Capital Structure (updated for January 2018)

Every business is faced with the question of whether to become bigger or build a better business model (delivering more in profits) and in this session, I start by looking at the factors that make that choice different for different businesses. I look at the conditions that make scaling up easier at some business than others, and the ingredients that go into a better business model. I also model out how founder characteristics (control versus ambition, longevity versus growth) and investor preference play into the scale vs profitability choice. In particular, I look at venture capital, the first stop for many ambitious business, and how the VC game (more pricing than value, top-heavy in terms of returns, lots of failures) can tilt businesses to prioritizing scaling over business models. I also look at two developments - a gray market, where private businesses can access increasing amounts of public equity, before they go public, and a public equity market, where momentum has stayed strong but reversals have weakened, and how those developments are also putting scaling ahead of business-building. Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/ScalevsProfits.pdfBlog Post: https://aswathdamodaran.blogspot.com/2026/09/the-scaling-and-profitability-trade-off.html Learn more about your ad choices. Visit megaphone.fm/adchoices

In this session, we continued on the question of how best to value a company by first looking at the four key components of value - cash flows from existing investments, growth in the future, discount rates and the terminal value. With cash flows, we noted the contrast between cash flows to equity and cash flows to the firm, with the former being after debt payments and the latter before. With discount rates, we argued that the same discount rates that we computed for investment hurdle rates can be used in valuation, with the caveat that these discount rates will change over time, as a company changes. While you can adjust betas, costs of debt and debt ratios, a simpler way to target a cost of capital in stable growth is to look at the median cost of capital for companies. The median cost of capital for a global company now is about 7.5%, in US dollar terms. With growth, the key is recognition that growth comes from what companies do in terms on how much they reinvest and how well, rather than from outside sources. Finally, for terminal value, I argued that the growth rate in perpetuity has to be less than or equal to the risk free rate.Slides: https://www.stern.nyu.edu/~adamodar/podcasts/cfspr22/session25slides.pdfPost class test: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session25test.pdfPost class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session25soln.pdf Learn more about your ad choices. Visit megaphone.fm/adchoices

The end game for every successful business, if you are an investor, is the harvest phase, where you collect cash flows from it. That is the role of dividends in corporate finance, but done right, it should be a residual cash flow that grows as a company ages. In practice, at many companies dividend policy is set on auto-pilot, driven by inertia (past dividends) and me-too-isms (what the rest of the sector is paying). I chronicle the shift from dividends to buybacks not just in the US, but globally, and report on dividends and buybacks across regions and sectors.Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/blog/dataupdate9for2018.pdfBlog Post: https://aswathdamodaran.blogspot.com/2018/02/january-2018-data-update-9-dividends.htmlData Links:1. Dividends, Buybacks and Cash Balances, by Country: http://www.stern.nyu.edu/~adamodar/pc/blog/CountryDividends2018.xlsx2. Dividends, Buybacks and Cash Balances, by Sector: http://www.stern.nyu.edu/~adamodar/pc/blog/SectorDividends2018.xlsx Learn more about your ad choices. Visit megaphone.fm/adchoices

The models that we use to estimate cost of equity and capital in finance are built for publicly traded company, with diversified marginal investors and observable market values for equity and debt. With private businesses, owners/potential buyers tend not to be diversified and there are no observable market values for equity and debt. In this session, I talk about how to overcome those challenges:Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/blog/TotalBetaInPractice.pdfTotal Beta dataset: http://www.stern.nyu.edu/~adamodar/pc/datasets/totalbeta.xls Learn more about your ad choices. Visit megaphone.fm/adchoices

In this class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don’t).Slides: https://www.stern.nyu.edu/~adamodar/podcasts/valUGspr22/session27slides.pdfPost class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session27Atest.pdfPost class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session27Asoln.pdf Learn more about your ad choices. Visit megaphone.fm/adchoices

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In this spreadsheet, I compute the cost of capital and firm value, at different debt ratios, with the intent of finding the optimal mix. It reflects the changes and constraints on debt in the 2017 tax reform act.Spreadsheet: http://www.stern.nyu.edu/~adamodar/pc/capstru2018.xlsx Learn more about your ad choices. Visit megaphone.fm/adchoices

In this session, I use the findings from project analyses to review the entire class, from corporate governance to valuation. I close by going back to the big picture of corporate finance, presented in the first session, and check on whether the objectives of the class have been accomplished.Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/ProjSumm22.pdfSummary of project findings: https://www.stern.nyu.edu/~adamodar/pc/cfanalysis/cfspr22.xlsx Learn more about your ad choices. Visit megaphone.fm/adchoices

In this session, I first look at the profitability of publicly traded companies around the world, using a range of profit margins. I thin look at the returns that companies generate on their existing investments, using accounting returns, and compare them to the cost of capital with a singular question. Do companies generally earn more, about equal to or less than their cost of capital? I find that not only do 60% of all companies earn less than their cost of capital, the problem cuts across companies in different geographies, size classes and growth classes. Put simply, growth in most companies is a value destroyer.Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/blog/dataupdate7for2018.pdfBlog Post: https://aswathdamodaran.blogspot.in/2018/01/january-2016-data-update-7-growth-and.htmlSpreadsheet: http://www.stern.nyu.edu/~adamodar/pc/returncalculator.xlsDatasets:1. Profit Margins, by sector (US): http://www.stern.nyu.edu/~adamodar/pc/datasets/margin.xls2. Profit Margins, by sector (Global): http://www.stern.nyu.edu/~adamodar/pc/datasets/marginGlobal.xls3. Excess Returns, by sector (US): http://www.stern.nyu.edu/~adamodar/pc/datasets/EVA.xls4. Excess Returns, by sector (Global): http://www.stern.nyu.edu/~adamodar/pc/datasets/EVAGlobal.xlsPaperReturn on Capital, Return on Invested Capital and ROE: Measures and Implications (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105499) Learn more about your ad choices. Visit megaphone.fm/adchoices