About the Authors
Preface
Brief Contents
Contents
Chapter 1: Introduction to Valuation
1.1 What Do We Mean By “The Value of a Company”?
1.2 The Economic Balance Sheet: Resources Equal Claims on Resources
1.4 Measuring the Value of the Firm
1.5 Measuring the Value of the Firm’s Equity
1.6 Real Options in Valuation
1.7 How Managers and Investors use Valuation Models
1.8 An Overview of the Valuation Process
Additional Reading and References
Solutions for Review Exercises
Chapter 2: Financial Statement Analysis
2.1 Sources of Information
2.2 How We Use Financial Ratios in Valuation
2.3 Identifying a Company’s Industry and Its Comparable Companies
2.4 The Gap, Inc.-An Illustration of the Calculation and Analysis of Financial Ratios
2.5 Measuring a Company’s Performance Using Accounting Rates of Return
2.6 Disaggregating the Return on Assets
2.7 Measuring a Company’s Cost Structure Using Expense Ratios
2.8 Analyzing a Company’s Asset Utilization Using Turnover Ratios
2.9 Summary of Disaggregating The Gap, Inc.’s Rates of Return
2.10 Analyzing A Company’s Working Capital Management
2.11 Analyzing A Company’s Fixed Asset Structure And Capital Expenditures
2.12 Other Types Of Financial Statement Relations-Growth, Trends, Per Share, Per Employee
2.13 Analyzing A Company’s Financial Leverage And Financial Risk
2.14 Disaggregating The Return On (Common) Equity
2.15 Assessing Competitive Advantage
2.16 Implementation And Measurement Issues
Additional Reading and References
Solutions for Review Exercises
Chapter 3: Measuring Free Cash Flows
3.1 Introduction To Measuring Free Cash Flows
3.2 The Bob Adams Company Example
3.3 Cash Flow Statement Basics
3.4 The Relationships Between The Free Cash Flow Schedule And The Cash Flow Statement
3.5 Differences Between Book And Tax Accounting And The Effect On Income Tax Rates
3.6 Understanding And Analyzing Income Tax Disclosures
3.7 Effects Of Interest Deduction Limitations And Net Operating Loss Carryforwards
Additional Reading and References
Solutions for Review Exercises
Chapter 4: Creating a Financial Model
4.1 An Overview of the Process of Creating a Financial Mode
4.2 Forecasting Starbucks Corporation (Starbucks)
4.3 Selecting and Forecasting the Forecast Drivers for the Company’s Operations (Steps 2 and 3)
4.4 Creating a Financial Model for the Company’s Operations (Step 4)
4.5 Stress Testing the Model and Assessing the Reasonableness of the Forecasts (Steps 5 and 6)
4.6 Incorporating the Company’s Capital Structure Strategy
4.7 Sensitivity and Scenario Analyses and Simulations
4.8 Forecasting Required Cash and Valuing Excess Cash
4.9 Forecasting Income Tax Rates and Payments
4.10 More Detailed Forecasts of Revenues and Capital Expenditures
Additional Reading and References
Solutions for Review Exercises
Chapter 5: The Adjusted Present Value and Weighted Average Cost of Capital Discounted Cash Flow Value
5.1 creating Value from Financing
5.2 The Adjusted Present Value and Weighted Average Cost of Capital Valuation Models
5.3 The Andy Alper Company
5.4 The Discounted Equity Free Cash Flow Valuation Method
5.5 The Discounted Dividend Valuation Model
5.6 Useful Valuation Concepts to Keep in Mind
5.7 Comprehensive Example-Dennis Keller, INC.
Additional Reading and References
Solutions for Review Exercises
Chapter 6: Measuring Continuing Value Using the Constant-Growth Perpetuity Model
6.1 The Constant-Growth Perpetuity Model
6.2 Estimating The Long-Term Growth Rate For The Constant-Growth Perpetuity Model
6.3 Estimating The Base-Year Year Free Cash Flow
6.4 Real Growth And Value Creation In The Constant-Growth Perpetuity Model
6.5 Assessing The Reasonableness Of The Continuing Value Estimate
Additional Reading and References
Solutions for Review Exercises
Chapter 7: The Excess Earnings (Residual Income) Valuation Method
7.1 The Excess Cash Flow Valuation Framework
7.2 The Excess Earnings Valuation Framework
7.3 The Weighted Average Cost of Capital Form of the Model
7.4 The Adjusted Present Value Form of the Model
7.5 The Equity Discounted Excess Earnings Model
7.6 Possible Information Advantages of the Excess Earnings Valuation Method
Additional Reading and References
Solutions for Review Exercises
Chapter 8: Estimating the Equity Cost of Capital
8.1 The Capital Asset Pricing Model
8.2 An Overview on Estimating the Equity Cost of Capital Using the Capital Asset Pricing Model
8.4 Adjusting Estimated Betas for Changes in Risk (Non-Stationary Betas)
8.5 Estimating the Market Risk Premium
8.6 Estimating the Risk-Free Rate of Return to Use in the Capm
8.7 Putting the Pieces Together
8.8 Adjusting the Capital Asset Pricing Model for Market Capitalization
8.11 Implied Cost of Capital Estimates
Additional Reading and References
Solutions for Review Exercises
Chapter 9: Measuring the Cost of Capital for Debt and Preferred Securities
9.1 Types of Non-Common-Equity Securities
9.2 Credit Ratings, Recovery Rates, Default Rates, and Yield to Maturity Versus the Cost of Debt
9.3 Measuring The Debt and Preferred Stock Costs of Capital
9.5 Bankruptcy Prediction and Financial Distress Models
Additional Reading and References
Appendix: An Overview of the Black-Scholes and Merton Option Pricing Models
Solutions for Review Exercises
Chapter 10: Levering and Unlevering the Cost of Capital and Beta
10.1 An Overview of the Unlevering and Levering Process
10.2 Selecting the Discount Rate and Measuring the Value of Interest Tax Shields
10.3 Levering the Unlevered Cost of Capital
10.4 Levering the Unlevered (Asset) Beta from the Capital Asset Pricing Model
10.5 Unlevering the Equity Cost of Capital and Equity Beta
10.6 Using Comparable Companies to Estimate Betas
10.7 Limitations of the Levering and Unlevering Formulas
Additional Reading and References
Solutions for Review Exercises
Chapter 11: Measuring the Weighted Average Cost of Capital and Related Valuation Issues
11.1 The Weighted Average Cost of Capital-Overview
11.2 Measuring Target Capital Structures and the Income Tax Rate for Interest Tax Shields
11.3 The Effects of Treating Liabilities as Debt Versus Operating Liabilities
11.4 Converting Operating Leases to Finance (or Capital) Leases
11.5 Valuing a Company with Interest and Net Operating Loss Carryforwards
11.6 Other Factors that Affect the Value Created from Debt Financing
Additional Reading and References
Appendix: Financial Statement and Free Cash Flow Effects of Leases
Solutions for Review Exercises
Chapter 12: The Effects of Stock-Based Compensation and Other Equity-Linked Securities on Discounted
12.1 Adjusting Discounted Cash Flow Valuations for the Expected Issuance of Future Stock-Based Comp
12.2 Adjusting a Discounted Cash Flow Valuation for Previously Issued and Outstanding Equity-Linked
12.3 Valuing Warrants, Employee Stock Options, and Other Option-Based Equity-Linked Securities
12.4 Measuring the Cost of Capital for Option-Based Equity-Linked Securities
Additional Reading and References
Solutions for Review Exercises
Chapter 13: Introduction to Market Multiple Valuation Methods
13.1 The Market Multiple Valuation Process
13.2 Commonly Used Market Multiples
13.3 Risk and Growth Value Determinants of Market Multiples
13.4 Additional Factors to Consider When Assessing Comparability
13.5 The Process for Identifying Comparable Companies
13.6 Transitory Shocks and Market Multiples
13.7 Analyzing and Measuring Continuing Value Multiples
Additional Reading and References
Solutions for Review Exercises
Chapter 14: Market Multiple Measurement and Implementation
14.1 First Principles for Measuring Market Multiples
14.2 Initial Financial Statement Review
14.3 Measuring Market Multiple “Numerators”
14.4 Basics of Measuring Market Multiple “Denominators”
14.5 Adjusting Market Multiple Inputs for Non-Recurring Items
14.6 Adjusting Market Multiple Inputs for Partially Owned Companies
14.7 Adjusting Market Multiple Inputs for Corporate Transactions
14.8 Comparison of Merck’s Market Multiples Based on Reported and Adjusted Inputs
14.9 Adjusting Market Multiple Inputs for Leases and Discontinued Operations
14.10 Selecting Among Alternative Market Multiples and Establishing a Range
Additional Reading and References
Solutions for Review Exercises
Chapter 15: Leveraged Buyout Transactions
15.1 Leveraged Buyout Activity, Deal Characteristics, and the Role of the Financial Sponsor
15.2 Potential Motivations, Economic Forces, and Economic Research
15.3 Steps in Assessing the Investment Value of Leveraged Buyout Transactions
15.4 The John Edwardson & Company Leveraged Buyout Transaction
15.5 Using Discounted Cash Flow Valuation Models to Evaluate LBO Transactions (Steps 9 and 10)
Additional Reading and References
Solutions for Review Exercises
Chapter 16: Mergers and Acquisitions
16.1 What Do We Know About Merger and Acquisition Transactions?
16.2 What Motivates Mergers and Acquisitions, and Do They Create Value?
16.3 Deal Structure, Income Taxes, and Other Contract Provisions
16.5 Overview Of How To Value Merger and Acquisition Transactions
16.6 Is the Merger and Acquisition Transaction Accretive or Dilutive?
16.7 Cash-Based Transactions-Negotiation Ranges and Allocation of Gains
16.8 Stock-Based Transactions-Negotiation Ranges and Allocation of Gains
16.9 The Xerox Corporation and Affiliated Computer Services, Inc. Merger
Additional Reading and References
Solutions for Review Exercises
Chapter 17: Valuing Businesses Across Borders
17.1 How Cross-Border Valuations Are Different
17.2 Exchange Rate Basics
17.3 Exchange Rate Theories and Forecasting Methods
17.4 Overview Of Potential Income and Other Tax Issues in a Cross-Border Setting
17.5 Measuring the Equity Cost of Capital
17.6 Cross-Border Valuation in Less Developed or Troubled Economies or Emerging Markets
17.7 Challenges Using Market and Transactions Multiples Across Borders
17.8 Exchange Rate Exposure and Hedging Basics
Additional Reading and References
Solutions for Review Exercises
Index
