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Valuation: Measuring and Managing the Value of Companies, Fifth Edition

Book Description

The number one guide to corporate valuation is back and better than ever

Thoroughly revised and expanded to reflect business conditions in today's volatile global economy, Valuation, Fifth Edition continues the tradition of its bestselling predecessors by providing up-to-date insights and practical advice on how to create, manage, and measure the value of an organization.

Along with all new case studies that illustrate how valuation techniques and principles are applied in real-world situations, this comprehensive guide has been updated to reflect new developments in corporate finance, changes in accounting rules, and an enhanced global perspective. Valuation, Fifth Edition is filled with expert guidance that managers at all levels, investors, and students can use to enhance their understanding of this important discipline.

  • Contains strategies for multi-business valuation and valuation for corporate restructuring, mergers, and acquisitions

  • Addresses how you can interpret the results of a valuation in light of a company's competitive situation

  • Also available: a book plus CD-ROM package (978-0-470-42469-8) as well as a stand-alone CD-ROM (978-0-470-42457-7) containing an interactive valuation DCF model

Valuation, Fifth Edition stands alone in this field with its reputation of quality and consistency. If you want to hone your valuation skills today and improve them for years to come, look no further than this book.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. About the Authors
  4. Preface
    1. WHY THIS BOOK
    2. STRUCTURE OF THE BOOK
    3. WHAT’S NEW ABOUT THE FIFTH EDITION
    4. VALUATION SPREADSHEET
  5. Acknowledgments
  6. Part One - Foundations of Value
    1. Chapter 1 - Why Value Value?
      1. CONSEQUENCES OF FORGETTING TO VALUE VALUE
      2. BENEFITS OF FOCUSING ON LONG-TERM VALUE
      3. CHALLENGES OF FOCUSING ON LONG-TERM VALUE
    2. Chapter 2 - Fundamental Principles of Value Creation
      1. GROWTH AND ROIC: DRIVERS OF VALUE
      2. CONSERVATION OF VALUE
      3. RISK AND VALUE CREATION
      4. THE MATH OF VALUE CREATION
      5. SUMMARY
    3. Chapter 3 - The Expectations Treadmill
      1. WHY SHAREHOLDER EXPECTATIONS BECOME A TREADMILL
      2. REAL-WORLD EFFECTS OF THE EXPECTATIONS TREADMILL
      3. DECOMPOSING TRS
      4. UNDERSTANDING EXPECTATIONS
      5. MANAGERIAL IMPLICATIONS
    4. Chapter 4 - Return on Invested Capital
      1. DRIVERS OF RETURN ON INVESTED CAPITAL
      2. COMPETITIVE ADVANTAGE
      3. SUSTAINABILITY OF RETURN ON INVESTED CAPITAL
      4. EMPIRICAL ANALYSIS OF RETURNS ON INVESTED CAPITAL
      5. ROIC Trends
      6. ROIC by Industry and Company Size
      7. SUMMARY
    5. Chapter 5 - Growth
      1. DRIVERS OF REVENUE GROWTH
      2. GROWTH AND VALUE CREATION
      3. DIFFICULTY OF SUSTAINING GROWTH
      4. EMPIRICAL ANALYSIS OF CORPORATE GROWTH
      5. SUMMARY
  7. Part Two - Core Valuation Techniques
    1. Chapter 6 - Frameworks for Valuation
      1. ENTERPRISE DISCOUNTED CASH FLOW MODEL
      2. ECONOMIC-PROFIT-BASED VALUATION MODELS
      3. ADJUSTED PRESENT VALUE MODEL
      4. CAPITAL CASH FLOW MODEL
      5. CASH-FLOW-TO-EQUITY VALUATION MODEL
      6. OTHER APPROACHES TO DISCOUNTED CASH FLOW
      7. ALTERNATIVES TO DISCOUNTED CASH FLOW
      8. SUMMARY
    2. Chapter 7 - Reorganizing the Financial Statements
      1. REORGANIZING THE ACCOUNTING STATEMENTS: KEY CONCEPTS
      2. REORGANIZING THE ACCOUNTING STATEMENTS: IN PRACTICE
      3. ADVANCED ANALYTICAL ISSUES
    3. Chapter 8 - Analyzing Performance and Competitive Position
      1. ANALYZING RETURNS ON INVESTED CAPITAL
      2. ANALYZING REVENUE GROWTH
      3. CREDIT HEALTH AND CAPITAL STRUCTURE
      4. ALTERNATIVES TO ROIC
      5. GENERAL CONSIDERATIONS
    4. Chapter 9 - Forecasting Performance
      1. DETERMINE LENGTH AND DETAIL OF THE FORECAST
      2. COMPONENTS OF A GOOD MODEL
      3. MECHANICS OF FORECASTING
      4. ADDITIONAL ISSUES
    5. Chapter 10 - Estimating Continuing Value
      1. RECOMMENDED FORMULA FOR DCF VALUATION
      2. RECOMMENDED FORMULA FOR ECONOMIC-PROFIT VALUATION
      3. SUBTLETIES OF CONTINUING VALUE
      4. COMMON PITFALLS
      5. EVALUATING OTHER APPROACHES TO CONTINUING VALUE
      6. ADVANCED FORMULAS FOR CONTINUING VALUE
    6. Chapter 11 - Estimating the Cost of Capital
      1. WEIGHTED AVERAGE COST OF CAPITAL
      2. ESTIMATING THE COST OF EQUITY
      3. ESTIMATING THE AFTER-TAX COST OF DEBT
      4. USING TARGET WEIGHTS TO DETERMINE THE COST OF CAPITAL
      5. COMPLEX CAPITAL STRUCTURES
    7. Chapter 12 - Moving from Enterprise Value to Value per Share
      1. VALUING NONOPERATING ASSETS
      2. VALUING DEBT AND DEBT EQUIVALENTS
      3. VALUING HYBRID SECURITIES AND MINORITY INTERESTS
      4. ESTIMATING VALUE PER SHARE
    8. Chapter 13 - Calculating and Interpreting Results
      1. VERIFYING VALUATION RESULTS
      2. SENSITIVITY ANALYSIS
      3. CREATING SCENARIOS
      4. VALUATION BY PARTS
      5. THE ART OF VALUATION
    9. Chapter 14 - Using Multiples to Triangulate Results
      1. USING THE RIGHT MULTIPLE
      2. CALCULATING THE MULTIPLE IN A CONSISTENT MANNER
      3. USING THE RIGHT PEER GROUP
      4. ALTERNATIVE MULTIPLES
      5. SUMMARY
  8. Part Three - Intrinsic Value and the Stock Market
    1. Chapter 15 - Market Value Tracks Return on Invested Capital and Growth
      1. STOCK MARKETS TRACK ECONOMIC FUNDAMENTALS
      2. COMPANY VALUATION LEVELS TRACK RETURN ON INVESTED CAPITAL AND GROWTH
      3. TOTAL RETURNS TO SHAREHOLDERS TRACK PERFORMANCE AGAINST EXPECTATIONS
      4. SUMMARY
    2. Chapter 16 - Markets Value Substance, Not Form
      1. MANAGING EARNINGS: NOT WORTH THE EFFORT
      2. ECONOMICS OF ACCOUNTING INFORMATION: NO MYSTERY TO THE MARKET
      3. TECHNICAL TRADING FACTORS ARE IRRELEVANT FOR VALUE
      4. SUMMARY
    3. Chapter 17 - Emotions and Mispricing in the Market
      1. EMOTIONS RARELY DRIVE STOCK MARKET VALUES
      2. COMPANY MISPRICING: CARVE-OUTS AND DUAL LISTINGS
      3. COMPANY MISPRICING: OVERREACTION AND UNDERREACTION, REVERSAL AND MOMENTUM
      4. MARKET MISPRICING: BUBBLES AND BURSTS
      5. SUMMARY
    4. Chapter 18 - Investors and Managers in Efficient Markets
      1. INVESTORS IN EFFICIENT MARKETS
      2. MANAGERIAL IMPLICATIONS
  9. Part Four - Managing for Value
    1. Chapter 19 - Corporate Portfolio Strategy
      1. WHAT MAKES AN OWNER THE BEST
      2. THE BEST-OWNER LIFE CYCLE
      3. CONSTANTLY EVOLVING PORTFOLIO OF BUSINESSES
      4. CONSTRUCTING THE PORTFOLIO
      5. THE MYTH OF DIVERSIFICATION
      6. SUMMARY
    2. Chapter 20 - Performance Management
      1. CHOOSING THE RIGHT METRICS
      2. ORGANIZATIONAL SUPPORT
      3. SUMMARY
    3. Chapter 21 - Mergers and Acquisitions
      1. VALUE CREATION FRAMEWORK
      2. EMPIRICAL RESULTS
      3. ARCHETYPES FOR VALUE-CREATING ACQUISITIONS
      4. MORE DIFFICULT STRATEGIES FOR CREATING VALUE FROM ACQUISITIONS
      5. ESTIMATION OF OPERATING IMPROVEMENTS
      6. HOW TO PAY: IN CASH OR IN STOCK?
      7. FOCUS ON VALUE CREATION, NOT ACCOUNTING
      8. SUMMARY
    4. Chapter 22 - Creating Value through Divestitures
      1. VALUE CREATION FROM DIVESTITURES
      2. HOW TO APPROACH DIVESTITURES
      3. DECIDING ON TRANSACTION TYPE
      4. SUMMARY
    5. Chapter 23 - Capital Structure
      1. CAPITAL STRUCTURE AND VALUE CREATION
      2. CREDIT RATINGS AND CAPITAL STRUCTURE
      3. SHORT-TERM STEPS TO MANAGE CAPITAL STRUCTURE
      4. DESIGNING A LONG-TERM CAPITAL STRUCTURE
      5. CREATING VALUE FROM FINANCIAL ENGINEERING
      6. SUMMARY
    6. Chapter 24 - Investor Communications
      1. INTRINSIC VALUE VERSUS MARKET VALUE
      2. UNDERSTANDING THE INVESTOR BASE
      3. COMMUNICATING TO INTRINSIC INVESTORS
      4. SUMMARY
  10. Part Five - Advanced Valuation Issues
    1. Chapter 25 - Taxes
      1. OPERATING TAXES ON THE REORGANIZED INCOME STATEMENT
      2. CONVERTING OPERATING TAXES TO OPERATING CASH TAXES
      3. DEFERRED TAXES ON THE REORGANIZED BALANCE SHEET
      4. VALUING DEFERRED TAXES
    2. Chapter 26 - Nonoperating Expenses, One-Time Charges, Reserves, and Provisions
      1. NONOPERATING EXPENSES AND ONE-TIME CHARGES
      2. PROVISIONS AND THEIR CORRESPONDING RESERVES
    3. Chapter 27 - Leases, Pensions, and Other Obligations
      1. OPERATING LEASES
      2. SECURITIZED RECEIVABLES
      3. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
    4. Chapter 28 - Capitalized Expenses
      1. EXPENSING VERSUS CAPITALIZATION
      2. PROCESS FOR CAPITALIZING R&D
      3. ROIC AND FREE CASH FLOW WITH CAPITALIZED R&D
      4. OTHER EXPENSES SUITABLE FOR CAPITALIZATION
    5. Chapter 29 - Inflation
      1. INFLATION LEADS TO LOWER VALUE CREATION
      2. HISTORICAL ANALYSIS IN TIMES OF HIGH INFLATION
      3. FINANCIAL PROJECTIONS IN REAL AND NOMINAL TERMS
      4. SUMMARY
    6. Chapter 30 - Foreign Currency
      1. FORECASTING CASH FLOWS IN FOREIGN AND DOMESTIC CURRENCY
      2. ESTIMATING THE COST OF CAPITAL IN FOREIGN CURRENCY
      3. INCORPORATING FOREIGN-CURRENCY RISK IN VALUATIONS
      4. USING TRANSLATED FOREIGN-CURRENCY FINANCIAL STATEMENTS
      5. SUMMARY
    7. Chapter 31 - Case Study: Heineken
      1. INDUSTRY DEVELOPMENTS
      2. REORGANIZING FINANCIAL STATEMENTS
      3. ANALYZING HISTORICAL PERFORMANCE
      4. FORECASTING PERFORMANCE
      5. ESTIMATING COST OF CAPITAL
      6. ESTIMATING CONTINUING VALUE
      7. CALCULATING AND INTERPRETING RESULTS
  11. Part Six - Special Situations
    1. Chapter 32 - Valuing Flexibility
      1. UNCERTAINTY, FLEXIBILITY, AND VALUE
      2. CLASSIFYING FLEXIBILITY IN TERMS OF REAL OPTIONS
      3. METHODS FOR VALUING FLEXIBILITY
      4. FOUR-STEP PROCESS FOR VALUING FLEXIBILITY
      5. REAL-OPTION VALUATION AND DECISION TREE ANALYSIS: A NUMERICAL EXAMPLE
      6. SUMMARY
    2. Chapter 33 - Valuation in Emerging Markets
      1. HISTORICAL ANALYSIS
      2. CREATING A CONSISTENT SET OF ECONOMIC ASSUMPTIONS
      3. FORECASTING CASH FLOWS
      4. INCORPORATING EMERGING-MARKET RISKS IN THE VALUATION
      5. ESTIMATING COST OF CAPITAL IN EMERGING MARKETS
      6. CALCULATING AND INTERPRETING RESULTS
      7. SUMMARY
    3. Chapter 34 - Valuing High-Growth Companies
      1. VALUATION PROCESS FOR HIGH-GROWTH COMPANIES
      2. UNCERTAINTY IS HERE TO STAY
      3. SUMMARY
    4. Chapter 35 - Valuing Cyclical Companies
      1. SHARE PRICE BEHAVIOR
      2. APPROACH TO VALUING CYCLICAL COMPANIES
      3. IMPLICATIONS FOR MANAGING CYCLICAL COMPANIES
      4. SUMMARY
    5. Chapter 36 - Valuing Banks
      1. ECONOMICS OF BANKING
      2. PRINCIPLES OF BANK VALUATION
      3. COMPLICATIONS IN BANK VALUATIONS
      4. SUMMARY
  12. APPENDIX A - Economic Profit and the Key Value Driver Formula
  13. APPENDIX B - Discounted Economic Profit Equals Discounted Free Cash Flow
  14. APPENDIX C - Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value
  15. APPENDIX D - Levering and Unlevering the Cost of Equity
  16. APPENDIX E - Leverage and the Price-to-Earnings Multiple
  17. Index