Measuring and Managing the Value of Companies (Valuation)

Valuation is the single best guide of its kind, helping financial professionals worldwide excel at measuring, managing, and maximizing shareholder and company value. This new sixth edition provides insights on the strategic advantages of value-based management, complete detailed instruction, and nuances managers should know about valuation and valuation techniques as applied to different industries, emerging markets, and other special situations.

Valuation lies at the crossroads of corporate strategy and finance. In today’s economy, it has become an essential role — and one that requires excellence at all points. This guide shows you everything you need to know, and gives you the understanding you need to be effective.

·       Estimate the value of business strategies to drive better decision making

·       Understand which business units a corporate parent is best positioned to own

·       Assess major transactions, including acquisitions, divestitures, and restructurings

·       Design a capital structure that supports strategy and minimizes risk

As the valuation function becomes ever more central to long- and short-term strategy, analysts and managers need an authoritative reference to turn to for answers to challenging situations. Valuation stands ahead of the field for its reputation, quality, and prestige, putting the solutions you need right at your fingertips.

Table of Contents

About the Authors ix

Preface xi

Acknowledgments xv

Part One Foundations of Value

1 Why Value Value? 3

2 Fundamental Principles of Value Creation 17

3 Conservation of Value and the Role of Risk 35

4 The Alchemy of Stock Market Performance 49

5 The Stock Market Is Smarter Than You Think 65

6 Return on Invested Capital 93

7 Growth 115

Part Two Core Valuation Techniques

8 Frameworks for Valuation 135

9 Reorganizing the Financial Statements 165

10 Analyzing Performance 201

11 Forecasting Performance 221

12 Estimating Continuing Value 247

13 Estimating the Cost of Capital 269

14 Moving from Enterprise Value to Value per Share 301

15 Analyzing the Results 321

16 Using Multiples 331

17 Valuation by Parts 353

Part Three Advanced Valuation Techniques

18 Taxes 373

19 Non-operating Items, Provisions, and Reserves 387

20 Leases and Retirement Obligations 405

21 Alternative Ways to Measure Return on Capital 423

22 Inflation 445

23 Cross-Border Valuation 459

24 Case Study: Heineken 481

Part Four Managing for Value

25 Corporate Portfolio Strategy 525

26 Performance Management 543

27 Mergers and Acquisitions 565

28 Divestitures 593

29 Capital Structure, Dividends, and Share Repurchases 611

30 Investor Communications 643

Part Five Special Situations

31 Emerging Markets 667

32 Valuing High-Growth Companies 691

33 Cyclical Companies 705

34 Banks 713

35 Flexibility 741

Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 775

Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 781

Appendix C Levering and Unlevering the Cost of Equity 787

Appendix D Leverage and the Price-to-Earnings Multiple 795

Appendix E Other Capital Structure Issues 799

Appendix F Technical Issues in Estimating the Market Risk

Premium 805

Index 809