Saturday, January 4, 2025 12:20 PM
FM2 Page 1
FM2 Page 2
FM2 Page 3
FM2 Page 4
Thursday, January 23, 2025 12:17 PM
FM2 Page 5
FM2 Page 6
FM2 Page 7
FM2 Page 8
FM2 Page 9
Saturday, January 25, 2025 10:38 AM
FM2 Page 10
FM2 Page 11
FM2 Page 12
Saturday, February 1, 2025 10:34 AM
FM2 Page 13
FM2 Page 14
FM2 Page 15
FM2 Page 16
FM2 Page 17
Wednesday, January 29, 2025 4:35 PM
FM2 Page 18
FM2 Page 19
FM2 Page 20
FM2 Page 21
FM2 Page 22
FM2 Page 23
FM2 Page 24
Wednesday, February 5, 2025 4:32 PM
FM2 Page 25
FM2 Page 26
FM2 Page 27
Thursday, February 6, 2025 12:16 PM
FM2 Page 28
FM2 Page 29
FM2 Page 30
Saturday, February 8, 2025 10:35 AM
FM2 Page 31
FM2 Page 32
FM2 Page 33
FM2 Page 34
FM2 Page 35
Wednesday, February 12, 2025 4:33 PM
FM2 Page 36
FM2 Page 37
FM2 Page 38
FM2 Page 39
Saturday, February 15, 2025 10:40 AM
FM2 Page 40
FM2 Page 41
FM2 Page 42
Wednesday, February 19, 2025 4:34 PM
FM2 Page 43
FM2 Page 44
Friday, February 21, 2025 2:46 PM
FM2 Page 45
FM2 Page 46
Session 13 - 26/02/2025
Wednesday, February 26, 2025 4:33 PM
Leveraged Buyouts (LBO)
A company acquired by PE firm using a small portion of equity and relatively large portion of
outside debt financing
Attributes:
• Buyout
• Time Horizon
• High outside debt
• Debt serviced by target firm's cash flow
If these 4 are met, we can say that the firm is purely leverage buyout.
Example:
Tata Motors:
Current Price - 662
Market Cap - 243547 -----> min this much to buy this firm
You might then have to buy the debt also. With approx calue
Equity ---> 243000 x 1.2 (in our calculations we'll take 20% so x1.2)
Debt ----> 100000
(Investments etc ----> 62000)
Purchase Price = 243000 x 1.2 + 100000 + 62000
= approx 333000
Say.
EBIT = 100
Max debt you can raise = 100
Say avg int rate = 10%
FM2 Page 47
Calculation:
E*1.2 + D(borrowings) - Cash - Investments = EV
EV = enterprise value --- would be the purchase price
EBIT should cover Interest payments
CASE: Elon Musk's Twitter Deal
Not an LBO
3 channels we can make money in a LBO
1. Leverage Channel - Cash availability, int, pay down debt
2. Operational Channel (MAIN) - improve ops efficiency
3. Valuation Channel
FM2 Page 48
Everything is given in Exhibits, just need to calculate this
FM2 Page 49
Session 14 - 05/03/2025
Wednesday, March 5, 2025 4:33 PM
Project Finance
Why is Equity-only project finance rare?
Equity is scare compared to debt?
- Equity has higher cost, debt is cheaper and more efficient
- Debt - tax shield
Equity - Perpetual, fixed payments
IndiGo - Income Statement
Effect of Leverage - Excel
Any cost which is fixed in nature will increase the risk - effect of leverage
DETERMINANTS OF MARKET RISK
- Nature of Product/Services
- Operating Risk
- Financial Risk
There's also:
- Labour Risk
- Behavioural leverage
Still being researched though ^
Actual Risk is Revenue -- OL and FL are like amplifier that work on the base line of the revenue risk
FM2 Page 50
Actual Risk is Revenue -- OL and FL are like amplifier that work on the base line of the revenue risk
Understand the following diagram:
Difference:
Project Finance and Corporate Finance
Corporate loan is lent against:
- Balance sheet
- Past cash flow and profit record
- Perpetual life
PROJECT FINANCE: Is a way to distribute risks and returns more efficiently
Instead of quiz -- we'll now have 2 assignments:
Assignment question:
Modigliani-Miller capital structure irrelevance theory and
relevance of capital structure in leveraged buyouts, project finance, and venture capital ---> Write a 2 page memorandum
Value Creation by Project Finance
1. Agency Cost Motivation - like LBOs, it resolves governance issues
2. Debt Overhang Motivation
Difference:
Project Finance vs Venture Finance
FM2 Page 51
Project Finance vs Venture Finance
In Venture Finance - we require control over the manager
Project Finance - no real control required, easier to monitor
ICR vs DSCR - slides
FM2 Page 52
Session - 07/03/2025
Friday, March 7, 2025 2:52 PM
DIVIDENDS
Dividend payout ratio = annual dividends per share/EPS
Dividend yield = annual dividends per shares/Price per share
Expected return on stock = Dividend Yield + Price Appreciation
We can also look at :
- Dividend per share
- Change in Dividend
- Dividend/Share
Why do firms pay dividends though?
Disappearing and Reappearing Dividends?
Dividends have been reducing. Why!!!???
How much dividend should be paid?
If NPV>0 - excess cash -- returning money to stockholders is GOOD
Should govt make dividend mandatory?
BUFFET's $1 Test
If you give $1 to stockholders, then the company value should also increase by at least $1 - something like this.
Should loss making firms pay dividends?
CASE: DIVIDEND POLICY - Four Decisions
4 distinct approaches to dividend policy:
• Berkshire Hathaway: No Dividends, Focus on Share Repurchases
• Led by Warren Buffett, Berkshire Hathaway has historically refrained from paying dividends. Instead, the
company opts for share repurchases when its stock is undervalued, effectively returning capital to
shareholders without regular dividend payouts.
thecasesolutions.com
• Microsoft: Transition from No Dividends to Regular Payouts
• Initially, Microsoft did not distribute dividends, focusing on reinvesting earnings into growth opportunities.
As the company matured and growth stabilized, it initiated regular dividend payments to shareholders,
reflecting a shift in its capital allocation strategy.
thecasesolutions.com
• Exxon Mobil: Consistent Dividend Payments
• Exxon Mobil has maintained a policy of consistent dividend payments, emphasizing dividend stability and
reliability. This approach caters to investors seeking regular income and reflects the company's commitment
FM2 Page 53
reliability. This approach caters to investors seeking regular income and reflects the company's commitment
to returning profits to shareholders.
thecasesolutions.com
• Wynn Resorts: Variable Dividends Based on Performance
• Wynn Resorts employs a flexible dividend policy, adjusting dividend payouts based on the company's
financial performance and prevailing economic conditions. This approach allows the company to align
dividend distributions with its earnings volatility and operational results
Bhai pata nahi Screener khol ke kuch toh bata rahe hain ://
Example of Indian Hotels:
They keep giving regular payouts (even when making loss - negative dividend payout %), and they've been reducing
debt and getting new equity (equity not from profits, it's new equity)
TATA Motors:
Research Findings
Agency Problems
Information Asymmetric
Female Directors
CEO Overconfidence
Single CEOs
FM2 Page 54
Wednesday, March 12, 2025 12:20 PM
FM2 Page 55
FM2 Page 56
FM2 Page 57
Thursday, March 13, 2025 2:51 PM
FM2 Page 58
Session 19 - 19/03/2025
Wednesday, March 19, 2025 2:48 PM
SIZE:
FM2 Page 59
So these factors indicate that small firms are generally more risky?
VALUE:
FM2 Page 60
Margin of Safety:
(Some book chapter 20 - Benjamin)
His argument is that we need to have (while buying bonds):
EBIT / I = 5
I= investment value
This is to ensure your own level of safety while making investments.
- Something to conclude that buying a cheaper stock/bond makes sense sometimes (Value buying)
- Compares Coal India (value) with Zomato (expensive)
Proxies of Value/Growth
P/E ---> For every rupee of earning, how much market is ready is pay
Ideal P/E? (Maybe depends on the industry - whether growth or value)
E/P (Inverse of P/E) - Earning Rate !?
FM2 Page 61
E/P (Inverse of P/E) - Earning Rate !?
Basically a lot of evidence for "VALUE STOCK" being good (Screener pe Coal India dikha diya)
MOMENTUM
Opposite of Value Stock ---> Glamour Stock
Randomly this came up: 4 factor Model 2 uses - 1) Calculate Cost of Capital 2) Performance measurement
(Like CAPM - 2 uses 1) Cost of Equity 2) Alpha
BACK TO MOMENTUM
Basic Idea:
Winner will continue to be winner
Loser will continue to lose
A stock will keep performing well if it performed well last year
FM2 Page 62
A stock will keep performing well if it performed well last year
BUT: (Reversal) ---- LONG TERM
If 1 stock performing well 3-5 years. And 2nd stock underperforming for 3-5 years ---> then chances get reversed
There's also INTERMEDIATE (6-12 months) - continue to perform similarly
Measure:
Nifty Alpha 50
Nifty 500 Momentum 50
A lot of evidence for Momentum - US mein some 200 years tak studied
Proxies of Momentum:
Closer to 52 week high (All time high in a year)
Frequent Gradual Changes (frog in the pan) (Idea is of Reversal actually)
Timing of 52Week high
Moving Avg Distance (MAD)
Relative Strength Indicator (RSI)
4 FACTOR MODEL
Small minus Big (SMB) --- S - B
Winner minus Loser (WML) -- W - L
High minus Low (HML) -- H - L
Betting against Beta
What's the central idea of CAPM?
--- If you want higher return, invest in higher Beta stocks
In India - CAPM line is actually convex
Why though?
BAB Factor ---> Betting Against Beta
Basically means buying stocks of companies with low Beta
Quality Minus Junk -- very nice paper
FM2 Page 63
Quality Minus Junk -- very nice paper
PV = Eo * DPR (1+g) / r - g
SUMMARY OF MODELS
FM2 Page 64
SESSION #20 - 21/03/2024
Friday, March 21, 2025 2:51 PM
EFFICIENT MARKET HYPOTHESIS (EMH)
Fama Fench Three Factor Model
Size Factor -- Small Minus Big (SMB)
Value Factor - HML - High Minus Low
Carhart 4 Factor Model:
He added another factor "Momentum"
Momentum Factor - UMD (Up Minus Down)
What is the use of these multi factor model?
1. Cost of Capital
2. Performance
Which model should be used for COST OF CAPITAL: CAPM, Fama Fench 3 factor or Carhart 4 Factor?
Fama Fench 3 factor >>> Better than CAPM
But 3 or 4? Should Momentum be included?
- Momentum is highly controversial
So it shouldn’t be included!? (I guess)
So Momentum SHOULD be included when testing "FUND PERFORMANCE"
But SHOULD NOT be included for "COST OF CAPITAL"
Warren Buffet ka portfolio - some discussion
PERFORMANCE OF INDIAN QUANT FUND - Paper
Used Fama Fench 5F + Momentum
Findings - alpha comes out to be zero (0)
EMH Appreciation Class - kuch toh yaar. Sahi cheez hai
FM2 Page 65
Good site for factors :
https://jkpfactors.com/
CAN WE EXPLAIN BOOM AND BUSTS?
1. Behavioural Explanation
The Triune Model of Brain
Neomammalian, Paleomammalian, Reptilian (Survival) ---> Reptilian Brain is the Best
Fear or Panic --> Reptilian Brain activates (Survival instinct)
Investments also we do based on this only
COURSE OVER!
End Term Discussion
1 hour (or 75 minutes)
FM2 Page 66
End Term Discussion
1 hour (or 75 minutes)
MCQ
No Negative Marking
End Term Readings - Doc he will send
With page numbers the topics are given
Some questions are also given
FM2 Page 67
