Corporate valuation : a guide for managers and investors

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Title:

Personal Author:

Daves, Phillip R.

Publication Information:

Mason, Ohio : Thomson/South-Western, 2004.

ISBN:

9780324274288

Subject Term:

Corporations -- Valuation

Business enterprises -- Valuation

Added Author:

Ehrhardt, Michael C. 1955-

Shrieves, Ronald E.

Available:*

Library	Item Barcode	Call Number	Material Type	Item Category 1	Status
Searching... PSZ JB	30000010124075	HG4028.V3 D38 2004	Open Access Book	Book	Searching... Unknown
Searching... Razak School	30000005120757	HG4028.V3 D38 2004	Open Access Book	Book	Searching... Unknown

This book is intended for two audiences: investors who, as "outside" analysts, are assessing the investment potential of a firm, and managers, who as "inside" analysts, want to assess the impact of specific corporate strategy choices on shareholder value. Therefore, it should fit in well as a supplement to investments or corporate finance courses, at both undergraduate and MBA levels. It might also fit in with some accounting courses as a supplement. It has two significant advantages relative to other books and software on the topic of valuation. First the expository approach of the authors is very user-friendly, with a pedagogy designed to build confidence. They begin with a very simple, but complete example in the first couple of chapters that takes the reader through the valuation of a company. They repeat the analysis for successively more complex examples in chapters 3-4, and in chapters 5-7. This iterative approach emphasizes development of a working knowledge firms' financial statements and thorough understanding of how managers' strategic and operating policy choices influence financial outcomes. It allows the reader to absorb "digestible" amounts of material before moving on to the next level of complication. The second pedagogic advantage is the structure of their valuation spreadsheet. They show the reader how to get real world data, and how to cut-and-paste it into their spreadsheet. The spreadsheet simplifies the complex accounting found in most actual companies' financial statements and condenses it into a simplified set of standardized financial statements. This allows the user to concentrate on the fundamental economic forces that underlie a company's value. It will provide tools and insights for assessing a company's value, and it will provide insights into how to measure, manage, and maximize a company's value.

About the Author	p. x
Preface	p. xii
Part 1 Basic Concepts of Corporate Valuation	p. 1
Chapter 1 Why Corporate Valuation?	p. 2
Introduction	p. 2
Our Goals	p. 3
Our Approach: One Step at a Time	p. 4
Discounted Cash Flow Techniques	p. 4
Accounting Skills	p. 6
Technology Skills	p. 6
Preview of What's Ahead	p. 6
Summary	p. 7
Chapter 2 A Complete Corporate Valuation for a Simple Company	p. 8
Introduction	p. 8
The Basic Concepts of Valuation	p. 9
Valuing a Very Simple Company	p. 9
Investors	p. 9
The Corporate Valuation Model	p. 11
The Weighted Average Cost of Capital	p. 11
Calculating Free Cash Flows	p. 12
An Overview of Financial Statements	p. 13
The Balance Sheet	p. 13
The Income Statement	p. 14
Calculating Free Cash Flows	p. 15
Calculating NOPAT	p. 15
Calculating Operating Capital	p. 16
Free Cash Flow	p. 17
Corporate Valuation	p. 18
Corporate Performance: The Return on Invested Capital	p. 20
Applications of the Corporate Valuation Model	p. 22
Mergers and Acquisitions	p. 22
Value-Based Management	p. 23
Fundamental Investing	p. 23
Summary	p. 23
Spreadsheet Problems	p. 24
Appendix 2 Comparing Bond and Stock Valuation Models with the Corporate Valuation Model	p. 26
Bond Pricing	p. 26
The Discounted Dividend Model of Stock Pricing	p. 27
The Uses of Free Cash Flow	p. 28
Part 2 Intermediate Concepts of Corporate Valuation	p. 29
Chapter 3 Financial Statements and Free Cash Flow	p. 30
Introduction	p. 30
What Is Cash Flow, Anyway?	p. 31
When Do You Record It? A "Cruel" Rule	p. 32
The Balance Sheet	p. 33
The Income Statement	p. 35
The Statement of Shareholder's Equity	p. 37
The Statement of Cash Flows	p. 37
ACME's Free Cash Flow	p. 42
Defining Free Cash Flow	p. 42
ACME's Operating Performance	p. 45
Summary	p. 46
Spreadsheet Problems	p. 46
Appendix 3 Reconciling Free Cash Flow with the Statement of Cash Flows	p. 48
Chapter 4 Estimating the Value of ACME	p. 51
Introduction	p. 51
The Weighted Average Cost of Capital	p. 51
Risk and Return	p. 51
Estimating the Cost of Debt	p. 52
Estimating the Cost of Common Stock	p. 54
Estimating the Target Weights	p. 55
Putting the Pieces Together: Calculating the WACC	p. 55
Estimating the Future Expected Free Cash Flows	p. 56
Alternative Valuation Approaches: The Method of Multiples	p. 61
Summary	p. 63
Spreadsheet Problems	p. 63
Appendix 4 Security Valuation	p. 65
The Whole versus the Sum of the Parts	p. 65
Fundamentals of Security Valuation	p. 65
Part 3 Projecting Financial Statements	p. 77
Chapter 5 Projecting Free Cash Flows	p. 78
Introduction	p. 78
Requirements for Useful Financial Projections	p. 78
Van Leer, Inc.	p. 79
Projecting Financial Statements	p. 81
Modeling the Financial Statements	p. 81
Choosing Inputs for the Model	p. 84
Calculating Free Cash Flow	p. 88
Summary	p. 89
Spreadsheet Problems	p. 89
Chapter 6 Projecting Consistent Financial Statements: The Miracle of Accounting	p. 92
Introduction	p. 92
Financial Policies and Projecting Financial Statements	p. 92
Projecting Long-Term Debt and Dividends	p. 93
Making Balance Sheets Balance: The Plug Approach	p. 94
Projecting Interest Expense and Interest Income	p. 95
Completing the Projections: Implementing the Financial Policies	p. 97
Projecting a Complete Income Statement	p. 98
Projecting Complete Balance Sheets	p. 98
Checking Your Projections for Plausibility	p. 102
Summary	p. 104
Spreadsheet Problems	p. 105
Chapter 7 Multiyear Projections and Valuation	p. 108
Introduction	p. 108
One-Year versus Multiyear Projections	p. 108
In the Short Run Anything Can Happen. In the Long Run...	p. 111
Considerations for the Long Run	p. 112
Projecting Operating Profit	p. 112
Projecting Operating Capital	p. 114
Projecting Operating Taxes	p. 118
Dividend and Debt Ratios	p. 118
The Projected Statements	p. 120
Balancing	p. 120
Checking the Projections	p. 120
Using Projections for Valuation	p. 125
Summary	p. 126
Spreadsheet Problems	p. 127
Chapter 8 Technical Issues in Projecting Financial Statements and Forecasting Financing Needs	p. 129
Introduction	p. 129
When Projections Aren't a Percentage of Sales	p. 130
Linear Model with Intercept	p. 130
Nonlinear Models	p. 132
Lumpy Assets	p. 134
Financial Modeling: Art versus Science	p. 137
Alternative Financing Policies	p. 137
Alternative Dividend Policies	p. 137
Alternative Common Stock Policies	p. 142
Projecting Interest Expense Based on the Average Debt during the Year	p. 147
Algebraic Solution to Circularity	p. 148
Spreadsheet Solution to Circularity	p. 148
An Illustration Using Van Leer	p. 149
Summary	p. 149
Spreadsheet Problems	p. 150
Part 4 Valuing Actual Companies with the Corporate Valuation Spreadsheet	p. 153
Chapter 9 The Starting Point for Corporate Valuation: Historical Financial Statements	p. 154
Introduction	p. 154
An Overview of the Corporate Valuation Spreadsheet	p. 154
Step 1 Get the Actual Historical Financial Statements of a Company	p. 156
Step 2 Link the Actual Statements to the Comprehensive Statements	p. 156
Step 3 Condensing the Comprehensive Statements	p. 160
Step 4 Analyzing the Current and Historical Financial Position of the Company	p. 162
Step 5 Estimating the Weighted Average Cost of Capital	p. 163
Step 6 Choose the Inputs for Your Projections	p. 163
Step 7 Completing the Valuation	p. 163
Getting Financial Statements from the Internet	p. 164
1. Thomson Financial and Thomson ONE-Business School Edition	p. 164
2. Edgar	p. 165
3. EdgarScan	p. 165
4. Yahoo!	p. 165
5. Company Web Pages	p. 165
Mapping Your Financial Statements from the Actual Worksheets into the Comprehensive Worksheet	p. 166
Income Statement	p. 167
Balance Sheets	p. 171
Required Special Items	p. 177
Optional Special Items	p. 178
Summary	p. 180
Spreadsheet Problems	p. 181
Appendix 9 Why We Condense the Financials	p. 182
Chapter 10 The Condensed Financial Statements and Historical Analysis	p. 184
Introduction	p. 184
The Condensed Statements	p. 184
Additional Detail on Operating Performance	p. 185
Additional Detail on Nonoperating Performance	p. 188
Adjustments Due to GAAP	p. 190
Calculating Free Cash Flow	p. 191
NOPAT Calculation	p. 191
Free Cash Flow Calculations	p. 193
Analyzing Home Depot's Past and Present Condition	p. 195
Analysis of Ratios Required to Project Financial Statements	p. 196
Analysis of Traditional Ratios as Compared to Competitors	p. 199
Summary	p. 204
Spreadsheet Problems	p. 205
Appendix 10 Mapping the Comprehensive Statements to the Condensed Statements: Advanced Issues in Measuring Free Cash Flows	p. 206
Introduction	p. 206
Overview of Financial Statement Adjustments and Condensing	p. 206
Income Statements	p. 207
Balance Sheets: Current Assets	p. 208
Balance Sheets: Long-Term Assets	p. 209
Balance Sheets: Current Liabilities	p. 209
Balance Sheets: Long-Term Liabilities and Equity	p. 210
An Explanation of Complicated Accounting and the Impact on FCF	p. 210
Goodwill	p. 211
Minority Interests	p. 214
Investments and Advances	p. 217
Operating Leases	p. 217
Pension-Related Liabilities	p. 219
LIFO Reserves	p. 220
Foreign Currency Translations	p. 221
Employee Stock Options	p. 222
Summary	p. 222
Chapter 11 Estimating the Weighted Average Cost of Capital	p. 223
Introduction	p. 223
Estimating the Target Weights	p. 223
Estimating the Values of the Financing Components	p. 224
Estimating the Target Weight for Long-Term Debt	p. 226
Estimating the Target Weight for Short-Term Debt	p. 226
Estimating the Target Weight for Preferred Stock	p. 227
Estimating the Target Weight for Common Equity	p. 227
Estimating the Cost of Long-Term Debt	p. 228
Estimating the Cost of Short-Term Debt	p. 233
Estimating the Cost of Preferred Stock	p. 233
Estimating the Cost of Common Stock	p. 234
Putting the Pieces Together: Calculating the WACC	p. 235
Complications and Advanced Issues	p. 235
Convertible Securities	p. 235
Privately Held Firms and Divisions	p. 237
Summary	p. 237
Spreadsheet Problems	p. 238
Chapter 12 Projecting Cash Flows for an Actual Company: Home Depot	p. 240
Introduction	p. 240
A Useful Perspective on Projections	p. 240
The Mechanics of Projecting the Condensed Statements	p. 241
Using Fade Rates to Input Forecasted Growth Rates	p. 242
Using Fade Rates to Forecast Home Depot's Growth Rates	p. 250
Choosing the Other Inputs Needed to Project Free Cash Flow	p. 252
Choosing the Inputs to Project NOPAT	p. 254
Choosing the Inputs to Project Operating Capital	p. 256
Choosing the Inputs to Calculate Operating Taxes	p. 257
Choosing Inputs to Complete the Projections	p. 257
Specifying the Dividend and Capital Structure Policies	p. 257
Specifying the Nonoperating Items	p. 259
Specifying Interest Rates	p. 259
Completing the Inputs	p. 260
Using Quarterly Data to Improve Your Inputs	p. 260
Reviewing Your Choices of Inputs	p. 262
Avoiding an Error in Your First Year's Projections	p. 263
Spotting Errors	p. 264
Summary	p. 264
Spreadsheet Problems	p. 265
Appendix 12 Top-Down Analysis	p. 266
The Macro Prospective: Global and National	p. 266
The Industry-Level Perspective	p. 266
The Firm-Level Point of View	p. 268
Chapter 13 The Valuation of an Actual Company: Home Depot	p. 269
Introduction	p. 269
Horizon Value Methods	p. 269
The Continuing Value Horizon Formula	p. 269
The Book Value Horizon Formula	p. 271
The Convergence Value Horizon Formula	p. 272
The General Value Horizon Formula	p. 273
The Horizon Value for Home Depot	p. 273
The Value of Operations for Home Depot	p. 274
The Half-Year Adjustment	p. 275
Estimating the Value at Times Other than Fiscal Year-End	p. 276
The Valuation of Home Depot	p. 277
Projections of Other Financial Measures	p. 281
Reverse Engineering/Scenario Analysis	p. 284
Valuing a Company with a Changing Capital Structure	p. 285
Summary	p. 285
Spreadsheet Problems	p. 286
Appendix 13 The Adjusted Present Value Method	p. 288
Capital Structure and the Value of a Company	p. 288
Too Much Debt and Bankruptcy Costs	p. 289
Too Much Debt and Managerial Behavior	p. 290
Valuation When Debt Is Moderate	p. 291
The Unlevered Value of Operations	p. 291
The Value of the Tax Shield	p. 292
Index	p. 295

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