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• “The Modigliani-Miller Propositions: A Simple Example.” IESE, FN-414-E.
The purpose of this note is to illustrate with a numerical example the Modigliani and Miller propositions I and II, which constitute one of the cornerstones of modern financial theory. It starts with a quick review of the original version of the propositions, and then it moves to illustrate them with a numerical example. Then one of the assumptions of the original analytical framework (the absence of corporate taxes) is relaxed, the propositions and their intuition are restated, and the numerical example is reworked. An appendix with some further discussion concludes the note.
• “Risk in European Securities Markets (I).” IESE, FN-436-E. (With Teaching Note)
Two assumptions widely used by both academics and practitioners are that stock prices follow a random walk and that stock returns are normally distributed. Although the balance of the evidence that emerges from the vast literature on these topics is that neither assumption is plausible from an empirical point of view, both assumptions are common in theoretical work. Furthermore, they both hide behind many simple calculations widely performed by practitioners. This note focuses on the second assumption and tests it using a sample of European stock returns. The note "Risk in European Securities Markets (II)," complementary to this one, focuses on the first assumption.
• “Risk in European Securities Markets (II).” IESE, FN-437-E. (With Teaching Note)
Two assumptions widely used by both academics and practitioners are that stock prices follow a random walk and that stock returns are normally distributed. Although the balance of the evidence that emerges from the vast literature on these topics is that neither assumption is plausible from an empirical point of view, both assumptions are common in theoretical work. Furthermore, they both hide behind many simple calculations widely performed by practitioners. This note focuses on the first assumption and tests it using a sample of European stock returns. The note "Risk in European Securities Markets (I)," complementary to this one, focuses on the second assumption.
• “A (Very) Brief Introduction to Shazam.” IESE, FN-438-E.
Shazam is a very powerful package for statistics and econometrics that occupies only four megabytes of disk space. Shazam is user friendly in the sense that most of the command names are closely related to what the user intends to do. Furthermore, Shazam's manual is clearly written and contains lots of examples. This note only attempts to help readers with their very first steps in Shazam, such as the handling of files and a few basic commands.
• “Stock Pricing: Coca-Cola.” IESE, F-678-E. (With Teaching Note)
This case is a rather non-technical introduction to stock pricing. It portrays the situation of an analyst who, at the beginning of 1997, has to report on whether Coca-Cola stock is undervalued or overvalued, and make a buy (or do-not-buy) recommendation. The tools of analysis introduced and briefly discussed in the case are the dividend-discount model and the CAPM, as well as some important magnitudes related to stock pricing.
• “The Pricing of Internet Stocks.” IESE, FN-467-E.
The technical note recreates a report written by a consultant to his clients which, far from trying to justify the valuation of Internet stocks, attempts to be a map to guide unaware investors through the "madness" of investing in these shares. It covers several interesting facts and opinions about Internet companies, analyzes the rationale behind the low supply and the high demand for Internet stocks, discusses several methods of valuation, and finally argues that may be not everything is as crazy as it seems.
• “Telefonica: The Dividend Decision.” IESE, F-890-E. (With Teaching Note)
The case portrays the situation of Telefónica, Spain’s largest company, on November, 1998, at the time it has to decide the dividend for the year. The situation is particularly interesting given that Telefónica was on the one hand generating large profits, but on the other it was under intense competitive pressure both in the home market and abroad. The case aims to encompass most of the important elements that any company must consider when setting its dividend policy. Important factors such as dividend smoothing, signaling effects, and clientele effects can be discussed. The case also illustrates many other important restrictions that companies must take into account when setting their dividend policy, such as financial constrains, growth opportunities, and restructuring needs, among others.
• “The Pricing of Internet Stocks (II).” IESE, FN-475-E.
This note, which complements the note “The Pricing of Internet Stocks” (FN-467-E), addresses two main issues, namely, reverse valuation and expected values and scenarios. Both valuation models are briefly analyzed and applied to the valuation of Yahoo, the leading Internet portal and one of the blue chips of the Internet world. The note concludes stressing that, regardless of the merits of the new measures designed to assess the value of Internet stocks, the value of any company was, is, and always will be equal to the present value of the cash flows the company is expected to generate.
• “Hilton Hotels, Corp.” IESE, F-711-E. (With Teaching Note)
This case aims to introduce students to the issue of firm valuation by applying both the dividend discount model and multiples. It has enough information to discuss different versions of the dividend discount model, such as the constant (one-stage) growth model, the two-stage growth model, and a model with a terminal price. It also has enough information to define several multiples (such as P/E ratios and P/B ratios) and apply them to the valuation of Hilton.
• “Repsol-YPF: Valuation in Emerging Markets.” IESE, F-723-E. (With Teaching Note)
This case aims to introduce MBAs and executives to the issue of valuation in emerging markets. It stresses the differences between estimating the expected cash flows and cost of capital of companies in developed markets and in emerging markets, with particular emphasis on the estimation of the cost of equity of companies in emerging markets. The case makes it possible to compute the cost of equity of YPF using the CAPM and three alternative approaches to this model, the three of them specifically designed for emerging markets. The case also makes it possible to perform relative-valuation analyses by using price-to-earning ratios, price-to-book ratios, and some other widely-used multiples, as well as a valuation of YPF’s main asset, its reserves of oil and gas.
• “Atlas Investment Management.” IESE, F-727-E. (With Teaching Note)
This case aims to introduce MBAs and executives to the issue of bond valuation. A group of financial advisors must decide which bond or bonds to recommend to one of their clients, for which several magnitudes relevant to bond valuation must be calculated and assessed. The main two tasks in the case are, first, to crunch the numbers, and then to make a good recommendation. The case provides information to compute and discuss yields to maturity, default risk, and interest-rate (market) risk. The case is also flexible enough to discuss several other basic issues related to bond valuation, such as types of bonds, issuers, duration, etc.
• “Project Evaluation in Emerging Markets: Exxon Mobil, Oil, and Argentina.” IESE, F-803-E. (With Teaching Note)
This case aims to introduce MBAs and executives to the issue of project evaluation (and indirectly, firm valuation) in emerging markets. It discusses four models specifically designed to estimate discount rates in emerging markets and applies all four models to the evaluation of an investment project (oil exploration) considered by Exxon Mobil in the south of Argentina.
• “The Essential Financial Toolkit. Tool 1 - Returns.” IESE, FN-552-E.
This note discusses the concept of returns, essential for evaluating the performance of any investment. It starts by defining the arithmetic return in any given period, and then expands the definition to multiperiod returns. Then it defines the logarithmic return in any given period, and again expands the definition to multiperiod returns. Finally, it concludes by discussing the distinction between these two types of returns.
• “The Essential Financial Toolkit. Tool 2 - Mean Returns.” IESE, FN-553-E.
This note discusses three definitions of mean returns and highlights their different interpretations and uses. In many cases, particularly when evaluating risky assets, the concept of ‘mean return’ is meaningless and stating the type of mean return discussed, arithmetic or geometric, is essential. Also, when investors trade actively, their mean return and that of the asset in which they invest may differ, which requires yet another concept, the dollar-weighted mean return.
• “The Essential Financial Toolkit. Tool 3 - Risk: Standard Deviation and Beta.” IESE, FN-555-E.
This note discusses two very widely-used definitions of risk, standard deviation and beta, both of which are at the heart of modern finance. Some say that risk, like beauty, is in the eyes of the beholder. May be it is, but even if that is case, understanding the relationship between the standard deviation, beta, and risk is essential for anyone who wants to have a basic knowledge of finance.
• “The Essential Financial Toolkit. Tool 4 - Diversification and Correlation.” IESE, FN-558-E.
This note discusses the issue of diversification, something that academics preach and most investors practice. It is often said that putting all the eggs in the same basket is not a good strategy. Diversification, at the end of the day, consists of following that simple advice when building investment portfolios, a process in which the correlation between assets plays a critical role.
• “The Essential Financial Toolkit. Tool 5 - Required Returns and the CAPM.” IESE, FN-559-E.
This note discusses the relationship between risk and return. It is obvious that investors would want a higher exposure to risk to be compensated with a higher return, but in order to estimate the actual return investors should require at different levels of risk, we need a model. The CAPM, one of the models most widely used in finance, provides a simple and intuitive way to tackle this issue.
• “The Essential Financial Toolkit. Tool 6 - Downside Risk.” IESE, FN-560-E.
This note discusses a view of risk that, unlike the standard deviation and beta, focuses on the downside faced by investors. Of the several measures that attempt to capture this downside, the focus here is on the semideviation, an increasingly popular magnitude that measures volatility below any chosen benchmark.
• “The Essential Financial Toolkit. Tool 7 - Risk-Adjusted Returns.” IESE, FN-561-E.
This note discusses how to properly evaluate the performance of assets by taking into account not just their returns, as most commercial rankings do, but also their risk. And because risk can be defined in more than one way, there is more than one measure of risk-adjusted returns. This note discusses five of them, some differing in the way they define risk and others in the way they incorporate it into a risk-adjusted measure.
• “The Essential Financial Toolkit. Tool 8 - NPV and IRR.” IESE, FN-562-E.
This note discusses the two most widely-used tools for project evaluation, NPV and IRR. Both tools require a critical input, the cost of capital, one of the most essential magnitudes for any company, which is also briefly discussed. Both NPV and IRR have applications that go way beyond project evaluation and no toolbox would be complete without them.
• “The Essential Financial Toolkit. Tool 9 - Multiples.” IESE, FN-563-E.
This note discusses stock valuation using relative valuation ratios, typically referred to as multiples. These multiples are widely used by equity analysts and widely discussed in the financial press. Their popularity is largely due to their simplicity but, as discussed below, this simplicity may be deceiving, may lead to faulty analyses, and ultimately to wrong investment decisions.
• “The Essential Financial Toolkit. Tool 10 - Bonds.” IESE, FN-564-E.
This note discusses a financial instrument that governments, companies, and investors could hardly do without. Bonds are an essential asset class, widely used by governments and companies to finance their investments and by investors to protect their portfolios. They come in many types and degrees of complexity, but the simple bonds discussed here, whose characteristics of risk and return are not difficult to understand, are the most widely used.
• “The CAPM, the Cost of Capital, and Project Evaluation.” IESE, FN-567-E.
This note provides a very brief introduction to the CAPM, the cost of capital, and the two main tools used in project evaluation, NPV and IRR. It is intended only as a primer on some basic aspects of these topics, and to be followed by class discussions or cases.
• “Boeing and the 777: The Cost of Capital & Project Evaluation.” IESE, F-864-E.
This very brief case aims to provide just enough information to calculate Boeing's cost of capital, and to evaluate the viability of the 777 plane, in order to discuss both the cost of capital and project evaluation with executives.
• “Beta, Leverage, and the Cost of Capital.” IESE, FN-616-E.
This note briefly discusses the versatile and widely-used technique of levering and unlevering beta, which has many and varied applications in finance. The note addresses the intuition and relevant mathematical expressions of this technique, and illustrates its usefulness with a practical application focusing on Starbucks.
• “Hertz and Dollar-Thrifty.” IESE, F-906-E. (With Teaching Note)
This case aims to apply discounted cash flow (DCF) analysis to value Dollar-Thrifty from Hertz’s perspective and to decide how much the latter should bid for the former. The case provides enough information to discuss several aspects that are relevant for the type of transaction considered, such as the possible battle among bidders for a given target; the valuation of the target from the bidder’s perspective; the valuation of the potential synergies expected from merging the companies; and possibly the bidding strategy to be used by the bidder.
• “Is the U.S. Market Cheap or Expensive?” IESE, F-917-E.
This very short case is designed to illustrate a case discussion to prospective MBA students who have not been exposed to the case method. The idea is to give them something very short to read and think about, including a very light background on the use of multiples for valuation and a timely topic. The case includes a preparation sheet with a few questions the prospective student needs to consider and be ready to discuss during the session.
• “Hertz and Dollar Thrifty - An Introduction to DCF.” IESE, F-940-E.
This short case is based on a longer case, Hertz & Dollar Thrifty (IESE, F-906-E). The longer case, meant to be discussed over two sessions, is designed to address in detail the discount rate, the estimation of cash flows, synergies in general and in this particular situation, takeover battles, and even regulatory issues. This much shorter case, on the other hand, is designed to focus on the essentials of the DCF model, and particularly on its WACC version, in just one session. The case enables the calculation of the cost of capital, the estimation of cash flows including a terminal value, the estimation of synergies and their split between the target and the bidding company, and a discussion of sensitivity analysis on the main variables.