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The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

Book Description

The definitive guide to valuation written by a who's who of today's top practitioners

The Valuation Handbook differs significantly from other related books on this topic because the contributors are practitioners, academics, and investment firms that explain how they value companies and other assets. It concentrates on specific and innovative valuation techniques, rather than the theoretical approaches more generally accepted and discussed. Given the extreme volatility of the stock market, valuation is a critical issue for analysts, investors, and businesses. Here, various professional contributors explain how their firms approach the valuation process, while academic contributors share their valuation consulting and research experience.

  • Examines how to value assets in today's dynamic market setting

  • Offers a broad spectrum of ideas from some of the top practitioners and academics in this field

  • Highlights state-of-the-art approaches to company valuation

Filled with in-depth insights and expert advice, The Valuation Handbook puts this difficult discipline in perspective.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Preface
    1. VALUATIONS ARE IMPORTANT
    2. VALUATION CHALLENGES: WHICH TECHNIQUES TO APPLY
    3. CONTRIBUTORS
    4. CHAPTER SUMMARIES
  5. CHAPTER 1 - Two Frameworks for Understanding Valuation Models
    1. TOP-DOWN/BOTTOM-UP ANALYSIS
    2. LIFE CYCLE
    3. FIRMS
    4. CONCLUSION
    5. NOTES
  6. CHAPTER 2 - The Value Edge
    1. VALUATION DECISIONS ARE MADE DIFFERENTLY BY DIFFERENT PEOPLE
    2. TECHNIQUES OF COMMUNICATING VALUE CAN DEMONSTRATE A COMMITMENT TO VALUE BUILDING
    3. ANALYSTS BEWARE: ONCE-SUCCESSFUL PUBLIC COMPANIES CAN LOSE THEIR WAY
    4. INCENTIVE COMPENSATION TECHNIQUES BASED ON VALUE ARE BETTER
    5. VALUATION TECHNIQUES FOR PRIVATE COMPANIES ARE ALSO MORE DATA DRIVEN
    6. ESTIMATES OF VALUE MAY DIFFER DEPENDING ON DATA INTEGRITY
    7. FINANCE THEORY AND CORPORATE VALUE
    8. THE VALUE EDGE BEGINS AT THE STRATEGIC BUSINESS UNIT LEVEL
    9. THE WATERFALL OF VALUE IDENTIFIES VALUE CREATORS AND DESTROYERS
    10. BETTER VALUATION FRAMEWORKS PROVIDE DISCIPLINE
    11. THE VALUE JOURNEY HAS MANY STEPS ALONG THE WAY
    12. ACKNOWLEDGMENTS
    13. REFERENCES
  7. CHAPTER 3 - Applying a Systems Mindset to Stock Valuation
    1. CHOICE 1: A SYSTEMS MINDSET
    2. CHOICE 2: FIRMS’ COMPETITIVE LIFE CYCLE
    3. CHOICE 3: INFLATION ADJUSTMENTS AND ECONOMIC RETURNS
    4. CHOICE 4: DENOMINATOR DEPENDS ON THE NUMERATOR
    5. CHOICE 5: INSIGHTS AND PLAUSIBILITY JUDGMENTS
    6. BACK TO THE FUTURE
    7. SEARCHING FOR FAILURES AND SUCCESSES
    8. CONCLUSION
    9. NOTES
    10. REFERENCES
  8. CHAPTER 4 - Comparing Valuation Models
    1. LITERATURE REVIEW
    2. BRIEF DESCRIPTION OF THE VALUATION MODELS THAT ARE COMPARED
    3. AN EXPERT SYSTEM THAT DOES VALUATION
    4. GOODNESS OF FIT: INITIAL SAMPLE (1,395 VALUATIONS 1993 TO 2000)
    5. TESTS OF DCF IN A HOLDOUT SAMPLE (NEW SAMPLE 2000-2008)
    6. CONVERGENCE TESTS
    7. STRAW MAN HORSE RACES (COMPARISON OF THREE MODELS)
    8. CONVERGENCE
    9. CONCLUSION
    10. NOTES
    11. REFERENCES
  9. CHAPTER 5 - Developing an Automated Discounted Cash Flow Model
    1. MODELS EXAMINED
    2. DATA AND INITIAL PARAMETERIZATION
    3. MEASUREMENT PRINCIPLES
    4. PROPRIETARY MODELS
    5. CONCLUSION
    6. APPENDIX: ACADEMIC LITERATURE
    7. NOTES
    8. REFERENCES
  10. CHAPTER 6 - The Essence of Value-Based Finance
    1. INTRODUCING VALUE-BASED FINANCE (A TRANSITION FROM ACCOUNTING TO ECONOMICS)
    2. VALUATION PERSPECTIVES: ECONOMIC PROFIT AND MARKET VALUE ADDED
    3. VALUATION PERSPECTIVES: THE MAGNIFIER
    4. VALUATION PERSPECTIVES: FINANCIAL DRIVERS AND VALUE PROFIT MARGIN
    5. VALUE ANALYSIS: THE PROPER FOCUS
    6. NOTE
  11. CHAPTER 7 - Residual Income and Stock Valuation Techniques
    1. ECONOMIC VALUE ADDED (EVA)
    2. RESIDUAL INCOME METHOD OF VALUATION
    3. ABNORMAL EARNINGS GROWTH MODEL
    4. NUMERICAL EXAMPLE OF RI AND AEG
    5. CONCLUSION
    6. NOTES
    7. REFERENCES
  12. CHAPTER 8 - Modern Tools for Valuation
    1. IDENTIFYING THE PROBLEM
    2. WHAT DRIVES STOCK MARKET VALUATION ?
    3. OUR VALUATION METHODOLOGY—PROVIDING A SOLUTION
    4. THEORY MEETS PRACTICE
    5. GENERAL NOTES ON STOCK PICKING
    6. APPENDIX A: DEFINITIONS OF KEY TERMS USED IN OUR VALUATION MODELS
    7. APPENDIX B : HOW OUR DYNAMIC DISCOUNTED CASH FLOW MODEL WORKS
    8. APPENDIX C: EXPLANATION OF RISK/REWARD RATING SYSTEM
    9. APPENDIX D : NOPAT, INVESTED CAPITAL, AND WACC CALCULATIONS FOR ACCENTURE
    10. NOTES
  13. CHAPTER 9 - The Economic Profit Approach to Securities Valuation
    1. BASICS OF ECONOMIC PROFIT VALUATION
    2. ECONOMIC PROFIT MODELS
    3. RECONCILIATION OF EVA MODELS
    4. COST OF CAPITAL EFFECTS
    5. PRICING IMPLICATIONS
    6. EVA ACCOUNTING ADJUSTMENTS
    7. EVA APPLICATION: JLG DOW FUNDAMENTAL
    8. EVA LINK TO FCF VALUATION
    9. FCF VALUATION: HORIZON YEARS
    10. FCF VALUATION: RESIDUAL YEARS
    11. SUMMARY
    12. NOTES
    13. REFERENCE
  14. CHAPTER 10 - Valuation for Managers
    1. CURRENT ENVIRONMENT
    2. ALTERNATIVE MEASURES OF VALUE CREATION: A QUICK REVIEW
    3. CONCLUSIONS
    4. NOTE
    5. REFERENCES
  15. CHAPTER 11 - The LifeCycle Returns Valuation System
    1. CONVERTING ACCOUNTING INFORMATION TO ECONOMIC RETURNS
    2. CONVERTING ECONOMIC RETURNS TO INTRINSIC VALUES
    3. CONVERTING INTRINSIC VALUES TO INVESTMENT DECISIONS
    4. SUMMARY
    5. APPENDIX: MARKET DERIVED DISCOUNT RATES AND CAPM BETA COSTS OF CAPITAL
    6. NOTES
    7. REFERENCES
  16. CHAPTER 12 - Morningstar’s Approach to Equity Analysis and Security Valuation
    1. APPLYING ECONOMIC MOATS TO SECURITY VALUATION
    2. INTRINSIC VALUE
    3. CONCLUSION
  17. CHAPTER 13 - Valuing Real Options
    1. OVERVIEW OF OPTION PRICING FOR FINANCIAL SECURITIES
    2. BASIC OPTION PRICING APPLICATIONS FOR REAL ASSETS
    3. ADVANCED OPTION PRICING APPLICATIONS FOR REAL ASSETS
    4. CONCLUSION AND FUTURE RESEARCH
    5. NOTE
    6. REFERENCES
  18. CHAPTER 14 - GRAPES
    1. A NEW THEORY OF ASSET PRICES
    2. ARBITRAGE
    3. THE BEGINNING OF ALL THINGS
    4. THE MODEL AND SYSTEM
    5. GRAPES SYSTEM FOR VALUING COMPANIES
    6. THE PRICING OF RISK
    7. APPENDIX: EXAMPLES OF MCDONALD’S AND WAL-MART
    8. NOTES
    9. REFERENCE
  19. CHAPTER 15 - Portfolio Valuation
    1. BACKGROUND
    2. METHODS ADOPTION IMPLICATIONS
    3. ACCOUNTING PRONOUNCEMENTS
    4. SEC GUIDANCE
    5. ACCOUNTING PRONOUNCEMENTS AND THE FASB
    6. XBRL FORMAT
    7. EMERGING BEST PRACTICES
    8. INTERNATIONAL STANDARDS
    9. PRODUCING PORTFOLIO VALUATIONS
    10. USING AUTOMATION IN VALUATIONS
    11. CONCLUSION
    12. NOTES
    13. REFERENCES
  20. CHAPTER 16 - The Valuation of Health Care Professional Practices
    1. BASIC ECONOMIC VALUATION TENETS
    2. THE VALUE PYRAMID
    3. BUY OR BUILD? VALUE AS INCREMENTAL BENEFIT
    4. STANDARD OF VALUE AND PREMISE OF VALUE
    5. VALUATION ADJUSTMENTS FOR RISK
    6. CLASSIFICATION OF ASSETS AND DETERMINATION OF GOODWILL
    7. IMPACT OF COMPETITIVE FORCES
    8. VALUATION APPROACHES, METHODS, AND TECHNIQUES
    9. ANALYSIS OF RISK
    10. LEVEL OF VALUE: DISCOUNTS AND PREMIUMS
    11. CONCLUSION
    12. NOTES
  21. CHAPTER 17 - Valuing Dental Practices
    1. NORMALIZATION
    2. FIXED ASSET APPRAISAL
    3. RATIO ANALYSIS
    4. TREND ANALYSIS
    5. USPAP STANDARDS
    6. SUMMARY
    7. NOTES
    8. REFERENCES
  22. CHAPTER 18 - Measures of Discount for Lack of Marketability and Liquidity
    1. PUBLICLY TRADED EQUIVALENT VALUE
    2. DISCOUNTS FOR LACK OF MARKETABILITY AND DISCOUNT FOR LACK OF LIQUIDITY
    3. BENCHMARKING METHODS
    4. EMPIRICAL STUDIES
    5. LIQUIDITY AS A PRICING FACTOR
    6. DISTINCTION BETWEEN HOLDING PERIOD AND LIQUIDATION PERIOD
    7. QUANTITATIVE APPROACHES BASED ON CAPM AND TIME VALUE
    8. HISTORICAL MARKET LIQUIDITY STATISTICS
    9. PRICE PRESSURE AND MARKET FAILURE
    10. MEASURING ASSET LIQUIDITY
    11. APPLICATION OF TIME/VOLATILITY (OPTION) MODELS TO DISCOUNT FOR LACK OF LIQUIDITY
    12. THREE OPTION BASED MODELS
    13. BLACK-SCHOLES PUT (BSP)
    14. AVERAGE PRICE ASIAN PUT (AAP)
    15. LOOK BACK PUT (LBP)
    16. CONCLUSIONS
    17. REFERENCES
  23. CHAPTER 19 - An Economic View of the Impact of Human Capital on Firm Performance and Valuation
    1. CREATING AND STANDARDIZING METRICS
    2. PREDICTING FUTURE FINANCIAL RESULTS
    3. ORGANIZATIONAL DECOMPOSITION
    4. MATHEMATICAL MODELS GUIDING PRACTICAL ACTION
    5. NOTE
    6. REFERENCE
  24. CHAPTER 20 - EBITDA
    1. WHAT IS EBITDA?
    2. WHO USES EBITDA AND WHY?
    3. EBITDA IN FINANCIAL REPORTING
    4. EBITDA IN EUROPE
    5. IMPACT ON THE U.S. CAPITAL MARKET
    6. THE REPORTING PERFORMANCE PROJECT
    7. CONCLUSIONS
    8. NOTES
    9. REFERENCES
  25. CHAPTER 21 - Optimizing the Value of Investor Relations
    1. INVESTOR RELATIONS AS A SERVICE FUNCTION
    2. THE INVESTMENT RELATIONS OFFICER AS THE RESIDENT INVESTMENT MARKET EXPERT
    3. BUILDING INVESTOR RESPECT AS WELL
    4. IT’S ALL ABOUT INFORMATION OF VALUE
    5. THE INFORMATION ADVANTAGE
    6. WORKING WITH ONE KEYINVESTOR AT A TIME
    7. WORKING WITH THE PRIMARY INVESTORS
    8. WHAT IT TAKES TO DO THE JOB
    9. IDENTIFYING THE INFORMATION THAT DETERMINES INTRINSIC VALUE
    10. FOCUS ON THE VALUE DRIVERS
    11. LINKING INTRINSIC VALUE TO STOCK PRICE
    12. NUMEROUS VITAL LESSONS FROM THIS BOOK
    13. WRAPPING IT UP
    14. NOTE
    15. REFERENCES
  26. CHAPTER 22 - Lower Risk and Higher Returns
    1. BACKGROUND
    2. INTRINSIC VALUES AND DISTRIBUTIONS
    3. AUTOMATED VALUATION MODELS
    4. RESEARCH DESIGN AND EMPIRICAL RESULTS
    5. CONCLUSION
    6. APPENDIX A : SYNTHESIZING THE LIFECYCLE FRAMEWORK
    7. APPENDIX B: TECHNICAL NOTE—RANGES OF BOUNDED RATIONALITY
    8. NOTES
    9. REFERENCES
  27. CHAPTER 23 - Common Themes and Differences
    1. DOES INTRINSIC VALUE HAVE ANY MEANING?
    2. METHODOLOGIES: MARK TO MARKET, MARK TO MODEL
    3. ILLIQUIDITY CRISES AND MARKET MELTDOWNS: EFFECT ON QUANTITATIVE STRATEGIES
    4. DISCOUNTED CASH FLOW METHODOLOGIES
    5. APPENDIX A: FINANCIAL MANAGEMENT ASSOCIATION PRACTITIONER DEMAND DRIVEN ACADEMIC RESEARCH INITIATIVE (FMA PDDARI)
    6. APPENDIX B:EXAMPLES OF ASSUMPTIONS AND THEORIES DESERVING DEBATE AND EMPIRICAL QUANTIFICATION
    7. REFERENCES
  28. About the Editors
  29. About the Contributors
  30. Index