Session 12: More Loose Ends in Valuation

In this session, we put the last loose ends to rest. First, we completed the discussion of cross holdings and why they are so difficult to deal with in valuation. Second, well looked at complex businesses and how to incorporate our concerns into value. Then, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:

[iAmLavri]

Professor, being a contrarian I bought Carnival at $8.31 (average price). I got really lucky. However I calculated the intrinsic value and I had about 75% of margin of safety. I was not so sophisticated in my approach as you are though. I learned a lot of things by watching your videos. I can't pay you enough but I would like to pay you by sponsoring a high-school student from India for a year. :)

[MotivationInvest]

When this video was recorded, I invested into Shell, Southwest (made some decent returns 60-80%) Great Minds Must think alike. 😉👍

[abhi]

Sir Please make a video on:- How to verify & detect fraud done by related party transactions, and prevent ourselves in investing in those companies.

[Михаил-дхз]

I feel like the notion of complexity is a cop-out. In and of itself, "complexity" is a measure of OUR inability to process/understand information. If I don't understand options, as most people don't, does not mean that there are options at huge discounts just waiting for me to buy. The market is definitely punishing complex companies for SOMETHING, and it is definitely correlated to measures of complexity, but I feel like one has to break down in each individual case as to what is causing the discount. For example, "complex" companies may be worse run than simple ones; they may require a larger corpus of management staff (with all the costs associated), etc. Basically, the Prof. just piled everything he might not like about a company into that composite score, which is in a sense a multifactor model for picking "shorts"...

[sajidsha]

Most of the listed companies have cross holdings. But most are 100%subsidiaries