Tag Archives: valuation

Calculate the Beta Coefficient of a stock

Beta CoefficientAs part of the Corporate Finance subject of my MBA we have to calculate the beta coefficient (aka Beta) of a company’s share price. The is applied economics and market mathematics, but it simply is a number which indicates how closely (or not) a company’s share price moves in relation to a broader market (or an index like the S&P ASX200 or the Dow Jones Industrial Average).

Anyway, part of the process is to create an excel format spreadsheet to aid with the calculation. I’ve done it and thought I share it with you. It will work with any spreadsheet program that can open .xls files

Update 1: 31 July 2009 the new version is available for testing by requesting it in a comment below. Once the testing is complete I’ll make it freely available to registered users.

Update 2: 7 July 2011 For a limited time you can get the Beta Coefficient Calculator without registering. Enter a valid email address in this form to receive a link to download the file. You’ll also get an email about new versions and bug fixes (with an opt-out link).

Update 3: 23 July 2011 If the form doesn’t work for you, please comment below and I’ll email it to you. The form is quicker but some people can’t get the download.

Enter your email address to download Beta Coefficient Calculator by Wealth Esteem

Version 0.9 beta_8
* Enabled automatic download via web form
* Added French and German to Translation tab (alpha code there)

Version 0.9 beta_7
* Fixed bug in date text description
* Updated sample data to 6 Jun 2011
* Changed sample data to BHP Billiton
* Made Instructions tab text translatable
* Cosmetic fixes

Version 0.9 beta_6
* Explained Translation tab in instructions and asked for volunteers
* Updated sample data to 2011
* Updated copyright date to 2011

Version 0.9 beta_5
* Added Change Log tab
* Moved text of index symbol & stock symbol to translation tab

Version 0.9 beta_4
* Added explanation of index and stock symbol fields on Beta Coefficient tab
* Updated copyright date to 2010

Version 0.9 beta_3
* Added email address to instructions tab

Version 0.9 beta_2
* Added logic to translate number of periods to a date range and show that range to users in Beta Coefficient tab at C11
* Swapped order of Security and Index tabs
* Fixed bug in coefficient calculation
* Introduced version numbering and control

Version 0.9 beta_1
* Updated instructions tab

Version 0.9 beta
* Initial public version

Support and feedback via the comments below.

MBA Term 2 course result

Wow I passed the Data Analysis and Statistical Modelling exam I wrote about in August. My term result was a solid Credit grade, so I didn’t do too badly given my inability to study for the exam.

One of Corporate Finance lecturers said my trade-off of limited study time for family and a new job was rational and utility-maximising 😀 Nice economist words those.

On with Corporate Finance which is mainly math. There is an optional workshop tomorrow for those who need to brush up on their high-school math skills.

Nicely the trick to this Corporate Finance course is not about the calculations. Any monkey can push buttons on a calculator or type numbers into excel. It’s knowing when and what kind of formulas apply to various similar problems when valuing a cash flow.

My inner geek is beaming again.

How to value a business startup

Richard HayesI met Richard Hayes at the Sydney OpenCoffee Meetup and he’s written an excellent article that he’s allowed me to reproduce below.

All people working in the Startup / Early Stage consistently asked the same question,
“How do you value business?”

The correct answer is there is no correct answer

Without trying to be facetious here is a number of models that may help.

Anyone wanting further information can attend Richard’s BEERonomics in a pub near you.

Courses in advance corporate finances cost you 2 beers / hour (Cheaper than a MBA)

  • Sales Revenue
    Most businesses are valued based upon revenue.
    This means a business with $1 Million revenue would be valued @ $750,000 to $1,250,000
    or values each dollar sales between $0.75 – $1.25
  • Price Earnings Ratio
    This is the number of years of after tax profit it takes to return your investment
    A typical private company sells for a PE of 2-5 where public companies sell for 8-20.
    Google sells with a PE 48Many people use EBIT, Earnings (profits) Before Interest and Tax as a measure of how much extra debt a company can take to help pay for the take over.
  • Discounted cash flow (DCF)
    This technique combines all the cash generated from the business and then discount
    (reduces) them to a present value. (IE A dollar today is worth more than a dollar tomorrow)
    This can be a problem if the wrong interest (discount) it used.
    BTW, The interest rate is ALWAYS WRONG
  • Replacement Value
    How much would it cost to get similar stuff either new or used?In software, many people use COCOMO which is a formula that count lines of code and examines the complexity of code thereby allocating a amount of developers time it would take to replicate it.slccount Is a free COCOMO tool that supports about 27 different languages.

    For many software startups this is a good starting point.

  • Return on Investment (ROI)
    This combines a number of the above techiques to derive a single figure.Many early stage investors Angels / VCs demand +45% ROI as compensation for the higher risk associated with early stage. This is a serious market failure.

Example:
A team of 3 developers have written 13K lines of PHP source code to develop a DIY superannuation management software. It has taken 6 months part time (IE 50 hour/wk)

They are all leaving their “real” jobs to pursue their dream.

Sales: Nil

User: 250

Total Cash Spent: $5,800

What is the company worth?

1. Sale Revenue Nil

Future Sales Revenue 2009 $1,000,000 (FV)
Discounted @ 40% pa $510,000

Company valuation $383,000 – $637,000

2. Price Earnings

2009 Sales $1,000,000
2009 Profit $180,000

PE 2 (180K x 2 x 40%) $183,000
PE 5 (180K x 5 x 40%) $459,000

Company valuation $183,000 – $459,000

Replacement value $413,228

The following output is from a real project

Totals grouped by language (dominant language first):
php: 13409 (99.83%)
sh: 23 (0.17%)

Total Physical Source Lines of Code (SLOC) = 13,432
Development Effort Estimate, Person-Years (Person-Months) = 3.06 (36.71)
(Basic COCOMO model, Person-Months = 2.4 * (KSLOC**1.05))
Schedule Estimate, Years (Months) = 0.82 (9.83)
(Basic COCOMO model, Months = 2.5 * (person-months**0.38))
Estimated Average Number of Developers (Effort/Schedule) = 3.73
Total Estimated Cost to Develop = $ 413,228
(average salary = $56,286/year, overhead = 2.40).

As you can see there is no right answer but valuation is much more about art than science.

© 2007 Richard Hayes RHI Ltd reprinted by permission.

Private Company Valuations

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.