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Equity Valuation, Risk, and Investment: A Practitioner's Roadmap

Book Description

Author Peter Stimes's analysis of the investment process has long been inspired by some of the best minds in the world of finance, yet some of the ways in which he approaches this discipline are truly unique. In Equity Valuation, Risk, and Investment, Stimes shares his extensive expertise with you and reveals how practitioners can integrate and apply both the theory and quantitative analysis found in finance to the day-to-day decisions they must make with regard to important investment issues.

Table of Contents

  1. Cover
  2. Contents
  3. Title
  4. Copyright
  5. Dedication
  6. Foreword
  7. Preface
  8. About the Author
  9. Chapter 1: Introduction
    1. Theoretical Precision or Theoretical Resilience?
    2. Practical Difficulties as Well
    3. Overview of Our Analysis
    4. A Quick and Important Note on Mathematical Notation
  10. Chapter 2: Inflation-Protected Bonds as a Valuation Template
    1. Formulas behind the Intuition
    2. TIPS versus Traditional Fixed-Rate Bonds: Measuring the Differences
    3. A Peek Ahead
  11. Chapter 3: Valuing Uncertain, Perpetual Income Streams
    1. Mathematical Development of Unleveraged Firm Valuation
    2. What Does the Valuation Formula Tell Us about Sensitivity to Inflation?
    3. Sensitivity to Real Discount Rates and Growth Factors
    4. Comparison with a Traditional Model of Firm Valuation
  12. Chapter 4: Valuing a Leveraged Equity Security
    1. Leverage in the Presence of Corporate Income Taxes
    2. From Theory to Practice
    3. Chapter 4 Supplement: Relationship between Leveraged Equity Discount Rate and Debt-to-Capital Ratio for Highly Leveraged Companies
  13. Chapter 5: Case Studies in Valuation During the Recent Decade
    1. Case 1: Coca-Cola
    2. Case 2: Intel
    3. Case 3: Procter & Gamble
    4. Market-Implied, Inflation-Adjusted Discount Rates for Coca-Cola, Intel, and Procter & Gamble
    5. Case 4: Enron
    6. Tying Up the Package: Practical Lessons from All Four Cases
  14. Chapter 6: Treatment of Mergers and Acquisitions
    1. Generalizing from the P&G/Gillette Example
    2. Applicability of the Results under Alternate Merger Terms
    3. Analytical Postscript 1: Common Stock Buybacks and Issuances Outside the Merger Framework
    4. Analytical Postscript 2: A Word on Executive Stock Option Grants
  15. Chapter 7: A Fair Representation? Broad Sample Testing over a 10-Year Market Cycle
    1. Sample Descriptive Data
    2. Basic Valuation Results
    3. Predictive Strength of the Model for the Whole Period
    4. Predictive Strength of the Model for Subperiods
  16. Chapter 8: Price Volatility and Underlying Causes
    1. Deriving the Formula for Price Changes
    2. Translating the Price Change Formula into Volatility Estimates
    3. Digression: Impact of Debt Leverage on Equity Volatility
    4. Obtaining the Volatility of the Underlying Variables
  17. Chapter 9: Constructing Efficient Portfolios
    1. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part I
    2. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part II
    3. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part III
    4. Creating Efficient Portfolios: Unconstrained Case
    5. Creating Efficient Portfolios: Case Where Asset Weights Are Required to Be Nonnegative
    6. Computing the Variance/Covariance Matrix Inputs
  18. Chapter 10: Selecting among Efficient Portfolios and Making Dynamic Rebalancing Adjustments
    1. Reconciling Portfolio Desirability and Feasibility
    2. Turning Theory into Easily Calculated Results
    3. Adjusting for Changes in Long-Term Expected Returns on Common Equity
    4. Adapting to More General Changes in Risk-Adjusted Expected Returns
    5. Recapitulation and an Important Caveat
  19. Chapter 11: How Did We Arrive Here Historically? Where Might We Go Prospectively?
    1. Crises of Confidence
    2. Some Answers Begin to Emerge
    3. What If Everyone Followed This Type of Model and Investing?
    4. Next Steps
  20. Appendix A: Mathematical Review of Growth Rates for Earnings, Dividends, and Book Value per Share
  21. Appendix B: Sustainable and Nonsustainable Inflation Rates
  22. Appendix C: Deriving the “Equity Duration” Formula
  23. Appendix D: Traditional Growth/Equity Valuation Formula
  24. Appendix E: Adjustments Required to the Traditional Growth/Equity Valuation Formula to Preserve Inflation Neutrality
  25. Appendix F: Brief Recapitulation of the Miller 1977 Capital Structure Irrelevance Theorem
  26. Appendix G: Time Series Charts of Unleveraged, Inflation-Adjusted Discount Rate Estimates
  27. Appendix H: Comparison of Volatility of Pretax and After-Tax Income
  28. Appendix I: Relationship between Observed Price-to-Earnings (“P/E”) Ratios and Nominal Interest Rates
  29. Appendix J: Additional Background on Mathematical Optimization Subject to Constraint Conditions
  30. Appendix K: Derivation of Asset Class Covariances
  31. Appendix L: Expected Return and Variance/Covariance Inputs Underlying Portfolio Examples
  32. Bibliography
  33. Index