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Equity Valuation: Models from Leading Investment Banks

Book Description

Equity Valuation: Models from the Leading Investment Banks is a clear and reader-friendly guide to how today's leading investment banks analyze firms. Editors Jan Viebig and Thorsten Poddig bring together expertise from UBS, Morgan Stanley, DWS Investment GmbH and Credit Suisse, providing a unique analysis of leading equity valuation models, from the very individuals who use them. Filled with real world insights, practical examples and theoretical approaches, the book will examine the strengths and weaknesses of some of the leading valuation approaches, helping readers understand how analysts:

  • estimate cash flows

  • calculate discount rates

  • adjust for accounting distortions

  • take uncertainty into consideration

Written for investment professionals, corporate managers and anyone interested in developing their understanding of this key area, Equity Valuation: Models from the Leading Investment Banks will arm readers with the latest thinking and depth of knowledge necessary to make the right decisions in their valuation methodologies.

Table of Contents

  1. Cover Page
  2. Dedication
  3. Title Page
  4. Copyright
  5. Contents
  6. Foreword
  7. Preface
  8. Acknowledgments
  9. Abbreviations
  10. Part I: Discounted Cash Flow (DCF) Models1
    1. Chapter 1: Introduction
    2. Chapter 2: The Fundamental Value of Stocks and Bonds
    3. Chapter 3: Discounted Cash Flow Models: The Main Input Factors
      1. 3.1 ANALYTICAL BALANCE SHEETS AND FREE CASH FLOW DISCOUNT MODELS
      2. 3.2 THE DIVIDEND DISCOUNT MODEL
      3. 3.3 THE FREE CASH FLOW TO THE FIRM (FCFF) MODEL
  11. Part II: Monte Carlo Free Cash Flow to the Firm (MC-FCFF) Models (Deutsche Bank/DWS)1
    1. Chapter 4: Introduction
    2. Chapter 5: Standard FCFF Model
      1. 5.1 NET REVENUES
      2. 5.2 COST STRUCTURE AND OPERATING INCOME
      3. 5.3 RECONCILING OPERATING INCOME TO FCFF
      4. 5.4 THE FINANCIAL VALUE DRIVER APPROACH
      5. 5.5 FUNDAMENTAL ENTERPRISE VALUE AND MARKET VALUE
      6. 5.6 BAIDU'S SHARE PRICE PERFORMANCE 2005–2007
    3. Chapter 6: Monte Carlo FCFF Models
      1. 6.1 MONTE CARLO SIMULATION: THE IDEA
      2. 6.2 MONTE CARLO SIMULATION WITH @RISK
      3. 6.3 DISCLAIMER
      4. References
  12. Part III: Beyond Earnings: A User's Guide to Excess Return Models and the HOLT CFROI® Framework1
    1. Chapter 7: Introduction 1
    2. Chapter 8: From Accounting to Economics – Part I
    3. Chapter 9: From Economics to Valuation – Part I
    4. Chapter 10: Where Does Accounting Go Wrong?
    5. Chapter 11: From Accounting to Economics: CFROI
      1. 11.1 THE BASICS
      2. 11.2 CFROI ADJUSTMENTS USING VODAFONE'S MARCH 2005 ANNUAL REPORT
      3. 11.3 CFROI CALCULATION FOR VODAFONE
      4. 11.4 A COMMENT ON GOODWILL
    6. Chapter 12: From Accounting to Economics: Economic Profit
      1. 12.1 THE BASICS
      2. 12.2 CAVEATS
      3. 12.3 EP ADJUSTMENTS USING VODAFONE MARCH 2005 ANNUAL REPORT
    7. Chapter 13: From Economics to Valuation – Part II
      1. 13.1 GENERAL RULES
      2. 13.2 MARKET VALUE ADDED
      3. 13.3 CFROI
      4. 13.4 A WORD ON DEBT
      5. 13.5 VALUATION
      6. 13.6 VALUATION OF VODAFONE
      7. 13.7 EP OR CFROI?
      8. 13.8 A FINAL WORD
    8. Appendix 1
    9. Appendix 2
  13. Part IV: Morgan Stanley ModelWare's Approach to Intrinsic Value: Focusing on Risk-Reward Trade-offs1
    1. Chapter 14: Introduction
    2. Chapter 15: Linking Fundamental Analysis to the Inputs of the Valuation Model
    3. Chapter 16: Our Valuation Framework
    4. Chapter 17: Linking Business Activity to Intrinsic Value: The ModelWare Profitability Tree
    5. Chapter 18: ModelWare's Intrinsic Value Approach
    6. Chapter 19: Treatment of Key Inputs
    7. Chapter 20: The Cost of Capital
      1. 20.1 RISK-FREE RATE
      2. 20.2 EQUITY RISK PREMIUM
      3. 20.3 BETA-ESTIMATION
    8. Chapter 21: Summary and Conclusions
    9. Appendix
      1. References
  14. Part V: UBS VCAM and EGQ Regression-based Valuation1
    1. Chapter 22: Introducing “EGQ” – Where Intrinsic Methods and Empirical Techniques Meet
    2. Chapter 23: A Quick Guide to DCF and Economic Profit Analysis
      1. 23.1 POWERFUL ANALYTICAL FRAMEWORKS, BUT NOT A COMPLETE SOLUTION
      2. 23.2 DYNAMICS OF ECONOMIC PROFIT ANALYSIS
      3. 23.3 “UNADULTERATED EVA”
      4. 23.4 VALUE DYNAMIC 1: ROIC
      5. 23.5 VALUE DYNAMIC 2: INVESTED CAPITAL
      6. 23.6 VALUE DYNAMIC 3: WACC
      7. 23.7 VALUE DYNAMIC 4: THE VALUE CREATION HORIZON
      8. 23.8 COMBINING ALL FOUR VALUE DYNAMICS: EGQ
    3. Chapter 24: Regression-based Valuation
    4. Chapter 25: UBS Economic Growth Quotient
      1. 25.1 THE EGQ CALCULATION
      2. 25.2 EGQ SPECIAL ATTRIBUTES
    5. Chapter 26: UBS EGQ Regression Valuation
      1. 26.1 INTRINSIC MEETS RELATIVE VALUATION
      2. 26.2 EGQ REGRESSIONS: RELATIVE VALUATION THEATER
      3. 26.3 EGQ REGRESSIONS: A LAYERED ALPHA FRAMEWORK
      4. 26.4 Y -INTERCEPT INDICATES COST OF CAPITAL
      5. 26.5 SLOPE VS. Y -INTERCEPT INDICATES STYLE
      6. 26.6 EMERGENT VALUATION
      7. 26.7 WHY REGRESS EGQ VS. EV/NOPAT?
      8. 26.8 THINK OPPOSITE WHEN UNDER THE X -AXIS
    6. Chapter 27: Understanding Regressions
      1. 27.1 KEY TAKEAWAYS
      2. 27.2 THE LINE – WHAT IS THE RELATIONSHIP?
      3. 27.3 THE EXPLANATORY POWER OR STRENGTH OF THE RELATIONSHIP
      4. 27.4 RELIABILITY OR CONFIDENCE IN THE QUANTIFIED RELATIONSHIP
      5. 27.5 REGRESSION OUTLIERS
      6. 27.6 BEWARE OF OUTLIERS IN EGQ REGRESSIONS
    7. Chapter 28: Appendix Discussions
      1. 28.1 EGQ'S MUTED SENSITIVITY TO ASSUMED WACC
      2. 28.2 EV/IC VS. ROIC/WACC REGRESSIONS
      3. 28.3 PE VS. EPS GROWTH REGRESSIONS OR PEG RATIOS
      4. 28.4 RETURN METRICS: ROIC VS. CFROI
      5. 28.5 ACCRUAL VS. CASH FLOW RETURN MEASURES
      6. 28.6 ROIC VS. CFROI
      7. 28.7 ADJUSTING INVESTED CAPITAL IMPORTANT, BUT NOT FOR EGQ
      8. References
  15. Part VI: Leverage Buyout (LBO) Models1
    1. Chapter 29: Introduction
    2. Chapter 30: Leveraged Buyouts
    3. Chapter 31: IRRs and the Structure of LBO Models
    4. Chapter 32: Assumptions of LBO Models
    5. Chapter 33: Example: Continental AG
      1. 33.1 BACKGROUND
      2. 33.2 LBO MODELING APPROACH – APPROPRIATE LEVEL OF DETAIL
      3. 33.3 KEY LBO PARAMETERS
      4. 33.4 STEP-BY-STEP WALK THROUGH THE MODEL
    6. Chapter 34: A Word of Caution
      1. References
  16. Part VII: Valuation 101: Approaches and Alternatives
    1. Chapter 35: Introduction
    2. Chapter 36: Overview of Valuation
    3. Chapter 37: Discounted Cash Flow Valuation
      1. 37.1 ESSENCE OF DISCOUNTED CASHFLOW VALUATION
      2. 37.2 DISCOUNT RATE ADJUSTMENT MODELS
      3. 37.3 CERTAINTY EQUIVALENT MODELS
      4. 37.4 EXCESS RETURN MODELS
      5. 37.5 ADJUSTED PRESENT VALUE MODELS
      6. 37.6 VALUE ENHANCEMENT IN THE DCF WORLD
    4. Chapter 38: Liquidation and Accounting Valuation
      1. 38.1 BOOK VALUE-BASED VALUATION
      2. 38.2 LIQUIDATION VALUATION
      3. 38.3 VALUE ENHANCEMENT IN THE ACCOUNTING WORLD
    5. Chapter 39: Relative Valuation
      1. 39.1 STEPS IN RELATIVE VALUATION
      2. 39.2 BASIS FOR APPROACH
      3. 39.3 STANDARDIZED VALUES AND MULTIPLES
      4. 39.4 DETERMINANTS OF MULTIPLES
      5. 39.5 COMPARABLE FIRMS
      6. 39.6 CONTROLLING FOR DIFFERENCES ACROSS FIRMS
      7. 39.7 VALUE ENHANCEMENT IN THE RELATIVE VALUATION WORLD
    6. Chapter 40: Real Option Valuation
      1. 40.1 BASIS FOR APPROACH
      2. 40.2 THE ESSENCE OF REAL OPTIONS
      3. 40.3 EXAMPLES OF REAL OPTIONS
      4. 40.4 VALUE ENHANCEMENT IN THE REAL OPTIONS WORLD
    7. Chapter 41: Closing Thoughts on Value Enhancement
      1. References
  17. Part VIII: Final Thoughts on Valuation1
    1. Chapter 42: Introduction
    2. Chapter 43: Valuation in Theory: The Valuation of a Single Asset
      1. 43.1 CERTAIN CASH FLOWS
      2. 43.2 UNCERTAIN CASH FLOWS
      3. 43.3 RISK PREMIA
      4. 43.4 CERTAINTY EQUIVALENTS AND UTILITY-BASED VALUATION
      5. 43.5 RISK NEUTRAL PROBABILITIES
    3. Chapter 44: Outlook: The Multi-asset Valuation and Allocation Case
    4. Chapter 45: Summary
      1. References
  18. Index