: knab fo avon aitocs<br />
Firm 2 -sag dna lio: rocnus<br />
Firm 3 - moclelt: tta <br />
Firm 4 - yrecorg: regork<br />
Firm 5 - amrahp: kcrem<br />
Firm 6 -otua: drofUnknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-52715002600165632032011-01-29T22:07:00.000-08:002011-01-29T22:07:28.146-08:00Electronic and Jazz songs you should check out.Because this is what powers us between 23:00 and 02:00. Right click to open link in a new tab.<br />
<br />
This is all new to me, but most of it is definitely not new. <br />
<br />
<br />
Buscemi, Brazilian Jazz, try <a href="http://www.youtube.com/watch?v=6BsWqNVCy8w">Ramiro's Theme</a><br />
<br />
Dub FX, really good dub, try <a href="http://www.youtube.com/watch?v=c5-iUrZzvKQ">Clue 1</a><br />
<br />
Kleerup, not a new band but still fairly unknown electronic artist, try <a href="http://www.youtube.com/watch?v=cPBNJHNXzGE">Towers of Trellick</a><br />
<br />
De-Phazz, Alt Jazz, try <a href="http://www.youtube.com/watch?v=OgRssU2eygE">Jazz Music</a><br />
<br />
Robyn, electronic pop... because it's hella catchy, try <a href="http://www.youtube.com/watch?v=cTBVj6QQKRo">Stars 4 Ever</a><br />
<br />
Zion I, hip hop. not that unheard of, try <a href="http://www.youtube.com/watch?v=Ame5i5ud67Y">Coastin</a><br />
<br />
Schmoov, electronic and soothing, try<a href="http://www.youtube.com/watch?v=lwm_SiduMPo"> Playground</a><br />
<br />
Gustav Holtz, Opera Number 32, VII, The Planets, Neptune. Best Classical musician I have ever <a href="http://www.youtube.com/watch?v=PSJub1A1aIk&feature=related">heard. </a><br />
<br />
Miami Horror, good upbeat electronica, try <a href="http://www.youtube.com/watch?v=Fn7FXGaHTNs">Sometimes</a><br />
<br />
Simian Mobile Disco, this driving electronica song is very appropriate for when I listen to music. <a href="http://www.youtube.com/watch?v=71Z8MYc5rFI">Sleep Deprivation</a><br />
<br />
Grafton Primary, Good electronica, very 80's feel. try <a href="http://www.youtube.com/watch?v=o9J_2Da6aPs">Left of Nowhere</a><br />
<br />
C-Mon & Kypski, Funky Jazz cut ups, try <a href="http://www.youtube.com/watch?v=u3RV03T9XOo">Shitty Bum</a><br />
<br />
Explosions in the Sky, driving mellow electric guitar, try <a href="http://www.youtube.com/watch?v=w0o8JCxjjpM">First Breath After Coma</a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-58344567543954717512011-01-24T22:50:00.000-08:002011-01-24T22:52:58.124-08:00Investment Banking PayI need to preface this by saying I don't actually know. I have a rough idea of what my first year compensation is, but I'm guessing on the performance bonus, and the hours per week are estimated from what analysts at wallstreetoasis.com are saying from my area and division. <br />
<br />
I decided to try to map out the first 10 years, and I was fairly aggressive with my progression. My hour per day estimates are below. <br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix-MEnD6-zUQAqREpdfKI2J-fsRy5YFHoeBO9RcjsSETKL2iBNXDxiJJkSL-3yTq8TZp1Z5nmGFL8rtEM5RBH50yp8GiEHxCdBauiDr-E9cYOPNRkURWZ982bVtXhO_1g8xsiypg2hpw/s1600/hours+per+week.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="408" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEix-MEnD6-zUQAqREpdfKI2J-fsRy5YFHoeBO9RcjsSETKL2iBNXDxiJJkSL-3yTq8TZp1Z5nmGFL8rtEM5RBH50yp8GiEHxCdBauiDr-E9cYOPNRkURWZ982bVtXhO_1g8xsiypg2hpw/s640/hours+per+week.jpg" width="640" /></a></div>So I'm thinking 2 years at Analyst, 3 at Associate, and then through VP to Director by the end of 10 years on the job. I know it's possible, I'm not sure if its plausible, but we have to start somewhere. I expect to be working 70 hour weeks as an Analyst, however I know that 100 hour weeks are possible. I set a lower bound at 45 hours, there is now way the deal could get sweeter than that, and if I'm only putting in 45 hour weeks its because my team has no work, so I'm likely both not looking at a good bonus and possibly out of a job. <br />
<br />
Now for the numbers.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQD3JaEqAWq8JJGJk3U9pmBaPoPu5mmvKkr_O9G0fz9T7ZPamDSRYE62FGx9Gdi6z8bRoKJmsJKz8JT00RCb2iRJhB9mrviKlPqO-41UYmJr862jHXC0r0ZKNT5JW_VkMfes0OEbXbIA/s1600/i+bank+wage+expectations.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="434" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQD3JaEqAWq8JJGJk3U9pmBaPoPu5mmvKkr_O9G0fz9T7ZPamDSRYE62FGx9Gdi6z8bRoKJmsJKz8JT00RCb2iRJhB9mrviKlPqO-41UYmJr862jHXC0r0ZKNT5JW_VkMfes0OEbXbIA/s640/i+bank+wage+expectations.jpg" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglCGvUwNsyx4qng6Dc5-acLzXN5RmwZT1Bl8ws3HCjxrBSz8TCmQquRbO050TXTGTgWuzkcJchWEbsMWhaf80U7IP5uJFi1eOFladYvHpowuafLIgRJjTCcgogyjJSdFwq9ZuwvNnihA/s1600/10+year+wage.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"></a></div><br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuvbccme15DmGcN0qvUSQxUMoUDF5WJmUMgaSOduRyN-92rJSvSIZwD9mu0N04bIYnBcq_5SBOchVx7zhVFGHCKpsIMYzp9y8QwziT88t0orGSsr6Cr8Fe5Jy8cxNpkCPixAyPQF4xYQ/s1600/hourly+wage+estimates.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="476" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuvbccme15DmGcN0qvUSQxUMoUDF5WJmUMgaSOduRyN-92rJSvSIZwD9mu0N04bIYnBcq_5SBOchVx7zhVFGHCKpsIMYzp9y8QwziT88t0orGSsr6Cr8Fe5Jy8cxNpkCPixAyPQF4xYQ/s640/hourly+wage+estimates.jpg" width="640" /></a></div>My sensitivity assumptions are subjective, should be viewed as upper and lower bands, not any statistical deviation measure derived from actual data sets. My expectation growth assumptions however are not entirely made up, there are lots of web resources that estimate salary scaling over time, I primarily used payscale.com. <br />
<br />
So whats the story. The upper graph shows clearly that i-banking is a 6 figure foray with bulge bracket banks, a mind boggling figure for any starving student. Of course this is all pre-tax, but it's nothing to complain about. The lower graph however tells the real story; one that is a common find for anyone seriously considering the industry. The pay per hour can be less than great. I suggest you read<a href="http://www.mergersandinquisitions.com/investment-banking-salaries-mcdonalds/"> this</a> mergers and inquisitions article, to hear the horror stories of i-bankers making less than McDonalds wages in the crunch. <br />
<br />
Now we aren't heading into a recession, especially not in commodities which is my area of work, so I should be hitting above $20 an hour, but there is no real reason to expect my pay to be that much higher. My "good" forecast assumes some pretty legendary bonus numbers, I really think I'm going to be hitting close to my expectations, especially early on. All this tells us that i-banking has its proving ground period, just like every other competitive entry level position in business. The salary numbers are big, but the hours put in at the office can be legendary; just look at all the i-banking blogs that talk about that exact topic!<br />
<br />
It is sure to be an interesting couple of years.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-1644084324176366997.post-77278209656276766922011-01-21T15:48:00.000-08:002011-01-21T15:48:55.663-08:00How to do a financial event studyEvent studies, the financial professors favorite tool in Efficient Market Hypothesis (EMH) tests. If you don't use it you lose it, so I figured I'd detail the process now while I remember it.<br />
<br />
<b>The Event</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjy7D3VDH3VP5oByV5BWgvbUOx5zaa6UKvYA3LpxfyoGKATDppNS8fjvNRkAhRcGU6wg_kyRlINKq-gelBCn2O8iRPAS5Cr_81SmS6pIF1pWVgQfA9XQMMuXSZxgMtzJlixpcFfulGueQ/s1600/Event+Study.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="413" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjy7D3VDH3VP5oByV5BWgvbUOx5zaa6UKvYA3LpxfyoGKATDppNS8fjvNRkAhRcGU6wg_kyRlINKq-gelBCn2O8iRPAS5Cr_81SmS6pIF1pWVgQfA9XQMMuXSZxgMtzJlixpcFfulGueQ/s640/Event+Study.jpg" width="640" /></a></div>So the above is the event study and its' many possibilities. Lets use a earnings release date as an example. The tallest vertical line is the actual release date, we will call this time 0. The left vertical line will be the end of the development period and we will say this is day -30. This means that the left line is 30 <i>trading</i> days before the earnings release date. Between the left line and the right line is the event window and it is symmetrical which means the event window ends on day +30. Now lets talk stats.<br />
<br />
<b>The Development Period</b><br />
As said above the development period ends at day -30, the left vertical line, and is begins around 100 days before that, lets say day -130. Through this period you need to develop your expected returns model - the CAPM.<br />
<b> </b><br />
<b> </b>The intuition of this is you want to find out if the company has returns that are different than what you would normally expect on a average trading day. You could simply suggest it would return the average daily historical return for the company, but there is a much better way. By regressing your companies returns against the market (the S&P 500 usually) you can create a one parameter model that will predict the expected return for your stock based on how the market is performing.<br />
<br />
E[Rj] = A + B(Rm - Rf). Where E means 'expected', Rj is the return of your 'j'th company, A is the 'alpha' AKA predicted abnormal return, B is the 'beta' the parameter that acts upon your independent variable to estimate your company return, Rm is the S&P 500 return and Rf is the risk free return for the period understudy. Many practitioners set their 'intercept' or A to zero so their regression simply is B(Rm - Rf). If this doesn't hurt the R2 of your test to much, it is an acceptable simplifying assumption.<br />
<br />
At the end of this you might have a formula that says Rj = 1.2*(Rm - 0) for a daily return. In words this says that the return of the S&P 500 multiplied by 1.2 will be your best estimate of your stock return.<br />
<br />
The last note on the development period is it needs to be 'sterile' or free of any big events. For instance if the company announced a bid to take over another company you will have some pretty irregular earnings in that period and your regression will not predict the event window very well.<br />
<br />
<b>The Event Window</b><br />
Okay so why did we stop our development period at day -30 instead of day 0. The answer is leakage. Often corporate 'events' will leak into the industry before they are widely disseminated by the press. This is sloppily shown by the brown line, which starts to rise before day 0. If the brown line were to rise as it does before day 0 but then flatten off you may be able to make the following statement. "The earnings announcement was responsible for positive abnormal returns, however these returns were not tradeable by the general public because they occurred before the announcement. <b> </b>This effect is closely monitored when the focus of your event study is the affect of insider trading.<br />
<br />
The red line that oscillates around the blue time-line represents a case where the company does not experience abnormal returns. It is important to remember this is not the same as saying the company has 0 return, if the market is going up or down the stock is following it with a closeness that is determined by its beta.<br />
<br />
The yellow line represents what the EMH predicts (red line too). As soon as the information is released the price adjusts and nobody has time to trade on it, unless they were holding the stock before the event, in which case they still were exposed to the risk of the abnormal return being negative. Unlike the brown or burgundy line the change has no drift. In reality sometimes events have drift, where the original bump continues of the following days. This is evidence for 'weak form efficiency' because a trader could just buy stocks who had an abnormal bump and sell stocks who had abnormal losses.<br />
<br />
<b>Prove it</b><br />
So lets say you think you can make money by always buying/selling a company after a certain event happens. You name it, it could be changing auditors, a technical indicator, a product announcement, whatever. Before you go dumping your money after seeing it work once, you should figure out the <i>strength</i> of the effect. Run the numbers on 30 firms who have gone through the event, calculating the CAPM for each and recording the abnormal returns. Add all of the abnormal returns in your chosen trading window (perhaps day 0 to day 45), this is the stocks 'cumulative abnormal <b> </b>return' or CAR. Then average all of the CAR's for each firm, and get your CAR_bar (bar means average in stats lingo). You also need the standard deviation of the sample of CAR's, call this Sigma_car.<br />
<br />
Test it with the following formula, Tstat = (CAR_bar)/(Sigma_car/(sqrt(N - 1))) where N is the 30 because you have 30 firms. If this Tstat is 2, you have a bomber strategy that is going to work with 90% certainty. Tstat of 2.56 works with 95% certainty. Lower Tstats means that your CAR_bar might not be significantly 'not zero' enough to gaurentee you a pay day.<br />
<br />
<b>So What</b><br />
Good point. Besides being a key component to any 4th year finance semester or grad school event studies aren't that common in the real world. They can however really simplify your search for indicators that affect stock prices, and if you find a match that has significant CAR with a lot of persistence or drift, you've got yourself a winning ticket.<b> </b>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-1644084324176366997.post-71623178809240626092011-01-20T12:00:00.000-08:002011-01-20T12:00:20.458-08:00The joy of always being wrongI just watched a BBC documentary on science (video below) and it centered on a general theme of precision. Basically anything in life is unknowable if you want absolute precision; it is only by allowing a certain degree of estimation that we can know anything. You can never truly know the age of the universe, the length of the space bar on your computer, what time it is, etc. <br />
<br />
This brings up a question: am I okay with being wrong. On a personal level I think I am okay that everything I think about life can be countered with a 'but'. I will really enjoy poking holes in all of the 'facts' my kids may bring home from school. It's being wrong as a professional that might get to me.<br />
<br />
Valuation is all estimation, and over the course of the last year I am beginning to learn that the best investment banker isn't the best estimator. Because valuation is all estimation, everybody understands any value derived is a 'best guess'. The thing about i-banking is that bankers almost always have an incentive to make the value higher or lower than the true value. I used to think that i-bankers would spend a lot of time on getting the true value, and then adjust growth, margin, and discount metrics, to derive an either optimistic or pessimistic price. Now I'm beginning to think that i-bankers skip the true valuation altogether and go straight for the optomistic or pessimistic price. Instead of that price being a statistically plausible deviation from the true price, it just becomes a strategically plausible price that the buyer/seller will accept. The whole process moves from science to sales.<br />
<br />
I like the science, I love how stochastic variables working together can bring meaningful estimations. The idea that time devoted to estimation of any variable makes it more accurate, that overtime any model can become more and more precise is extremely empowering. Like the mathematician/physicist/statistician, time spent on my task brings increase certainty; unlike the scientist, instead of studying how things are or were, I focus on how things will be.<br />
<br />
I am okay with always being wrong if I cared about being right in the first place. Reality hardly ever strikes the middle of the bell curve anyhow. I am not sure if I'm okay with being wrong, if I use the excuse that I can never be right to shape (or fabricate) my sure-to-be wrong answer to the will of my employer. I can only hope after the mind shock of moving into the private sector that I remember the difference. <br />
<br />
<div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/5nyZR4Ya4oI?feature=player_embedded' frameborder='0'></iframe></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-43173000693119769382011-01-10T18:04:00.000-08:002011-01-10T18:04:40.826-08:00Thoughts on Reputation and the Politics of GroupworkI had some thoughts on personal reputation on the walk home and although I'm fairly hopped up on DayQuil I think I'll take the time to write about it while the thought is fresh. I'd also like to talk about institutional reputation (like school reputation), and how one might handle their personal reputation when being first seen as a representative of a brand (like a school or a business... "oh so and so works for goldman, they must be cutthroat"), but I'll do that in another post.<br />
<br />
The reason the idea of reputation came to me, is I'm starting my third quarter in b-school and this comes with 4 classes that involve grouping into teams. It's a bit interesting to see the power plays and politics in this scenario, and I'm left to wonder how one might 'game the system' or pretend to be a real player when they are actually a academic lightweight.<br />
<br />
<b>The Game</b><br />
Grouping into teams is nothing new for most business students, but many "hard science" students haven't had much exposure to the concept before b-school. Also in American b-schools competition is fierce and so even those students who are familiar with the politics, find the higher stakes ups the energy.<br />
<b> </b><br />
<b> </b>The class might ask for groups of 5. Strong students have an incentive to group up with other strong students, and weak students have a at least equal (but likely greater if they care about grades) incentive to group up with strong students. The <i>theory</i> is that groups with the most strong students will score the best on assignments, something that very well may not be true but under the assumption that it's generally accepted by the class, means that everyones goal is the same and so the basic principles of game theory should hold.<br />
<br />
<b>The Players</b><br />
This is where reputation comes in. I'll briefly try to slot students into their separate 'types' and then I'll start talking about how reputation can both help and hinder the student. <br />
<br />
The Apathetic<br />
For whatever reason this type of student both doesn't put the time in, and doesn't want to put the time in. Maybe b-school isn't for them, whatever the case these students are quickly recognized by their group members as freeloaders and as the year progresses that word gets around. This doesn't necessarily mean they don't get into the best groups, and the politics of the group up play a big factor - I'll expand later. [on a re-read I never do, so I will now, Apathetic can transform into Unprepared]<br />
<br />
The Unprepared<br />
Business schools generally accept ~60% of their students from non BCOM backgrounds, and these students come in with no or very little academic background in the subject matter. Matched with a ESL status, it can be very daunting for these student to keep up to their BCOM background peers. Some have that special gift of an amazing work ethic and can compete toe to toe with those students on their second lap of the material, some don't and although their ROI on the degree is greater than the BCOM's they aren't able to lock in that high GPA. We'll somewhat unfairly call these students "The Unprepared".<br />
<br />
The Scattered<br />
It may be maturity, it may be a hard coded need to procrastinate, it may be a slice of genius, whatever the cause every class has the scattered student. Some of them do surprisingly well on exams and homework, after cramming and last minute all nighters; some fall apart when they time their push a bit late. I personally find this type of student the most frustrating to work with, but I do admire those who pull it off. <br />
<br />
The Work Horse<br />
These types of students are the ones who put their blood sweat and tears into their work. I truly wish I was one, but I burn out hours before these students really start pouring it on. The interesting thing about these students is half of them are 'dark horses' and half are well known for their work ethic. People will often think The Naturals (below) are the students with the highest grades, but in my experience they almost always trail a handful of work horses that are knocking of 4.0 gpa's every semester. The dark horses won't speak up in class, but can be often found in the library late into the evening, while the recognized - light horses?? - will be very questioning students that contribute regularly (sometimes to excess) in class discussion. <br />
<br />
The Naturals<br />
These students are either set up for success by being both relative hard working and coming from a BCOM background. There is a bit of grey area between this student and the successful 'Scattered' student. Although the successful scattered student is obviously 'a natural', I'll just keep the naturals in this discussion to the nutured (as opposed to by nature) kind.<br />
<br />
<b>The Politics</b><br />
So what actually happens? From what I can tell there are three behaviors, the initiators, the receivers, and the lost. Weeks, sometimes months before the class<b> </b>begins the initiators will start approaching who they view to be strong students, and ask them to be group mates. Initiators seem to usually be The Unprepared, The Workhorses, and sometimes The Naturals. The receivers tend to either be Workhorses or Naturals. And here is where it gets interesting, the answer is almost always yes.<br />
<br />
Being a receiver is a gratifying experience, everybody likes to be asked into a group, it's like getting picked first for the sports team. The trouble is receivers have a chance of being asked by an Unprepared, and it is really hard politically to say no. This cockiness can lead to a sub-optimal group allocation, but sometimes the Natural or the Workhorses get asked by a fellow Workhorse or Natural, and that is the ultimate ego boost - being asked to be on the A team, by the A team. Ironically because of the reputation effect Naturals benefit from, they have the opportunity to be recruited by students stronger than themselves (A team recruiting the B team). This phenomena creates an incentive to be a receiver for two reasons, first the ego boost, second receivers who are asked are automatically identified as either Workhorses or Naturals by both the asking team, and anyone around the person when the asking occurs. This reputation boost can create a bit of an aura for the person in the best way possible - they don't have to say a thing. <br />
<br />
As a quick aside before we move to initiators, those not asked become quickly (either wrongly or rightly) identified as Scattered or Apathetic, a dark mark but sometime a fairly unobservable one.<br />
<br />
So as you can probably see the Workhorses and the Naturals have a choice to make. Take the risk to become a receiver and get the reputation benefit of being on the A-Team, or the cost of either not being picked at all, or being picked, and begrudgingly accepting, by the Unprepared. As a initiator the cost is small and the reward is small - if they are a Unprepared they have the chance to group up with Workhorses or Naturals, if they are Workhorses or Naturals they have the chance to group up with other like-strength peers before being asked by a Unprepared. So there is little downside, but they 'signal' to the student body that they may be an Unprepared student (recalling that we assume only Naturals and Workhorses are recievers and initiators can be Naturals, Workhorses or Unprepareds). So they don't get a reputation boost, and depending on the information known about their abilities they may actually be mislabeled as Unprepared.<br />
<br />
So what happens. It seems to me workhorses that have BCOM (or other team work related) backgrounds tend to choose the initiator path and keep their reputation intact by talking about their marks a bit, and making an effort to show their fellow group members that they are workhorses in hopes that the word spreads (and in time it does). By thinking ahead these students can secure some really powerful groups and if given the chance only play the game once, by grouping up with the same students in every class. Workhorses from non-teamworking backgrounds seem to be receivers mostly because they are not familiar with 'the game', and they often are picked up by the Unprepared students who can see their strength and (relative) ambivalence. Most of the Naturals seem to play the waiting game, and those with the gift of the 'silver tongue' can dodge unwanted invites with class and end up in 'power groups' (or what they perceive to be good groups at least). This can be a reputation boost, but interestingly the biggest winner seems to be the Natural who willingly accepts both A Team and B Team groups, and carries the B Team group. Although not energy efficient and likely not mark efficient it seems to be reputationally efficient, because it showcases their academic vigor, and because they end up working with a variety of people which spreads the population of 'witnesses'. <br />
<br />
<b>Does it matter?</b><br />
Not really. Most of the marks end up on the final exam anyways, and reputation is a very surface level assessment of a person. It can be manipulated or misrepresented only when track record and third party information is unavailable (as in previous group mates, not agencies). Also the group split is far from equal, in my experience over 80% of the class could be characterized as workhorses or naturals, I have yet to work with a 'dud'.<br />
<br />
Still the small scale political theater is fun to watch and it drives home an old point. Those that say the least about themselves (both in words and in actions -> being a initatior) have an opportunity to create an aura of excellence that surpasses their actual skills. Although overtime this difference normalizes as their true track record comes to light, it can provide some interesting opportunities and benifits in the short run. It reminds me of Lt. Spiers from The Band of Brothers, here is the quote:<br />
<br />
<dl><dd><b><a class="extiw" href="http://en.wikipedia.org/wiki/Ronald_Speirs" title="w:Ronald Speirs">Speirs</a></b>: You wanna know if they're true or not, the stories about me? Did you ever notice with stories like that, everyone says they heard it from someone who was there. Then when you ask that person, they say they heard it from someone who was there. It's nothing new, really. I bet if you went back two thousand years, you'd hear a couple centurions standing around yakkin' about how Tertius lopped off the heads of some Carthaginian prisoners.</dd><dd><b><a class="extiw" href="http://en.wikipedia.org/wiki/Carwood_Lipton" title="w:Carwood Lipton">Lipton</a></b>: Well, maybe they kept talking about it because they never heard Tertius deny it.</dd><dd><b><a class="extiw" href="http://en.wikipedia.org/wiki/Ronald_Speirs" title="w:Ronald Speirs">Speirs</a></b>: Maybe that's because Tertius knew there was some value to the men thinking he was the meanest, toughest son of a bitch in the whole Roman Legion.</dd></dl><div class="separator" style="clear: both; text-align: center;"><a href="http://i103.photobucket.com/albums/m130/sarmand7/spiers.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="241" src="http://i103.photobucket.com/albums/m130/sarmand7/spiers.jpg" width="320" /></a></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-90521127933808930342010-12-26T15:22:00.000-08:002010-12-26T15:22:51.211-08:00Working for the Empire - Convincing family and friends that i-banking is moralChristmas has passed, marking the mid way point of another winter vacation and the conclusion of two great nights of debate with the extended family. Christmas eve was devoted to the virtues and problems of wikileaks, religion, foreign policy, Canada's involvement in Afganistan, and the motivations behind joining the army. Christmas day however centered largely on one topic, the financial crash and the gross immorality of investment bankers.<br />
<br />
Before I resign myself to the idea that my years ahead will be spent reporting to Lord Vader on how I managed to squeeze $30M out of 5 deals that were not in the underlying firms interest, I think my trade needs me to give it the chance to be moral and just.<br />
<br />
My fathers side of the family is composed of many families that have made their living in C level careers in the oil in gas industry. They are in essence a good composition of my future clients, and it's a bit startling to learn how much my future customers might secretly hate me.<br />
<br />
Their main gripes center around two issues: the money, and the incentive. On the macro level they feel that the high pay draws away bright minds from engineering, medical, and policy careers that the country needs more. On the micro level they feel that salaries give i-bankers a false sense of superiority and invincibility. Make millions when times are good, get government bailouts when times are bad.<br />
<br />
I argue that the money is good because few are up to the task of doing the work. There is no oligopoly in the investment banking world, it is highly competitive on all levels and in all areas. With so much competition, and so much interest in becoming an i-banker, if the workers didn't hold some element of a scarce resource their salaries would be squeezed away to keep the firms margins high. But it is the people who drive the business, and when one person manages to bring in $10M of revenue their salary becomes justified.<br />
<br />
What I have more trouble explaining is why the business itself is so profitable. How has the ~3% spread stayed so high if there really is so much competition. The obvious answer is risk, but my uncles seem convinced that the i-banks of today have almost completely eliminated their exposure. I'm sure the next 12 months will shed some light on the issue. If in fact the industry has been able to collude and keep these historical premiums while managing to eliminate the risk (and the costs that come with it) then maybe the industry isn't so "fair". But it's a industry wide phenomena, and one that is admirable to any capitalist as long as there is not some anti-capitalist framework keeping it in place (government relationships, or true collusion). Over time the markets should correct for these non-normal profits and my future paycheck should get a bit slimmer.<br />
<br />
The incentives are another issue because they really are a product of the individual i-bankers business conduct. My firm will make money when a deal is done. It will make more money if the deal is big, and it will make more money on more deals. Thus the big incentive is to have i-bankers drive as many big deals as possible. Deals are IPO's, bond issuance's, mergers, acquisitions, consolidations, spin offs, carve outs, and LBO's. It is my uncles contention that i-bankers advise companies to do deals when they shouldn't, and that when the deal is going through the i-banker isn't thinking about the firm, but instead how to maximize their cut. <br />
<br />
I think the biggest point of issue is that business men know how to run their business, and if they are good, they know how to run it well. Unfortunately finding oil reserves and getting to them efficiently, doesn't have a lot to do with a bond deal or a takeover. Very smart individuals get caught in a world they don't understand and it's their baby at stake if things go sour. When you don't have a good grasp of the playing field it's natural to feel like its slanted against you. And sadly it is natural for it to be slanted against you. Businesses need capital, and so they need i-bankers, and i-bankers need businesses to need capital. This symbiotic relationship <i>should</i> ensure that neither side screws the other on the macro level because each side can permanently avoid the other on an individual level. If an i-banking team gets a rap for being sleazy and underhanded they won't get business. If a business gets a rap for providing faulty information and trying to screw their bankers, they won't get capital. These 'jungle rules' keep both parties from the extremes, but I would agree that the balance of power is in the i-bankers court. Tough.<br />
<br />
Neither of these business realities are immoral. I truly believe that an i-banker that screws his clients, is not long for his job, and definitely not destined for riches in the long term. Like any service industry the client is king, and the i-banker that does right by his clients, will win their trust and lead them through the really bid deals when the time comes.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-9651785260840596072010-12-18T17:25:00.000-08:002011-02-17T07:57:11.596-08:00How do YOU DCF?Many a young financier becomes enraptured with the power of the discounted cash flow model in their third year finance classes, and student investment funds are teeming with DCF models that do three way sensitivity, have 4 growth stages, and model 20 years into the future. However quickly students feel cheated by this tool that promises to value everything with a income statement.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://www.businesspundit.com/wp-content/uploads/2009/09/zzzprox.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://www.businesspundit.com/wp-content/uploads/2009/09/zzzprox.jpg" /></a></div>At first it's the baseline figures; what should the beginning change in net working capital be, what if it's been on a negative growth path for the last 3 years. Back in 2009, baselines were really ugly; what should you do with deferred tax loss, a negative NOPAT, uncertain CapEx expenditures. Then it's growth rates, which are especially tricky for growth companies. Soon you end up with a value per share for Google at $103 and you wonder where you went wrong.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://media.tumblr.com/tumblr_lc0o1tEZs81qbq056.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://media.tumblr.com/tumblr_lc0o1tEZs81qbq056.png" /></a></div>I'll outline how I approach some of the many DCF decisions and then I'll talk about where the DCF really shines - when it's used backwards.<br />
<br />
<b>Revenue</b><br />
This is the best line item to spend the majority of your time modeling because it's the hardest to fake. Managers can push and pull on SG&A, depreciation, tax expense, and really everything else before net income, but there is very little you can do (legally) to move the top line around.<br />
<br />
<b> </b><br />
I like to use one of three approaches to model revenue growth, regressions, market share & growth, and historical. Regressions are by far my favorite, especially for resource companies. How much correlation do you think there is between Nobel Energy Corp's historical revenue and the yearly price of oil multiplied by the barrels of oil produced per year? 85%.<br />
<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixkcX4m8fAeS36qx7sQOMWWeEEd0uz9Sq0LRZxnYSauEUp54XWXJA_ot2ZvadtHiNzGfU3EAm1Ex8EwheS-ocyrYbhNE_FQv8hYy4jCtpgWpycvfZqgfp7LW-tFkPlAZE1s-9kGdfyGQ/s1600/DCF+Nobel.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="476" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixkcX4m8fAeS36qx7sQOMWWeEEd0uz9Sq0LRZxnYSauEUp54XWXJA_ot2ZvadtHiNzGfU3EAm1Ex8EwheS-ocyrYbhNE_FQv8hYy4jCtpgWpycvfZqgfp7LW-tFkPlAZE1s-9kGdfyGQ/s640/DCF+Nobel.jpg" width="640" /></a> </div>Yes it's a very short development period, but it tells a good story, and it makes sense (when oil price drops so does revenue). The biggest plus is with regressions you are able to use industry data to forecast the company. In this Nobel Energy example I used the EIA oil forecast (see my "must have links" post) and with this I can model out 30 years if I desire. If the company you are tackling has been pretty stable for the last 10 years (no M&A or spin offs) you'd be best to create your model in a development period and then test it on recent ex ante data to see how it performs. For example create the formula on data from 2000 to 2006 and then see how it performs from 07 to 08. Or develop through 08 and test 09 to the TTM. Most models might break through the crash period, so give your power tests some slack if you use this as your test period. <br />
<br />
If you are valuing a consumer goods or manufacturing business you will be most interested in market share and market growth. Analysts produce a lot of research on which companies are likely to gain or lose market share, and how much the entire market is expected to be worth today and tomorrow. The gathering and aggregating of this data will be much messier than resource data, but if you are able to put it all together I'd bet your model power would be far stronger than just extrapolating on historical data.<br />
<br />
Sometimes you need to use what you have in the company, and although it hurts there are ways to make the best of it. The big first step is to dive deep into the MD&A and scour past conference calls to get a good idea on managements expectations for growth. Any negative expectations should be taken very seriously, any very positive expectation should be taken with a grain of salt.<br />
<br />
<b>NWC, CapEx, Dep, EBIT</b><br />
So after spending all that time on modeling revenue, must we do the same for each DCF component as well. I say we do not! Whittling to our free cash flow using the formula:<br />
<div style="text-align: center;">[Rev-Exp=GM-Dep-Tax=EBI+Dep+Chg_NWC-CapEx=FCF] </div>We are just left to consider proportions and margins before the terminal cash flow. If management gives firm CapEx projections than you can hard code those in if you feel they will happen, otherwise look closely at the CapEx proportion to revenue over a historical period that represents the future 5/10 years. Same should be done with depreciation, NWC and the profit margin to EBIT to estimate expenses. Generally if the company is doing more business all of these items should increase roughly linearly. The exception of course is if the business is shifting from one business cycle to another. If you feel the company is losing its "core competency" or competitive edge then you should make some adjustments to the EBIT margin you assume in the future. This is tricky business and you might want to look at a historical example. For instance you might look at Microsoft's margins coming into 2000, to model Google's next 10 years.<br />
<br />
<b>Terminal Cash Flow</b><br />
This whole calculation is a headache in itself, but extremely important as it usually makes up ~2/3 of the firm value. If the firm is steady state you could probably do the terminal cash flow anywhere from 5 to 10 years out. Theory and historical data suggests that the profit margin should squeeze that the firm will increase dividend payments (or start them) so your plowback is smaller. If the firm is growth, you might want to go through the exercise of smoothing to a mature stage over a 10 to 15 year horizon. Generally this is a messy business and it is hard not to feel like you are crudely making up growth factors when it's 2021.<br />
<br />
<b>Making the DCF do something useful</b><br />
So after playing with your DCF and making it produce a price that fits your thesis, it's hard to think that the model is anything more than a elaborate way of making up a stock price. And honestly, without rich financial data, a professionally developed model, and a team of 7am to 11pm working analysts your not going to generate alpha. You can however make the model do something useful.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://knowyourmeme.com/system/icons/4457/original/challenge.jpg?1291495361" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="http://knowyourmeme.com/system/icons/4457/original/challenge.jpg?1291495361" width="320" /></a></div>By accepting Semi Strong Form Efficiency instead of WFE we can say that the stock price is the correct price. This allows us to chose a different output variable, like equity risk premium for our DCF model (hope you soft coded it, so you can use solver). The beauty of it is, if the output variable is a 'common variable' (not firm specific) we can use several different firm DCF models to narrow down on a more accurate value. It's like triangulation in mountaineering, but in finance! For instance by modeling all of the big companies in the auto sector (and yes going through the work of regressions and margin estimates for each of them) we can turn all the models around and figure out what equity holders demand as a risk premium. Of course adjustments for outliers will be needed and you may want to weight your average to focus on 'pure' peer firms in the industry. Boil this down through all the sectors and you have completed a much more robust and <i>market sensitive</i> estimate of E[Rm], which we can feed back into either the CAPM or Famma French Model to make passive investment decisions. The power obviously would be found in narrow sub sectors where you are likely to be have some added information, but the method is actually a widely used practice.<br />
<br />
What actually keyed me onto this method was a paper by Aswath Damodaran. You can find the paper <a href="http://pages.stern.nyu.edu/%7Eadamodar/pdfiles/papers/ERPfull.pdf">here</a>, and it nicely details some of the implications of the E[Rm] DCF solution method near the last third.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-39937125070139473132010-12-10T15:32:00.000-08:002010-12-11T07:50:57.448-08:00Some Gradschool Greats and GripesLast final tomorrow afternoon - time for a breakdown.<br />
<br />
<b>Great things about Gradschool</b><br />
The people. It sounds cliche, but gradschool is a further tightening of the social spectrum one relates to, and it's always fun to hang out with people who are like minded. When you think about it's probably the pinnacle of optimal social settings till the retirement home.<br />
<br />
Think about it this way; you start life in grade school. The school is filled with people from all sorts of different persuasions; as put in Ferris Bueller's Day Off you have "The sportos, the motorheads, geeks, sluts, bloods, wastoids, dweebies, [and] dickheads". Plus while you are co-mingling with the masses you also are constrained by your history. If you did something memorable in grade 9 (either good or bad), that has bearing on your identity for the next three years. I'm not saying I had a bad high school experience, but there are benefits of going to university. When you go to your undergrad, you are amongst the masses - able to reinvent yourself - and as you focus in on your major your circle of friends become even more like minded. By the time I finished my undergrad, I probably had 15 close like minded friends; when you go to a grad school which you were on the edge to get into, you find nearly everyone in the program is "your people". As we move into careers the age spectrum will jump out at us, and depending on the business it might be hard to find 100 friends with a passing glance around a room.<br />
<br />
The pace. Everything pre-gradschool moves so slowly. Actually most other grad school experiences (engineering, math, history, etc) are equally slow, b-school really is an exception. I'd rather be busy than bored, and balancing 4 quarters of classes, a job search, professional designation exams, and a social life, makes time fly by. <br />
<br />
The facility. Coming from a middle class upbringing, and a public university that fed heavily on in-city students, I'm still a bit star struck by the grandeur involved in private universities in America. As an international student, I was going to be paying upwards of ~50,000 no matter where I went , and so it made sense to go to a school where every student ponied up the same amount (instead of state schools which are subsidized for domestics). The result is me spending my days in rooms that resemble Hogwarts. It also has an impact on the undergraduate student body. Graduate students are all driven individuals but undergrads can be... less so. Although there is a lot more 'valley girl' presence in the halls here, generally the students conduct themselves with a bit more class then I am used to, and it's oddly motivating. If all the undergrads are quietly holed up in the library, then I surely am meant to be working. <br />
<br />
The material. I'm not taking a Ph.D. developing masters. If I were I'd be eye deep in math and worrying about "quals". Instead I'm learning the why's and how's of industry practiced finance. My undergrad brought me halfway there, but there still was an emphasis on the academic delivery and testing of the material. Now I'm not doing my work by hand, I'm doing it on excel. When I'm doing stats exams I have a laptop in front of me, all of the work involves real world data and situations, and the solution is delivered as a memo, not a proof.<br />
<br />
<b>The Gripes</b><br />
THE DOORS. Oh my goodness, it gets to me every day. For some reason this school loves closed doors. Doors, in its' halls, tunnels, some vestibule doors, doors just there to be doors. On my walk to from my locker to the library I open 8 doors. It's a 2 minute journey! Locker to squash court is 16 doors. The student body has adapted by constantly slapping the handicap buttons to force the doors open for 10 seconds at a time, but I have a much simpler solution. Every interior hall/tunnel door is affixed open by an electromagnet. If a fire alarm is pulled the power is cut to the magnets and all the doors shut. Problem solved. (Ahh real motivation for post appeased)<br />
<br />
America. I really like the people I interact with on a day to day basis, but this country can bring a man down a bit. Money in and out is a hassle. Air travel is a hassle. AT&T is a hassle. F1 visa is a hassle. Having to think about 'saftey' is a hassle. Being separated from my CAD licensed car is a hassle. Domestic politics and it's influence on the world is depressing. H1B sponsorship is nearly impossible. And seeing the wealth and race divide is sad.<br />
<br />
At my previous university the student body was composed of students from a middle to lower class background. Although this added to the 'riff-raff', it also meant that the people working the cafeteria, washing the floors, and staffing Tim Horton's, were all peers who were just doing some part time work. Here the only establishments that seems to employ students are Starbucks and the libraries, everything else is employed by primarily Black or Hispanic middle aged men and women who show the cultural characteristics of being on the wrong side of the wealth divide. This said I am acutely aware "great" paragraph 4 is in part a direct pairing with this gripe, and I can't have my cake and eat it too.<br />
<br />
And those are the big ones. Next post from Canada, where health care is free, strangers high-five, nobody thinks my dance moves are "elaborate", airport security is just a slip and slide, and roads are paved with candy frogs and internet memes.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1644084324176366997.post-83232839289187165232010-12-06T16:39:00.000-08:002010-12-07T08:50:25.504-08:00Business Majors - The Personality TestI finished my accounting final about 3 hours ago, and like many of my previous undergraduate accounting exams as soon as I started I couldn't wait for it to be done. I usually do well in accounting, but the it's always been an unpleasant experience. After the exam I began studying investments and the last three hours have been a huge contrast in pain, to the same three hours spent yesterday. When I think about it, the business majors all have a personality of their own, and the people who thrive in them seem to exhibit certain attributes. So for what its worth, here's my take on the major - personality match up!<br />
<br />
<b>The Accountant</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://www.neurosoftware.ro/finance/wp-content/plugins/wp-o-matic/cache/6210a_home-office-desk-computer-black-and-white.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="300" src="http://www.neurosoftware.ro/finance/wp-content/plugins/wp-o-matic/cache/6210a_home-office-desk-computer-black-and-white.jpg" width="400" /></a></div><div style="text-align: justify;">Oh accountants. So neat, so orderly, so... anal. I hate because I lack these qualities, and some of them I really do which I had. The biggest thing accounting has taught me is how to view a rigid puzzle, and to <strike>appreciate</strike> tolerate all the checks and balances that are involved in financial reporting.<br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">At first you learn how the 3 major financial statements link together. How the cashflow statement is a throwback to cash-basis accounting and reconciles cash from revenue, financing, and investment. How income from one year is gathered in retained earnings during closing, and how working capital accounts interact with revenue and expenses. It's all pretty elegant really, and with purchases all taking place on January 1st, life is a hunky dory place.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">But then come the exceptions. Inventory = FIFO, LIFO, WA, Specific Identification. Depreciation = Straight Line, DDB, Sum of the Years, Units of Production. Investments = Held for Trading, Held to Maturity, or Available for Sale. Leases = Operating or Capital. Building Costs = Expensed or Capitalized. Foreign Currency Translation = Temporal Method, Current Rate, Hyper-Inflationary. The list goes on. The beauty of the simplicity, is replaced by ad hoc rules and standards dictating which method is appropriate and you end up tearing it all with imparments and re-statements anyhow. A rage begins to boil up inside me as I memorize the pointless completely offsetting joural entries involved in cash flow hedges, and I just want to scream "WHO CARES"... And that's why I'm not an accountant.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">But some do care. If you like organization, putting everything in it's place, and naturally follow the rules to the letter in all of life's activities then accounting is for you. Some of the best accountants I know were group mates that "tut tut'd" when I wrote formatted "align left" instead of "justify", I didn't even noticed, it was a big deal to them. (Hence my solute to them with the justification of these paragraphs). You hear of things in big accounting organizations like "pen hierarchy" where newbies get one colour, mid levels get another and top level get the red pen. When reviewing work all the colours trickle down, with each level trumping the next. If I walk up to my i-banking boss and he tells me that red pens are reserved for managers, I'd shit a brick.</div><br />
<b>Marketing</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://internetprofessionalsblog.com/images/MessyDesk.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="http://internetprofessionalsblog.com/images/MessyDesk.jpg" width="400" /></a></div>I see marketers as exactly opposite to accountants. They are free spirits and their major focuses on instilling the primal business spirit into students, contrary to most other majors which focus on skill creation. It does have one thing in common with finance, most marketing majors don't end up in marketing, they end up in some sort of sales. I'll break it down into these two factions, but as a student who's always been on the numbers side, my view into these functions are not as strong.<br />
<br />
The pure marketer usually exists in three organizations: corporate, consulting, or PR/Gov. Within these organizations most of the work is on the PR side along with event planing, but a lucky few really get to become creative and craft the firms message. The creators will be very smart, but maybe not a numbers fan. Their profession is essentially behavior analysis and psychology of the masses. They need to figure out what their consumers are trying to tell them or what they think of them, and then what steps they need to take to move those perception in the desired direction. To me it's voodo magic and often a unjustifiably high expense (look at the difference between Gross Margin and Net Profit with a company like Coke), but it works. Economically I understand what they are trying to do, scarce resource creation to allow for price discrimination. How it's actually done is much more of an art, with a ton of market analysis to drive decisions. <br />
<br />
<b>Sales</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://media.lehighvalleylive.com/tv_impact/photo/8984664-large.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="375" src="http://media.lehighvalleylive.com/tv_impact/photo/8984664-large.jpg" width="400" /></a></div>Sales is what makes the world go round. Small business owners, lemon aid stands, traders, corporate 'client services', it's all sales. Sales personnel from the marketing background tend to be the best at talking the talk. Students who aren't particularly academic but have good business instinct fit this mold well. I would describe this person as a very popular, well spoken person who above all can influence people. The slick salesman who no-one likes won't go very far, especially in corporate, it's the super networkers that keep reaching new heights.<br />
<br />
In corporate it's usually the salemen with a background in the technology that the firm sells that really excel. This is because B2B selling is focused on a very knowledgeable customer, and the engineer turned salesman will both understand their needs, and also may have formed a relationship with them before flipping to the money side.<br />
<br />
Traders are salesmen with all the tools of a more typical finance worker. Sometimes they actually don't talk to their end customer, but they understand their customer better than any profession because it's the relationship between the two that creates the profit, not the product. The customer of course is who ever may be on the other side of the traders trade. The trader must understand where the customer is wrong in their understanding of the product (read: security or asset) and he is right. Traders are self confident, very intelligent, risk taking individuals. Unlike most salesmen, traders don't need to be particularly social or nice, but most of the ones I've met are. <br />
<br />
For the rest of the world, small businesses are filled with owners who read some sort of book on marketing and sales, because generally your brand and your core business is the one thing you can't outsource.<br />
<br />
<b>Finance</b><br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://dealbreaker.com/images/thumbs/adamsenderbloombergsmall.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="295" src="http://dealbreaker.com/images/thumbs/adamsenderbloombergsmall.jpg" width="400" /></a></div>Okay that's a trader which is really sales but the picture is too good.<b></b> Finance is for the soothsayers of today, the entire profession is based on an estimation of risk and reward. Accountants hate looking forward, and most estimates they do, they shop out to the treasury department. Financiers need to have a very strong understanding of accounting but it's always from the view point of what's next. What are the nasty surprises likely to come, does a regression with average barrels per day and average oil price do a good job modeling revenue - will it in the future as well?<br />
<br />
A good financier can think big picture. When they learn subjects they really 'get it' when they understand the why's and how's, not when they memorize the method. The world works by methods, rules, and convention, but there is a little sloppyness to all of this; a financier who truly grasps the underlying framework will see when the convention does not hold and profit from it. This means that financier has a strong grounding in statistics, economics, accounting, and econometrics. It is a service industry so they must also be a good communicator, and be able to understand what the client is asking better than they do. This is a bit caveat'd by which side of the firm you are. A Ph.D. physics background quant may have few communication skills and still thrive, and those more on the sales side may get by with less fundamental knowledge of the products they are selling. <br />
<br />
On the personal level my commentary on what makes a good financier is obviously biased but I'll take a stab. Those in finance are usually curious about the world. They are well read, like the news, and like to think about how seemingly unrelated events might fit together. How might a missile strike on North Korea affect the USD or gold? How would a dividend cut at RBC affect BMO? This comes through an understanding of systematic risk, everything is connected on the base level, and every event is an additional piece of information that may have value on predicting any future events. Financiers are usually competitive, relatively hard working, and quick witted. A professor once told me that in finance it's not good enough to be right, you need to be right <i>and </i>first - something I have really taken as a personal goal. <br />
<br />
I'd like to say that financiers aren't incredibly detail orientated, but I think it's just that <i>I</i> am not incredibly detail orientated. As I read more about the work of investment banking, there doesn't seem to be much room for error, and so this year has included a focus to drop that pesky 5% margin of error from stupid mistakes. Interestingly a very competitive bell curve has naturally given that goal a fair bit of incentive!<br />
<br />
Major's I'm leaving out include Operations and Information Systems. Operations folk are an odd mix between engineer and accountant. It's a study of efficiency, and although I always enjoyed the math, the issues were a bit boring. I/S majors are a mix between marketing and computer science engineers. I worked in a high tech company, and am a big fan of internet culture, so I definitely sympathize with these folks, I'm just not that interested in web design or database management.Unknownnoreply@blogger.com0