Aswath Damodaran Session 7: Cost of Debt and Accounting Earnings

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Published on Sep 28, 2016

In this class, we started with computing costs of debt for companies without the usual crutches (traded bonds and ratings) and talked about synthetic ratings and default spreads. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis:

We then moved on to getting the base year's earnings right and explored several issues:

1. To get updated numbers, you should be using either trailing 12 month numbers or complete the current year with forecasted numbers. In either case, your objective should be to get the most updated numbers you can for each input rather than be consistent about timing.

2. To clean up earnings, you have to correct accounting two biggest problems: the treatment of operating leases as operating (instead of financial) expenses and the categorization of R&D as operating (instead of capital) expenses. The biggest reason for making these corrections is to get a better sense of how much capital has been invested in the business and how much return this capital is generating.

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