Investment Valuation (eBook, ePUB)
Tools and Techniques for Determining the Value of any Asset, University Edition
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Investment Valuation (eBook, ePUB)
Tools and Techniques for Determining the Value of any Asset, University Edition
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The definitive source of information on all topics related to investment valuation tools and techniques
Valuation is at the heart of any investment decision, whether that decision is buy, sell or hold. But the pricing of many assets has become a more complex task in modern markets, especially after the recent financial crisis. In order to be successful at this endeavor, you must have a firm understanding of the proper valuation techniques. One valuation book stands out as withstanding the test of time among students of financial markets and investors, Aswath Damodaran's Investment Valuation…mehr
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Valuation is at the heart of any investment decision, whether that decision is buy, sell or hold. But the pricing of many assets has become a more complex task in modern markets, especially after the recent financial crisis. In order to be successful at this endeavor, you must have a firm understanding of the proper valuation techniques. One valuation book stands out as withstanding the test of time among students of financial markets and investors, Aswath Damodaran'sInvestment Valuation.
Now completely revised and updated to reflect changing market conditions, this third edition comprehensively introduces students and investment professionals to the range of valuation models available and how to chose the right model for any given asset valuation scenario. This edition includes valuation techniques for a whole host of real options, start-up firms, unconventional assets, distressed companies and private equity, and real estate. All examples have been updated and new material has been added.
- An expansion of ancillaries include updated online databases, spreadsheets, and other educational support tools
- Fully revised to incorporate valuation lessons learned from the last five years, from the market crisis and emerging markets to new types of equity investments
- Revised examples of company valuations such as companies from Eastern Europe and Africa, which stress the global nature of modern valuation
- Author Aswath Damodaran is regarded as one of the best educators and thinkers on the topic of investment valuation
This indispensable guide is a must read for students wishing to gain a better understanding of investment valuation and its methods. With it, you can take the insights and advice of a recognized authority on the valuation process and immediately put them to work for you.
- Produktdetails
- Verlag: John Wiley & Sons
- Erscheinungstermin: 16. März 2012
- Englisch
- ISBN-13: 9781118206591
- Artikelnr.: 38230696
- Verlag: John Wiley & Sons
- Erscheinungstermin: 16. März 2012
- Englisch
- ISBN-13: 9781118206591
- Artikelnr.: 38230696
A Philosophical Basis for Valuation 1
Generalities about Valuation 2
The Role of Valuation 6
Conclusion 9
Questions and Short Problems 9
Chapter 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11
Relative Valuation 19
Contingent Claim Valuation 23
Conclusion 25
Questions and Short Problems 25
Chapter 3 Understanding Financial Statements 27
The Basic Accounting Statements 27
Asset Measurement and Valuation 29
Measuring Financing Mix 36
Measuring Earnings and Profitability 42
Measuring Risk 47
Other Issues in Analyzing Financial Statements 53
Conclusion 55
Questions and Short Problems 55
Chapter 4 The Basics of Risk 58
What is Risk? 58
Equity Risk and Expected Return 59
Alternative Models for Equity Risk 71
A Comparative Analysis of Equity Risk Models 76
Models of Default Risk 77
Conclusion 81
Questions and Short Problems 82
Chapter 5 Option Pricing Theory and Models 87
Basics of Option Pricing 87
Determinants of Option Value 89
Option Pricing Models 90
Extensions of Option Pricing 107
Conclusion 109
Questions and Short Problems 109
Chapter 6 Market Efficiency—Definition, Tests, and Evidence 111
Market Efficiency and Investment Valuation 111
What Is an Efficient Market? 112
Implications of Market Efficiency 112
Necessary Conditions for Market Efficiency 114
Propositions about Market Efficiency 114
Testing Market Efficiency 116
Cardinal Sins in Testing Market Efficiency 120
Some Lesser Sins That Can Be a Problem 121
Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122
Market Reaction to Information Events 130
Market Anomalies 134
Evidence on Insiders and Investment Professionals 142
Conclusion 149
Questions and Short Problems 150
Chapter 7 Riskless Rates and Risk Premiums 154
The Risk-Free Rate 154
Equity Risk Premium 159
Default Spreads on Bonds 177
Conclusion 180
Questions and Short Problems 180
Chapter 8 Estimating Risk Parameters and Costs of Financing 182
The Cost of Equity and Capital 182
Cost of Equity 183
From Cost of Equity to Cost of Capital 210
Best Practices at Firms 221
Conclusion 222
Questions and Short Problems 223
Chapter 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229
Adjusting Earnings 230
Conclusion 247
Questions and Short Problems 249
Chapter 10 From Earnings to Cash Flows 250
The Tax Effect 250
Reinvestment Needs 258
Conclusion 268
Questions and Short Problems 269
Chapter 11 Estimating Growth 271
The Importance of Growth 272
Historical Growth 272
Analyst Estimates of Growth 282
Fundamental Determinants of Growth 285
Qualitative Aspects of Growth 301
Conclusion 302
Questions and Short Problems 302
Chapter 12 Closure in Valuation: Estimating Terminal Value 304
Closure in Valuation 304
The Survival Issue 318
Closing Thoughts on Terminal Value 320
Conclusion 321
Questions and Short Problems 321
Chapter 13 Dividend Discount Models 323
The General Model 323
Versions of the Model 324
Issues in Using the Dividend Discount Model 344
Tests of the Dividend Discount Model 345
Conclusion 348
Questions and Short Problems 349
Chapter 14 Free Cash Flow to Equity Discount Models 351
Measuring What Firms Can Return to Their Stockholders 351
FCFE Valuation Models 357
FCFE Valuation versus Dividend Discount Model Valuation 372
Conclusion 376
Questions and Short Problems 376
Chapter 15 Firm Valuation: Cost of Capital and Adjusted Present Value Approaches 380
Free Cash flow to the Firm 380
Firm Valuation: The Cost of Capital Approach 383
Firm Valuation: The Adjusted Present Value Approach 398
Effect of Leverage on Firm Value 402
Adjusted Present Value and Financial Leverage 415
Conclusion 419
Questions and Short Problems 419
Chapter 16 Estimating Equity Value per Share 423
Value of Nonoperating Assets 423
Firm Value and Equity Value 440
Management and Employee Options 442
Value per Share When Voting Rights Vary 448
Conclusion 450
Questions and Short Problems 451
Chapter 17 Fundamental Principles of Relative Valuation 453
Use of Relative Valuation 453
Standardized Values and Multiples 454
Four Basic Steps to Using Multiples 456
Reconciling Relative and Discounted Cash Flow Valuations 466
Conclusion 467
Questions and Short Problems 467
Chapter 18 Earnings Multiples 468
Price-Earnings Ratio 468
The PEG Ratio 487
Other Variants on the PE Ratio 497
Enterprise Value to EBITDA Multiple 500
Conclusion 508
Questions and Short Problems 508
Chapter 19 Book Value Multiples 511
Price-to-Book Equity 511
Applications of Price–Book Value Ratios 521
Use in Investment Strategies 530
Value-to-Book Ratios 532
Tobin’s Q: Market Value/Replacement Cost 537
Conclusion 539
Questions and Short Problems 539
Chapter 20 Revenue Multiples and Sector-Specific Multiples 542
Revenue Multiples 542
Sector-Specific Multiples 571
Conclusion 577
Questions and Short Problems 577
Chapter 21 Valuing Financial Service Firms 581
Categories of Financial Service Firms 581
What is Unique about Financial Service Firms? 582
General Framework for Valuation 583
Discounted Cash Flow Valuation 584
Asset-Based Valuation 599
Relative Valuation 599
Issues in Valuing Financial Service Firms 605
Conclusion 607
Questions and Short Problems 608
Chapter 22 Valuing Firms with Negative or Abnormal Earnings 611
Negative Earnings: Consequences and Causes 611
Valuing Negative Earnings Firms 615
Conclusion 639
Questions and Short Problems 639
Chapter 23 Valuing Young or Start-Up Firms 643
Information Constraints 643
New Paradigms or Old Principles:
A Life Cycle Perspective 644
Venture Capital Valuation 646
General Framework for Analysis 648
Value Drivers 659
Estimation Noise 661
Implications for Investors 662
Implications for Managers 663
The Expectations Game 663
Conclusion 665
Questions and Short Problems 666
Chapter 24 Valuing Private Firms 667
What Makes Private Firms Different? 667
Estimating Valuation Inputs at Private Firms 668
Valuation Motives and Value Estimates 688
Valuing Venture Capital and Private Equity Stakes 693
Relative Valuation of Private Businesses 695
Conclusion 699
Questions and Short Problems 699
Chapter 25 Aquisitions and Takeovers 702
Background on Acquisitions 702
Empirical Evidence on the Value Effects of Takeovers 705
Steps in an Acquisition 705
Takeover Valuation: Biases and Common Errors 724
Structuring the Acquisition 725
Analyzing Management and Leveraged Buyouts 730
Conclusion 734
Questions and Short Problems 735
Chapter 26 Valuing Real Estate 739
Real versus Financial Assets 739
Discounted Cash Flow Valuation 740
Comparable/Relative Valuation 759
Valuing Real Estate Businesses 761
Conclusion 763
Questions and Short Problems 763
Chapter 27 Valuing Other Assets 766
Cash-Flow-Producing Assets 766
Non-Cash-Flow-Producing Assets 775
Assets with Option Characteristics 777
Conclusion 778
Questions and Short Problems 779
Chapter 28 The Option to Delay and Valuation Implications 781
The Option to Delay a Project 781
Valuing a Patent 789
Natural Resource Options 796
Other Applications 802
Conclusion 802
Questions and Short Problems 803
Chapter 29 The Options to Expand and to Abandon: Valuation Implications 805
The Option to Expand 805
When Are Expansion Options Valuable? 812
Valuing a Firm with the Option to Expand 815
Value of Financial Flexibility 817
The Option to Abandon 820
Reconciling Net Present Value and Real Option Valuations 823
Conclusion 823
Questions and Short Problems 824
Chapter 30 Valuing Equity in Distressed Firms 826
Equity in Highly Levered Distressed Firms 826
Implications of Viewing Equity as an Option 828
Estimating the Value of Equity as an Option 831
Consequences for Decision Making 836
Conclusion 839
Questions and Short Problems 839
Chapter 31 Value Enhancement: A Discounted Cash Flow Valuation Framework 841
Value-Creating and Value-Neutral Actions 841
Ways of Increasing Value 842
Value Enhancement Chain 859
Closing Thoughts on Value Enhancement 864
Conclusion 865
Questions and Short Problems 865
Chapter 32 Value Enhancement: Economic Value Added, Cash Flow Return on Investment, and Other Tools 869
Economic Value Added 870
Cash Flow Return on Investment 884
A Postscript on Value Enhancement 890
Conclusion 891
Questions and Short Problems 891
Chapter 33 Probabilistic Approaches in Valuation: Scenario Analysis, Decision Trees, and Simulations 894
Scenario Analysis 894
Decision Trees 899
Simulations 908
An Overall Assessment of Probabilistic Risk-Assessment Approaches 919
Conclusion 921
Questions and Short Problems 921
Chapter 34 Overview and Conclusion 925
Choices in Valuation Models 925
Which Approach Should You Use? 926
Choosing the Right Discounted Cash Flow Model 929
Choosing the Right Relative Valuation Model 933
When Should You Use the Option Pricing Models? 937
Conclusion 938
References 939
Index 954
Generalities about Valuation 2 The Role of Valuation 6 Conclusion 9
Questions and Short Problems 9 CHAPTER 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11 Relative Valuation 19 Contingent Claim
Valuation 23 Conclusion 25 Questions and Short Problems 25 CHAPTER 3
Understanding Financial Statements 27 The Basic Accounting Statements 27
Asset Measurement and Valuation 29 Measuring Financing Mix 36 Measuring
Earnings and Profitability 42 Measuring Risk 47 Other Issues in Analyzing
Financial Statements 53 Conclusion 55 Questions and Short Problems 55
CHAPTER 4 The Basics of Risk 58 What is Risk? 58 Equity Risk and Expected
Return 59 Alternative Models for Equity Risk 71 A Comparative Analysis of
Equity Risk Models 76 Models of Default Risk 77 Conclusion 81 Questions and
Short Problems 82 CHAPTER 5 Option Pricing Theory and Models 87 Basics of
Option Pricing 87 Determinants of Option Value 89 Option Pricing Models 90
Extensions of Option Pricing 107 Conclusion 109 Questions and Short
Problems 109 CHAPTER 6 Market Efficiency--Definition, Tests, and Evidence
111 Market Efficiency and Investment Valuation 111 What Is an Efficient
Market? 112 Implications of Market Efficiency 112 Necessary Conditions for
Market Efficiency 114 Propositions about Market Efficiency 114 Testing
Market Efficiency 116 Cardinal Sins in Testing Market Efficiency 120 Some
Lesser Sins That Can Be a Problem 121 Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122 Market Reaction to Information
Events 130 Market Anomalies 134 Evidence on Insiders and Investment
Professionals 142 Conclusion 149 Questions and Short Problems 150 CHAPTER 7
Riskless Rates and Risk Premiums 154 The Risk-Free Rate 154 Equity Risk
Premium 159 Default Spreads on Bonds 177 Conclusion 180 Questions and Short
Problems 180 CHAPTER 8 Estimating Risk Parameters and Costs of Financing
182 The Cost of Equity and Capital 182 Cost of Equity 183 From Cost of
Equity to Cost of Capital 210 Best Practices at Firms 221 Conclusion 222
Questions and Short Problems 223 CHAPTER 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229 Adjusting Earnings 230
Conclusion 247 Questions and Short Problems 249 CHAPTER 10 From Earnings to
Cash Flows 250 The Tax Effect 250 Reinvestment Needs 258 Conclusion 268
Questions and Short Problems 269 CHAPTER 11 Estimating Growth 271 The
Importance of Growth 272 Historical Growth 272 Analyst Estimates of Growth
282 Fundamental Determinants of Growth 285 Qualitative Aspects of Growth
301 Conclusion 302 Questions and Short Problems 302 CHAPTER 12 Closure in
Valuation: Estimating Terminal Value 304 Closure in Valuation 304 The
Survival Issue 318 Closing Thoughts on Terminal Value 320 Conclusion 321
Questions and Short Problems 321 CHAPTER 13 Dividend Discount Models 323
The General Model 323 Versions of the Model 324 Issues in Using the
Dividend Discount Model 344 Tests of the Dividend Discount Model 345
Conclusion 348 Questions and Short Problems 349 CHAPTER 14 Free Cash Flow
to Equity Discount Models 351 Measuring What Firms Can Return to Their
Stockholders 351 FCFE Valuation Models 357 FCFE Valuation versus Dividend
Discount Model Valuation 372 Conclusion 376 Questions and Short Problems
376 CHAPTER 15 Firm Valuation: Cost of Capital and Adjusted Present Value
Approaches 380 Free Cash flow to the Firm 380 Firm Valuation: The Cost of
Capital Approach 383 Firm Valuation: The Adjusted Present Value Approach
398 Effect of Leverage on Firm Value 402 Adjusted Present Value and
Financial Leverage 415 Conclusion 419 Questions and Short Problems 419
CHAPTER 16 Estimating Equity Value per Share 423 Value of Nonoperating
Assets 423 Firm Value and Equity Value 440 Management and Employee Options
442 Value per Share When Voting Rights Vary 448 Conclusion 450 Questions
and Short Problems 451 CHAPTER 17 Fundamental Principles of Relative
Valuation 453 Use of Relative Valuation 453 Standardized Values and
Multiples 454 Four Basic Steps to Using Multiples 456 Reconciling Relative
and Discounted Cash Flow Valuations 466 Conclusion 467 Questions and Short
Problems 467 CHAPTER 18 Earnings Multiples 468 Price-Earnings Ratio 468 The
PEG Ratio 487 Other Variants on the PE Ratio 497 Enterprise Value to EBITDA
Multiple 500 Conclusion 508 Questions and Short Problems 508 CHAPTER 19
Book Value Multiples 511 Price-to-Book Equity 511 Applications of
Price-Book Value Ratios 521 Use in Investment Strategies 530 Value-to-Book
Ratios 532 Tobin's Q: Market Value/Replacement Cost 537 Conclusion 539
Questions and Short Problems 539 CHAPTER 20 Revenue Multiples and
Sector-Specific Multiples 542 Revenue Multiples 542 Sector-Specific
Multiples 571 Conclusion 577 Questions and Short Problems 577 CHAPTER 21
Valuing Financial Service Firms 581 Categories of Financial Service Firms
581 What is Unique about Financial Service Firms? 582 General Framework for
Valuation 583 Discounted Cash Flow Valuation 584 Asset-Based Valuation 599
Relative Valuation 599 Issues in Valuing Financial Service Firms 605
Conclusion 607 Questions and Short Problems 608 CHAPTER 22 Valuing Firms
with Negative or Abnormal Earnings 611 Negative Earnings: Consequences and
Causes 611 Valuing Negative Earnings Firms 615 Conclusion 639 Questions and
Short Problems 639 CHAPTER 23 Valuing Young or Start-Up Firms 643
Information Constraints 643 New Paradigms or Old Principles: A Life Cycle
Perspective 644 Venture Capital Valuation 646 General Framework for
Analysis 648 Value Drivers 659 Estimation Noise 661 Implications for
Investors 662 Implications for Managers 663 The Expectations Game 663
Conclusion 665 Questions and Short Problems 666 CHAPTER 24 Valuing Private
Firms 667 What Makes Private Firms Different? 667 Estimating Valuation
Inputs at Private Firms 668 Valuation Motives and Value Estimates 688
Valuing Venture Capital and Private Equity Stakes 693 Relative Valuation of
Private Businesses 695 Conclusion 699 Questions and Short Problems 699
CHAPTER 25 Aquisitions and Takeovers 702 Background on Acquisitions 702
Empirical Evidence on the Value Effects of Takeovers 705 Steps in an
Acquisition 705 Takeover Valuation: Biases and Common Errors 724
Structuring the Acquisition 725 Analyzing Management and Leveraged Buyouts
730 Conclusion 734 Questions and Short Problems 735 CHAPTER 26 Valuing Real
Estate 739 Real versus Financial Assets 739 Discounted Cash Flow Valuation
740 Comparable/Relative Valuation 759 Valuing Real Estate Businesses 761
Conclusion 763 Questions and Short Problems 763 CHAPTER 27 Valuing Other
Assets 766 Cash-Flow-Producing Assets 766 Non-Cash-Flow-Producing Assets
775 Assets with Option Characteristics 777 Conclusion 778 Questions and
Short Problems 779 CHAPTER 28 The Option to Delay and Valuation
Implications 781 The Option to Delay a Project 781 Valuing a Patent 789
Natural Resource Options 796 Other Applications 802 Conclusion 802
Questions and Short Problems 803 CHAPTER 29 The Options to Expand and to
Abandon: Valuation Implications 805 The Option to Expand 805 When Are
Expansion Options Valuable? 812 Valuing a Firm with the Option to Expand
815 Value of Financial Flexibility 817 The Option to Abandon 820
Reconciling Net Present Value and Real Option Valuations 823 Conclusion 823
Questions and Short Problems 824 CHAPTER 30 Valuing Equity in Distressed
Firms 826 Equity in Highly Levered Distressed Firms 826 Implications of
Viewing Equity as an Option 828 Estimating the Value of Equity as an Option
831 Consequences for Decision Making 836 Conclusion 839 Questions and Short
Problems 839 CHAPTER 31 Value Enhancement: A Discounted Cash Flow Valuation
Framework 841 Value-Creating and Value-Neutral Actions 841 Ways of
Increasing Value 842 Value Enhancement Chain 859 Closing Thoughts on Value
Enhancement 864 Conclusion 865 Questions and Short Problems 865 CHAPTER 32
Value Enhancement: Economic Value Added, Cash Flow Return on Investment,
and Other Tools 869 Economic Value Added 870 Cash Flow Return on Investment
884 A Postscript on Value Enhancement 890 Conclusion 891 Questions and
Short Problems 891 CHAPTER 33 Probabilistic Approaches in Valuation:
Scenario Analysis, Decision Trees, and Simulations 894 Scenario Analysis
894 Decision Trees 899 Simulations 908 An Overall Assessment of
Probabilistic Risk-Assessment Approaches 919 Conclusion 921 Questions and
Short Problems 921 CHAPTER 34 Overview and Conclusion 925 Choices in
Valuation Models 925 Which Approach Should You Use? 926 Choosing the Right
Discounted Cash Flow Model 929 Choosing the Right Relative Valuation Model
933 When Should You Use the Option Pricing Models? 937 Conclusion 938
References 939 Index 954
A Philosophical Basis for Valuation 1
Generalities about Valuation 2
The Role of Valuation 6
Conclusion 9
Questions and Short Problems 9
Chapter 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11
Relative Valuation 19
Contingent Claim Valuation 23
Conclusion 25
Questions and Short Problems 25
Chapter 3 Understanding Financial Statements 27
The Basic Accounting Statements 27
Asset Measurement and Valuation 29
Measuring Financing Mix 36
Measuring Earnings and Profitability 42
Measuring Risk 47
Other Issues in Analyzing Financial Statements 53
Conclusion 55
Questions and Short Problems 55
Chapter 4 The Basics of Risk 58
What is Risk? 58
Equity Risk and Expected Return 59
Alternative Models for Equity Risk 71
A Comparative Analysis of Equity Risk Models 76
Models of Default Risk 77
Conclusion 81
Questions and Short Problems 82
Chapter 5 Option Pricing Theory and Models 87
Basics of Option Pricing 87
Determinants of Option Value 89
Option Pricing Models 90
Extensions of Option Pricing 107
Conclusion 109
Questions and Short Problems 109
Chapter 6 Market Efficiency--Definition, Tests, and Evidence 111
Market Efficiency and Investment Valuation 111
What Is an Efficient Market? 112
Implications of Market Efficiency 112
Necessary Conditions for Market Efficiency 114
Propositions about Market Efficiency 114
Testing Market Efficiency 116
Cardinal Sins in Testing Market Efficiency 120
Some Lesser Sins That Can Be a Problem 121
Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122
Market Reaction to Information Events 130
Market Anomalies 134
Evidence on Insiders and Investment Professionals 142
Conclusion 149
Questions and Short Problems 150
Chapter 7 Riskless Rates and Risk Premiums 154
The Risk-Free Rate 154
Equity Risk Premium 159
Default Spreads on Bonds 177
Conclusion 180
Questions and Short Problems 180
Chapter 8 Estimating Risk Parameters and Costs of Financing 182
The Cost of Equity and Capital 182
Cost of Equity 183
From Cost of Equity to Cost of Capital 210
Best Practices at Firms 221
Conclusion 222
Questions and Short Problems 223
Chapter 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229
Adjusting Earnings 230
Conclusion 247
Questions and Short Problems 249
Chapter 10 From Earnings to Cash Flows 250
The Tax Effect 250
Reinvestment Needs 258
Conclusion 268
Questions and Short Problems 269
Chapter 11 Estimating Growth 271
The Importance of Growth 272
Historical Growth 272
Analyst Estimates of Growth 282
Fundamental Determinants of Growth 285
Qualitative Aspects of Growth 301
Conclusion 302
Questions and Short Problems 302
Chapter 12 Closure in Valuation: Estimating Terminal Value 304
Closure in Valuation 304
The Survival Issue 318
Closing Thoughts on Terminal Value 320
Conclusion 321
Questions and Short Problems 32
A Philosophical Basis for Valuation 1
Generalities about Valuation 2
The Role of Valuation 6
Conclusion 9
Questions and Short Problems 9
Chapter 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11
Relative Valuation 19
Contingent Claim Valuation 23
Conclusion 25
Questions and Short Problems 25
Chapter 3 Understanding Financial Statements 27
The Basic Accounting Statements 27
Asset Measurement and Valuation 29
Measuring Financing Mix 36
Measuring Earnings and Profitability 42
Measuring Risk 47
Other Issues in Analyzing Financial Statements 53
Conclusion 55
Questions and Short Problems 55
Chapter 4 The Basics of Risk 58
What is Risk? 58
Equity Risk and Expected Return 59
Alternative Models for Equity Risk 71
A Comparative Analysis of Equity Risk Models 76
Models of Default Risk 77
Conclusion 81
Questions and Short Problems 82
Chapter 5 Option Pricing Theory and Models 87
Basics of Option Pricing 87
Determinants of Option Value 89
Option Pricing Models 90
Extensions of Option Pricing 107
Conclusion 109
Questions and Short Problems 109
Chapter 6 Market Efficiency—Definition, Tests, and Evidence 111
Market Efficiency and Investment Valuation 111
What Is an Efficient Market? 112
Implications of Market Efficiency 112
Necessary Conditions for Market Efficiency 114
Propositions about Market Efficiency 114
Testing Market Efficiency 116
Cardinal Sins in Testing Market Efficiency 120
Some Lesser Sins That Can Be a Problem 121
Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122
Market Reaction to Information Events 130
Market Anomalies 134
Evidence on Insiders and Investment Professionals 142
Conclusion 149
Questions and Short Problems 150
Chapter 7 Riskless Rates and Risk Premiums 154
The Risk-Free Rate 154
Equity Risk Premium 159
Default Spreads on Bonds 177
Conclusion 180
Questions and Short Problems 180
Chapter 8 Estimating Risk Parameters and Costs of Financing 182
The Cost of Equity and Capital 182
Cost of Equity 183
From Cost of Equity to Cost of Capital 210
Best Practices at Firms 221
Conclusion 222
Questions and Short Problems 223
Chapter 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229
Adjusting Earnings 230
Conclusion 247
Questions and Short Problems 249
Chapter 10 From Earnings to Cash Flows 250
The Tax Effect 250
Reinvestment Needs 258
Conclusion 268
Questions and Short Problems 269
Chapter 11 Estimating Growth 271
The Importance of Growth 272
Historical Growth 272
Analyst Estimates of Growth 282
Fundamental Determinants of Growth 285
Qualitative Aspects of Growth 301
Conclusion 302
Questions and Short Problems 302
Chapter 12 Closure in Valuation: Estimating Terminal Value 304
Closure in Valuation 304
The Survival Issue 318
Closing Thoughts on Terminal Value 320
Conclusion 321
Questions and Short Problems 321
Chapter 13 Dividend Discount Models 323
The General Model 323
Versions of the Model 324
Issues in Using the Dividend Discount Model 344
Tests of the Dividend Discount Model 345
Conclusion 348
Questions and Short Problems 349
Chapter 14 Free Cash Flow to Equity Discount Models 351
Measuring What Firms Can Return to Their Stockholders 351
FCFE Valuation Models 357
FCFE Valuation versus Dividend Discount Model Valuation 372
Conclusion 376
Questions and Short Problems 376
Chapter 15 Firm Valuation: Cost of Capital and Adjusted Present Value Approaches 380
Free Cash flow to the Firm 380
Firm Valuation: The Cost of Capital Approach 383
Firm Valuation: The Adjusted Present Value Approach 398
Effect of Leverage on Firm Value 402
Adjusted Present Value and Financial Leverage 415
Conclusion 419
Questions and Short Problems 419
Chapter 16 Estimating Equity Value per Share 423
Value of Nonoperating Assets 423
Firm Value and Equity Value 440
Management and Employee Options 442
Value per Share When Voting Rights Vary 448
Conclusion 450
Questions and Short Problems 451
Chapter 17 Fundamental Principles of Relative Valuation 453
Use of Relative Valuation 453
Standardized Values and Multiples 454
Four Basic Steps to Using Multiples 456
Reconciling Relative and Discounted Cash Flow Valuations 466
Conclusion 467
Questions and Short Problems 467
Chapter 18 Earnings Multiples 468
Price-Earnings Ratio 468
The PEG Ratio 487
Other Variants on the PE Ratio 497
Enterprise Value to EBITDA Multiple 500
Conclusion 508
Questions and Short Problems 508
Chapter 19 Book Value Multiples 511
Price-to-Book Equity 511
Applications of Price–Book Value Ratios 521
Use in Investment Strategies 530
Value-to-Book Ratios 532
Tobin’s Q: Market Value/Replacement Cost 537
Conclusion 539
Questions and Short Problems 539
Chapter 20 Revenue Multiples and Sector-Specific Multiples 542
Revenue Multiples 542
Sector-Specific Multiples 571
Conclusion 577
Questions and Short Problems 577
Chapter 21 Valuing Financial Service Firms 581
Categories of Financial Service Firms 581
What is Unique about Financial Service Firms? 582
General Framework for Valuation 583
Discounted Cash Flow Valuation 584
Asset-Based Valuation 599
Relative Valuation 599
Issues in Valuing Financial Service Firms 605
Conclusion 607
Questions and Short Problems 608
Chapter 22 Valuing Firms with Negative or Abnormal Earnings 611
Negative Earnings: Consequences and Causes 611
Valuing Negative Earnings Firms 615
Conclusion 639
Questions and Short Problems 639
Chapter 23 Valuing Young or Start-Up Firms 643
Information Constraints 643
New Paradigms or Old Principles:
A Life Cycle Perspective 644
Venture Capital Valuation 646
General Framework for Analysis 648
Value Drivers 659
Estimation Noise 661
Implications for Investors 662
Implications for Managers 663
The Expectations Game 663
Conclusion 665
Questions and Short Problems 666
Chapter 24 Valuing Private Firms 667
What Makes Private Firms Different? 667
Estimating Valuation Inputs at Private Firms 668
Valuation Motives and Value Estimates 688
Valuing Venture Capital and Private Equity Stakes 693
Relative Valuation of Private Businesses 695
Conclusion 699
Questions and Short Problems 699
Chapter 25 Aquisitions and Takeovers 702
Background on Acquisitions 702
Empirical Evidence on the Value Effects of Takeovers 705
Steps in an Acquisition 705
Takeover Valuation: Biases and Common Errors 724
Structuring the Acquisition 725
Analyzing Management and Leveraged Buyouts 730
Conclusion 734
Questions and Short Problems 735
Chapter 26 Valuing Real Estate 739
Real versus Financial Assets 739
Discounted Cash Flow Valuation 740
Comparable/Relative Valuation 759
Valuing Real Estate Businesses 761
Conclusion 763
Questions and Short Problems 763
Chapter 27 Valuing Other Assets 766
Cash-Flow-Producing Assets 766
Non-Cash-Flow-Producing Assets 775
Assets with Option Characteristics 777
Conclusion 778
Questions and Short Problems 779
Chapter 28 The Option to Delay and Valuation Implications 781
The Option to Delay a Project 781
Valuing a Patent 789
Natural Resource Options 796
Other Applications 802
Conclusion 802
Questions and Short Problems 803
Chapter 29 The Options to Expand and to Abandon: Valuation Implications 805
The Option to Expand 805
When Are Expansion Options Valuable? 812
Valuing a Firm with the Option to Expand 815
Value of Financial Flexibility 817
The Option to Abandon 820
Reconciling Net Present Value and Real Option Valuations 823
Conclusion 823
Questions and Short Problems 824
Chapter 30 Valuing Equity in Distressed Firms 826
Equity in Highly Levered Distressed Firms 826
Implications of Viewing Equity as an Option 828
Estimating the Value of Equity as an Option 831
Consequences for Decision Making 836
Conclusion 839
Questions and Short Problems 839
Chapter 31 Value Enhancement: A Discounted Cash Flow Valuation Framework 841
Value-Creating and Value-Neutral Actions 841
Ways of Increasing Value 842
Value Enhancement Chain 859
Closing Thoughts on Value Enhancement 864
Conclusion 865
Questions and Short Problems 865
Chapter 32 Value Enhancement: Economic Value Added, Cash Flow Return on Investment, and Other Tools 869
Economic Value Added 870
Cash Flow Return on Investment 884
A Postscript on Value Enhancement 890
Conclusion 891
Questions and Short Problems 891
Chapter 33 Probabilistic Approaches in Valuation: Scenario Analysis, Decision Trees, and Simulations 894
Scenario Analysis 894
Decision Trees 899
Simulations 908
An Overall Assessment of Probabilistic Risk-Assessment Approaches 919
Conclusion 921
Questions and Short Problems 921
Chapter 34 Overview and Conclusion 925
Choices in Valuation Models 925
Which Approach Should You Use? 926
Choosing the Right Discounted Cash Flow Model 929
Choosing the Right Relative Valuation Model 933
When Should You Use the Option Pricing Models? 937
Conclusion 938
References 939
Index 954
Generalities about Valuation 2 The Role of Valuation 6 Conclusion 9
Questions and Short Problems 9 CHAPTER 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11 Relative Valuation 19 Contingent Claim
Valuation 23 Conclusion 25 Questions and Short Problems 25 CHAPTER 3
Understanding Financial Statements 27 The Basic Accounting Statements 27
Asset Measurement and Valuation 29 Measuring Financing Mix 36 Measuring
Earnings and Profitability 42 Measuring Risk 47 Other Issues in Analyzing
Financial Statements 53 Conclusion 55 Questions and Short Problems 55
CHAPTER 4 The Basics of Risk 58 What is Risk? 58 Equity Risk and Expected
Return 59 Alternative Models for Equity Risk 71 A Comparative Analysis of
Equity Risk Models 76 Models of Default Risk 77 Conclusion 81 Questions and
Short Problems 82 CHAPTER 5 Option Pricing Theory and Models 87 Basics of
Option Pricing 87 Determinants of Option Value 89 Option Pricing Models 90
Extensions of Option Pricing 107 Conclusion 109 Questions and Short
Problems 109 CHAPTER 6 Market Efficiency--Definition, Tests, and Evidence
111 Market Efficiency and Investment Valuation 111 What Is an Efficient
Market? 112 Implications of Market Efficiency 112 Necessary Conditions for
Market Efficiency 114 Propositions about Market Efficiency 114 Testing
Market Efficiency 116 Cardinal Sins in Testing Market Efficiency 120 Some
Lesser Sins That Can Be a Problem 121 Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122 Market Reaction to Information
Events 130 Market Anomalies 134 Evidence on Insiders and Investment
Professionals 142 Conclusion 149 Questions and Short Problems 150 CHAPTER 7
Riskless Rates and Risk Premiums 154 The Risk-Free Rate 154 Equity Risk
Premium 159 Default Spreads on Bonds 177 Conclusion 180 Questions and Short
Problems 180 CHAPTER 8 Estimating Risk Parameters and Costs of Financing
182 The Cost of Equity and Capital 182 Cost of Equity 183 From Cost of
Equity to Cost of Capital 210 Best Practices at Firms 221 Conclusion 222
Questions and Short Problems 223 CHAPTER 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229 Adjusting Earnings 230
Conclusion 247 Questions and Short Problems 249 CHAPTER 10 From Earnings to
Cash Flows 250 The Tax Effect 250 Reinvestment Needs 258 Conclusion 268
Questions and Short Problems 269 CHAPTER 11 Estimating Growth 271 The
Importance of Growth 272 Historical Growth 272 Analyst Estimates of Growth
282 Fundamental Determinants of Growth 285 Qualitative Aspects of Growth
301 Conclusion 302 Questions and Short Problems 302 CHAPTER 12 Closure in
Valuation: Estimating Terminal Value 304 Closure in Valuation 304 The
Survival Issue 318 Closing Thoughts on Terminal Value 320 Conclusion 321
Questions and Short Problems 321 CHAPTER 13 Dividend Discount Models 323
The General Model 323 Versions of the Model 324 Issues in Using the
Dividend Discount Model 344 Tests of the Dividend Discount Model 345
Conclusion 348 Questions and Short Problems 349 CHAPTER 14 Free Cash Flow
to Equity Discount Models 351 Measuring What Firms Can Return to Their
Stockholders 351 FCFE Valuation Models 357 FCFE Valuation versus Dividend
Discount Model Valuation 372 Conclusion 376 Questions and Short Problems
376 CHAPTER 15 Firm Valuation: Cost of Capital and Adjusted Present Value
Approaches 380 Free Cash flow to the Firm 380 Firm Valuation: The Cost of
Capital Approach 383 Firm Valuation: The Adjusted Present Value Approach
398 Effect of Leverage on Firm Value 402 Adjusted Present Value and
Financial Leverage 415 Conclusion 419 Questions and Short Problems 419
CHAPTER 16 Estimating Equity Value per Share 423 Value of Nonoperating
Assets 423 Firm Value and Equity Value 440 Management and Employee Options
442 Value per Share When Voting Rights Vary 448 Conclusion 450 Questions
and Short Problems 451 CHAPTER 17 Fundamental Principles of Relative
Valuation 453 Use of Relative Valuation 453 Standardized Values and
Multiples 454 Four Basic Steps to Using Multiples 456 Reconciling Relative
and Discounted Cash Flow Valuations 466 Conclusion 467 Questions and Short
Problems 467 CHAPTER 18 Earnings Multiples 468 Price-Earnings Ratio 468 The
PEG Ratio 487 Other Variants on the PE Ratio 497 Enterprise Value to EBITDA
Multiple 500 Conclusion 508 Questions and Short Problems 508 CHAPTER 19
Book Value Multiples 511 Price-to-Book Equity 511 Applications of
Price-Book Value Ratios 521 Use in Investment Strategies 530 Value-to-Book
Ratios 532 Tobin's Q: Market Value/Replacement Cost 537 Conclusion 539
Questions and Short Problems 539 CHAPTER 20 Revenue Multiples and
Sector-Specific Multiples 542 Revenue Multiples 542 Sector-Specific
Multiples 571 Conclusion 577 Questions and Short Problems 577 CHAPTER 21
Valuing Financial Service Firms 581 Categories of Financial Service Firms
581 What is Unique about Financial Service Firms? 582 General Framework for
Valuation 583 Discounted Cash Flow Valuation 584 Asset-Based Valuation 599
Relative Valuation 599 Issues in Valuing Financial Service Firms 605
Conclusion 607 Questions and Short Problems 608 CHAPTER 22 Valuing Firms
with Negative or Abnormal Earnings 611 Negative Earnings: Consequences and
Causes 611 Valuing Negative Earnings Firms 615 Conclusion 639 Questions and
Short Problems 639 CHAPTER 23 Valuing Young or Start-Up Firms 643
Information Constraints 643 New Paradigms or Old Principles: A Life Cycle
Perspective 644 Venture Capital Valuation 646 General Framework for
Analysis 648 Value Drivers 659 Estimation Noise 661 Implications for
Investors 662 Implications for Managers 663 The Expectations Game 663
Conclusion 665 Questions and Short Problems 666 CHAPTER 24 Valuing Private
Firms 667 What Makes Private Firms Different? 667 Estimating Valuation
Inputs at Private Firms 668 Valuation Motives and Value Estimates 688
Valuing Venture Capital and Private Equity Stakes 693 Relative Valuation of
Private Businesses 695 Conclusion 699 Questions and Short Problems 699
CHAPTER 25 Aquisitions and Takeovers 702 Background on Acquisitions 702
Empirical Evidence on the Value Effects of Takeovers 705 Steps in an
Acquisition 705 Takeover Valuation: Biases and Common Errors 724
Structuring the Acquisition 725 Analyzing Management and Leveraged Buyouts
730 Conclusion 734 Questions and Short Problems 735 CHAPTER 26 Valuing Real
Estate 739 Real versus Financial Assets 739 Discounted Cash Flow Valuation
740 Comparable/Relative Valuation 759 Valuing Real Estate Businesses 761
Conclusion 763 Questions and Short Problems 763 CHAPTER 27 Valuing Other
Assets 766 Cash-Flow-Producing Assets 766 Non-Cash-Flow-Producing Assets
775 Assets with Option Characteristics 777 Conclusion 778 Questions and
Short Problems 779 CHAPTER 28 The Option to Delay and Valuation
Implications 781 The Option to Delay a Project 781 Valuing a Patent 789
Natural Resource Options 796 Other Applications 802 Conclusion 802
Questions and Short Problems 803 CHAPTER 29 The Options to Expand and to
Abandon: Valuation Implications 805 The Option to Expand 805 When Are
Expansion Options Valuable? 812 Valuing a Firm with the Option to Expand
815 Value of Financial Flexibility 817 The Option to Abandon 820
Reconciling Net Present Value and Real Option Valuations 823 Conclusion 823
Questions and Short Problems 824 CHAPTER 30 Valuing Equity in Distressed
Firms 826 Equity in Highly Levered Distressed Firms 826 Implications of
Viewing Equity as an Option 828 Estimating the Value of Equity as an Option
831 Consequences for Decision Making 836 Conclusion 839 Questions and Short
Problems 839 CHAPTER 31 Value Enhancement: A Discounted Cash Flow Valuation
Framework 841 Value-Creating and Value-Neutral Actions 841 Ways of
Increasing Value 842 Value Enhancement Chain 859 Closing Thoughts on Value
Enhancement 864 Conclusion 865 Questions and Short Problems 865 CHAPTER 32
Value Enhancement: Economic Value Added, Cash Flow Return on Investment,
and Other Tools 869 Economic Value Added 870 Cash Flow Return on Investment
884 A Postscript on Value Enhancement 890 Conclusion 891 Questions and
Short Problems 891 CHAPTER 33 Probabilistic Approaches in Valuation:
Scenario Analysis, Decision Trees, and Simulations 894 Scenario Analysis
894 Decision Trees 899 Simulations 908 An Overall Assessment of
Probabilistic Risk-Assessment Approaches 919 Conclusion 921 Questions and
Short Problems 921 CHAPTER 34 Overview and Conclusion 925 Choices in
Valuation Models 925 Which Approach Should You Use? 926 Choosing the Right
Discounted Cash Flow Model 929 Choosing the Right Relative Valuation Model
933 When Should You Use the Option Pricing Models? 937 Conclusion 938
References 939 Index 954
A Philosophical Basis for Valuation 1
Generalities about Valuation 2
The Role of Valuation 6
Conclusion 9
Questions and Short Problems 9
Chapter 2 Approaches to Valuation 11
Discounted Cash Flow Valuation 11
Relative Valuation 19
Contingent Claim Valuation 23
Conclusion 25
Questions and Short Problems 25
Chapter 3 Understanding Financial Statements 27
The Basic Accounting Statements 27
Asset Measurement and Valuation 29
Measuring Financing Mix 36
Measuring Earnings and Profitability 42
Measuring Risk 47
Other Issues in Analyzing Financial Statements 53
Conclusion 55
Questions and Short Problems 55
Chapter 4 The Basics of Risk 58
What is Risk? 58
Equity Risk and Expected Return 59
Alternative Models for Equity Risk 71
A Comparative Analysis of Equity Risk Models 76
Models of Default Risk 77
Conclusion 81
Questions and Short Problems 82
Chapter 5 Option Pricing Theory and Models 87
Basics of Option Pricing 87
Determinants of Option Value 89
Option Pricing Models 90
Extensions of Option Pricing 107
Conclusion 109
Questions and Short Problems 109
Chapter 6 Market Efficiency--Definition, Tests, and Evidence 111
Market Efficiency and Investment Valuation 111
What Is an Efficient Market? 112
Implications of Market Efficiency 112
Necessary Conditions for Market Efficiency 114
Propositions about Market Efficiency 114
Testing Market Efficiency 116
Cardinal Sins in Testing Market Efficiency 120
Some Lesser Sins That Can Be a Problem 121
Evidence on Market Efficiency 122
Time Series Properties of Price Changes 122
Market Reaction to Information Events 130
Market Anomalies 134
Evidence on Insiders and Investment Professionals 142
Conclusion 149
Questions and Short Problems 150
Chapter 7 Riskless Rates and Risk Premiums 154
The Risk-Free Rate 154
Equity Risk Premium 159
Default Spreads on Bonds 177
Conclusion 180
Questions and Short Problems 180
Chapter 8 Estimating Risk Parameters and Costs of Financing 182
The Cost of Equity and Capital 182
Cost of Equity 183
From Cost of Equity to Cost of Capital 210
Best Practices at Firms 221
Conclusion 222
Questions and Short Problems 223
Chapter 9 Measuring Earnings 229
Accounting versus Financial Balance Sheets 229
Adjusting Earnings 230
Conclusion 247
Questions and Short Problems 249
Chapter 10 From Earnings to Cash Flows 250
The Tax Effect 250
Reinvestment Needs 258
Conclusion 268
Questions and Short Problems 269
Chapter 11 Estimating Growth 271
The Importance of Growth 272
Historical Growth 272
Analyst Estimates of Growth 282
Fundamental Determinants of Growth 285
Qualitative Aspects of Growth 301
Conclusion 302
Questions and Short Problems 302
Chapter 12 Closure in Valuation: Estimating Terminal Value 304
Closure in Valuation 304
The Survival Issue 318
Closing Thoughts on Terminal Value 320
Conclusion 321
Questions and Short Problems 32