1. Session 3 MOOC– CORP FINC 5880 Shanghai 2015 IMBA

2. If you don’t use it you loose it!

3. Top down or bottom up?

4. Regression Beta’s

5. Diversifiable risk…

6. Let’s do the regression for Disney…

7. Monthly data…

8. Recent Disney…

9. The regression…

10. Quick Test…

11. How Professionals work…

12. Regression Output…

13. Interpreting the results…

14. So what’s the true value of regression beta’s ?

15. High Beta…Low Beta...

16. What determined a Beta?

17. Industry Beta’s

19. Operating Leverage…

20. Financial leverage (HAMADA)

21. For Disney recently…(2013)

22. Before we start… What is the beta of cash? So the more cash a company has the higher/lower it’s beta? Say: Beta (microsoft)= Beta cash* (cash/firm value) + beta software business *(firm value- cash)/firm value Or say Beta microsoft is 1.10 what is the beta of the software business? If microsoft holds 20% of its value in cash and cash equivalents? 1.10= 0* 20% + Beta software business*80% thus Beta software business= 1.10/0.8=1.375…

23. Let’s do this for Apple Inc. Cash/Mkt Sec totals $ 155 B USD Apple’s overall Beta is reported at 1.03 Apple’s Value 638 B USD What is Apple’s real Business beta? 1.03= 155/638*beta cash+(638-155)/638* business beta THUS Since the beta of cash=0 it follows: 1.03=0.76*business beta THUS Apple’s business beta is: 1.03/0.76= 1.36….

24. TRY: Updated for the latest Balance sheet Firm Value: 674.17B+53.46B=$ 727.64B USD Cash 21.12 B+20.48B+164.07B=$ 205.67B USD Reported all in Beta: 1.00… Apple’s Unlevered Business Beta? NOTE: Unlever with HAMADA and correct for cash... Assume tax rate: 35%

25. Answer Apple Inc’s unlevered Business beta Unlever with Hamada: B(u)=B(l)/(1+D/E(1-t)) Unlevered incl. cash: 1.00/1.0515=0.951 Thus: 0.951=468.5B/727.6B*Business Beta + 205.7/727.6B*Beta cash (zero)= It follows Business Beta Apple INC. (unlevered and corrected for cash) is: 0.951/0.6439= 1.48 Apple is becoming a more “risky” business…but it is not easy to determine this from the reported Beta...

26. The effect of taking samples: Statistics: The STDEV of a BLUE estimator can be reduced to 1/√n with n being the sample size: Sample sizeSTDEV reduction to: 450% 933.33% 2520% 10010$ 10,0001% 1,000,0000.1%

27. Or… +5+16+75+9900

28. Illustrated…

29. Weighting with each business…

30. So each business it’s own WACC%

31. DEMO…of how you should build your spread sheet for your homework

32. Disney recently (2013)

33. Disney by segment 2013

34. Attempt to allocate debt…

35. Beta’s for private companies…

36. So come up with a WACC% ?

37. Session 3: Beta assignment… Try to find a Bottom up beta for your company following the methodology in these slides Note; a sample of 9 firms per segment is enough…

38. Class Assignment Yahoo-MSFT

39. Answer Yahoo MSFT case

40. Apple iTV case

41. Answer Apple iTV case