Correct benchmark for beta
I'm a buy-side equity analyst at a European bank that has an equity portfolio of only euro zone stocks. In my valuation models, namely discounted cash flows, to arrive the WACC of a specific stock I use the Beta of the stock versus a European benchmark (I use Dow Jones Eurostoxx 50 index) with daily... I'm a buy-side equity analyst at a European bank that has an equity portfolio of only euro zone stocks. In my valuation models, namely discounted cash flows, to arrive the WACC of a specific stock I use the Beta of the stock versus a European benchmark (I use Dow Jones Eurostoxx 50 index) with daily data for one year. But usually I see that on valuation it is used the national benchmark (in sell-side research), so my question is should I use a national benchmark for valuation of, for example, a Dutch company or use the benchmark of my portfolio?

Note: for the USA I think that the S&P 500 is the correct index to arrive the value of Beta but for Europe it's trickier. For instance, if I'm valuating a Portuguese company (my home country) if I use the national benchmark (PSI-20 Index) for the major capitalization stocks the Beta will be close to 1 (because the top 5 weights represent almost 65% of the index) and for a European benchmark they will be very different, so the impact on valuation is relevant.
Which approach do you consider the best? Read More

RE: Finance 101: DDM?
Hello! I've two questions regarding this module. 1) In the Disney example, what decide finally of whether or not to invest is to see does IRR beat the project-specific WACC. My question is: will it be possibe that IRR and NPV do not agree in the decision of investment, coz I recall from Corpora... Hello!

I've two questions regarding this module.
1) In the Disney example, what decide finally of whether or not to invest is to see does IRR beat the project-specific WACC. My question is: will it be possibe that IRR and NPV do not agree in the decision of investment, coz I recall from Corporate Finance class that the importance of NPV was greatly emphasized, and that the teacher concluded that NPV is king!

2) About firm-specific risk--From CAPM, we can get the risk of single stock after diversification. I'm still not clear about the diversifiable firm-specific risk. Can you give me an example of the risk that can be diversified away, and can it be measured by any formula?

Many thanks!
Cecilia Read More

RE: Merger Modeling Basics: Questions on Merger model
Firstly, Thank you for your answers. A few more points on that: (4a). I still don't understand it. It seems to me that the table is the way you physically pay the target (as you also highlighted in the M&A Deal Structuring courses - in which you ask to write below the header "physical currenc... Firstly, Thank you for your answers. A few more points on that:

(4a). I still don't understand it. It seems to me that the table is the way you physically pay the target (as you also highlighted in the M&A Deal Structuring courses - in which you ask to write below the header "physical currency" in that slide). And I believe it is not the same thing as you pointed out above (issuing shares directly to the target means that they will bear the risks of ups and downs on the acquirer's stock price/and business, whereas if you raise equity in the markets and then pay the target S/H with these proceeds, it's another story). So, did you understand my doubt? I'm still not sure if we should consider the physically payment or the funding when modeling it. Could you help me to figure it out?

(4b). Also, if you're saying in #4 that "you issue stock directly to the s/h", so how you refinance your debt w/ physical stock (as your answer above suggests, that table shows the shares issued to target) ando so, how is that used to refinance/retire the target's debt? Did you get my point now? So that part in stock is or is not assumed to be equity raised in the markets?

Thanks again. Read More

CAPM alpha risk
Should we include alpha risk in calculating CAPM? If, yes, what should be included?

Complex Trading: Quick cost of debt question
Hi,

This might be a dumb question but I just need to be clarified:

I know that the risk free rate for equity is 10yr Treasury bill. But the cost of debt (before tax) the yield to maturity of what instrument? Is this always the case or when do we use a different instrument?

Thanks