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TitleValuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options
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Table of Contents
                            Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options
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Contents
Foreword
Introduction
Part I: Valuation Perspectives: Then and Now
	Chapter 1: Two Illustrative Approaches to Formula Valuations of Common Stocks
		Notes
	Chapter 2: Seeking a Margin of Safety and Valuation
		Two Basic Investment Goals
		The Price of Money is Fake
		The Future is Uncertain
		Dealing with Macro Risk
		Owning an Enterprise Preserves Purchasing Power
		Seek a Margin of Safety
			Valuation
			Business Model Erosion
			Focus on Assets, Not on Residual Equity
			Management
		Flexibility to Look Different
		Conclusion
		Question and Answer Session
		Note
Part II: Valuation Methodologies
	Chapter 3: Company Performance and Measures of Value Added
		Foreword
		Acknowledgments
		Introduction
			How Value Is Created
			Relating New Performance Methods to Capital-Budgeting Techniques
			Summary
		Traditional Measures of Performance
			Return-on-Investment Ratios
			Tobin's q
			Summary
		Measures of Value Added
			Economic Profit
			Market Value Added
			Reconciling Economic Value Added with Market Value Added
			Challenges in Applying Value-Added Measures
			Holt's Cfroi
			Summary
		Comparison of Alternative Performance Measures
			The Sample
			The Variables
			Empirical Results
			Summary
		Conclusions
		Appendix 3A: The Firm's Cost Of Capital
			Cost of Debt
			Cost of Preferred Stock
			The Cost of Common Equity
			Weighted-Average Cost of Capital
			Issues in Calculating a WACC
		Appendix 3B: Net Present Value and Internal Rate of Return
		Glossary
		Notes
		References
	Chapter 4: The Affordable Dividend Approach to Equity Valuation
		Affordable Dividends
		Affordable vs. Conventional dividends
		Significance of Difference
		Book Value vs. Economic Value weights
		Conclusion
		Notes
	Chapter 5: Discounted-Cash-Flow Approach to Valuation
		The DCF Formula
		Estimation of Cash Flows
		Discount Rate
			Definition
			External Factors
			Internal Factors
			Components
		Terminal Value
		Conclusion
		Question and Answer Section
		Note
	Chapter 6: Equity Securities Analysis Case Study: Merck & Company
		Recent Annual Reports
			Strategic Objectives
			Structural Reorganization
			Position on Health Care Reform
			Outlook for the Future
		Fundamentals of the U.S. Pharmaceutical Industry
			Pricing and the Demand for Pharmaceuticals
			Consolidation and Joint Ventures
			Marketing Trends
			International Competition
			The U.S. Political/Regulatory Environment
		Tasks to be Completed
		Appendix 6A: Merck & Company Financial Data
		Appendix 6B: Statistical Data: Pharmaceutical Industry
		Appendix 6C: Competitive Strategy Analysis Framework
		Appendix 6D: Review of the Dupont Financial Ratio Analysis Method
		Appendix 6E: Selected Valuation Methods
			Single-Stage Constant-Growth DCF Model
			Multistage DCF Model
			H-Model
			Financial Ratios Approaches
		Guideline Answers: The Merck Case
			The Current Issues Involved in Marketing Pharmaceuticals
			The Competitive Structure of the U.S. Pharmaceutical Industry
			Porter's Model and Merck
			Evaluation of Merck's Recent ROE Performance
			Calculate Merck's Intrinsic Value
			Calculate Merck's Intrinsic Value Using a Two-Stage DCF Model
			Intrinsic Value Sensitivity Analysis
			Discussion of Intrinsic Value Sensitivity Analysis
			Calculation of Intrinsic Value Using Merck's P/E and EPS
			Discussion of the Valuation Analysis
			Calculation of Intrinsic Value Using the H-Model
			Sensitivity Analysis of the H-Model
			Analysis of the H-Model Results
			Overall Valuation Opinion and Investment Recommendation
			Observations on Quantitative Factors
			Observations on Qualitative Factors
	Chapter 7: Traditional Equity Valuation Methods
		Purpose
		Shortcuts
			Expectational Models
			Valuation Models
		Traditional Valuation Methods
		P/B
		P/S
		P/E
		DDM
		Screening
			Sector Composition
			Valuation
			ROE Composition
			Growth
			Risk, Expectations, and Performance
		Fundamental Analysis
			Growth and Discount Rates
			Valuation
		Conclusion
		Question and Answer Session
	Chapter 8: A Simple Valuation Model and Growth Expectations
		The Gordon and Gordon Model
		A Simple Finite-Growth Model
			Case 1: All Earnings Reinvested in Positive-NPV Projects
			Case 2: Partial Reinvestment of Earnings in Positive-NPV Projects
		The Model and Market Expectations
		Evaluating the Reasonableness of a P/E
		Overpricing of High-P/E Stocks
		Conclusion
		Appendix 8A: Comparison of New Model with Gordon and Gordon Model
		Acknowledgments
		Notes
		References
	Chapter 9: Franchise Valuation Under Q-Type Competition
		Single-Phase No-Growth Model
		Q-Type Competitive Equilibrium
		A General Decay Model
		The PV-Equivalent ROE
		Basic Two-Phase Growth Model
			Growth-Driven ROE
			Terminal ROEs in Q-Type Competition
		Conclusion
		Notes
		References
	Chapter 10: Value Enhancement and Cash-Driven Valuation Models
		Discounted Cash Flow and Estimates
		Estimation Issues
			Nominal versus Real Valuation
			Cost of Equity
		Value Creation
			Value-Neutral Actions
			Alternative Approaches to Enhancing Value
		Economic Value Added
			EVA Caveats
			Comparing EVA and DCF Valuation
		Conclusion
		Question and Answer Session
	Chapter 11: FEVA: A Financial and Economic Approach to Valuation
		Principle of One Value
		Solving the Circularity Problem
		FEVA
		Conclusion
		Appendix 11A: Derivation of FEVA Formula
		Notes
		References
	Chapter 12: Choosing the Right Valuation Approach
		Equity Valuation in Perspective
			No More New Economy
			Survey of Valuation Techniques
			Market Multiples
		Choosing a Better Comparable
			Two Key Issues
			Defining the Multiple
			Drivers behind the Multiples
			Research Design
			Research Results
		Summary
		Question and Answer Session
		Notes
	Chapter 13: Choosing the Right Valuation Approach
		Defining the Valuation Problem
		Asset/Cost Approaches
			Adjusted Book Value Approach
			Replacement Cost Approach
		Market Approaches
			Guideline Multiples
			Guideline Transactions
			Summary
		Income Approaches
			FCFF Approaches
			FCFE Approach
			DDM Approach
		Contingent Claims Approach: Option Valuation Method
		Conclusion
		Question and Answer Session
		Notes
	Chapter 14: Valuing Illiquid Common Stock
		Value of Liquidity
		Stock Return Volatility
			Measuring Volatility
			Stock Return Volatilities
			Is Volatility Persistent?
		Case Study
			Maximum Discount for Illiquidity
			Determining the Final Discount
		Conclusion
		Notes
		References
Part III: Earnings and Cash Flow Analysis
	Chapter 15: Earnings: Measurement, Disclosure, and the Impact on Equity Valuation
		Foreword
		Acknowledgments
		Dedication
		Introduction
		Evidence on the Relevance of Earnings to Valuation
			Earnings Information and Equity Prices
			The Information Content of Earnings versus Cash Flows
			Analysts' Use of Earnings in Valuation
			Summary
		The Reporting of Earnings and Equity Valuation
			Free Cash Flow Models or Earnings-Based Models?
			The Classified Income Statement
			Unusual and Nonrecurring Items
			Restructurings
			Discontinued Operations
			Accounting Changes
			Comprehensive Income and Its Components
			Summary
		How Buy-Side Equity Analysts use Earnings in Valuation
			Objectives and Procedures
			Analysis of Stock-Price Estimates
			Insights from the Experiment
			Follow-Up Study
			Summary
		Conclusion
		Notes
		References
	Chapter 16: Cash Flow Analysis and Equity Valuation
		FCF Approach
			Justification for the FCF Approach
			Practical Questions
			Implementation Problems
		Problems with Earnings Focus
			Depreciation and Amortization
			Restructuring Charges
			Gains and Losses
			Research and Development (R&D) Expenditures
			Postemployment Expenses
		FCF Analysis for Stock Valuation
			Estimate Current FCF
			Estimate Anticipated Growth in FCF
			Infer Expected Return on the "Unlevered Firm"
			Calculate Levered r
			Relate Equity-r to Risk
		FCF Example
		Conclusion
		Question and Answer Session
	Chapter 17: Accounting Valuation: Is Earnings Quality an Issue?
		Earnings Measures and Valuation
		Empirical Tests of Earnings Quality
			Value Relevance Method
			Information Content Method
			Predictive Ability Method
			Methods Compared
			Economic Earnings Measures
			Component Data
		Policy Implications
		Notes
		References
	Chapter 18: Earnings Quality Analysis and Equity Valuation
		Why Analyze Earnings Quality?
		Impact of Earnings Surprises
		Defining Earnings Quality
		Simple Accruals Example
		Decomposing Earnings
		Conclusion
		Question and Answer Session
	Chapter 19: Is Cash Flow King in Valuations?
		Multiples-Based Valuation
		Prior U.S. Evidence: Dominance of Earnings
		International Sample
		International Results
			Operating Cash Flows vs. Earnings
			Dividends versus Earnings
			Absolute Valuation Performance of EPS Forecasts
		Conclusion
		Appendix 19A: Variable Definitions
			Earnings Per Share (EPS)
			Operating Cash Flow Per Share (OCPS)
			Dividends Per Share (DPS)
		Notes
		References
Part IV: Option Valuation
	Chapter 20: Employee Stock Options and Equity Valuation
		Foreword
		Preface
		Employee Stock Option Basics
			A Typical Employee Option
			Options in Equity Valuation
		Expected Cost of Options
			Accounting for Stock Options
			Dell Example
			Tax Issues
		Patterns of Option Exercise
			Assumptions about Exercise
			Timing of Exercise
			Empirical Evidence
			Implications
			Option-Valuation Models
		Option Value to Employees
			Employee Risk Aversion vs. Incentive Effects
			Volatility and Employee Options
			Incentive Benefits vs. Accounting Benefits of Options
			Accounting, Compensation Design, and Repricing
		Impact on Cash Flow and Valuation
			Determinants of Option Grants
			Options, Repurchases, Dilution, and Cash Flow
			Options and Incentives
			Options and Dilution
			Market Valuation of Options
		Summary and Application
			Implications of the Research
			Future Option Issues
			Possible Shift to Restricted Stock
		Appendix 20A: Selected Disclosures from Dell Computer's 2002 Annual Report
		Notes
		References
	Chapter 21: Employee Stock Option Valuation with an Early Exercise Boundary
		Heuristic Models of a Voluntary Early Exercise Boundary
			"Adjusted Maturity" Approach (an L Model)
			HW "Multiple of Strike Price" Approach (an M Model)
			"Proportion of Option Value Captured" Approach (a µ Model)
		Comparison of L, M, and µ Models
			Calculation of Model Prices for a Representative Investor
			Relative Prices Obtained from the Models
			Performance of Heuristic Models against an Objective Option Value
		Conclusion
		Acknowledgments
		Notes
		References
Part V: Real Options Valuation
	Chapter 22: Real Options and Investment Valuation
		Foreword
		Preface
		Introduction
			Real Options in the Technology Sector
			Background and Methodology of Real Options
			Summary
		Valuation Models: Traditional Versus Real Options
			Investment Opportunity for the Hokie Company
			Traditional Valuation Tools
			Option Valuation
			Summary
		A Framework for the Valuation of Real Options
			Valuation of Financial Options
			Valuation of Real Options Using Financial Option-Pricing Models
			Summary
		Getting Real About Real Options
			Applying Real Options Valuation
			Valuation of Cisco Systems
			Case Study in Valuing a Company with Real Options
			Summary
		Pitfalls and Pratfalls in Real Options Valuation
			Complications from Internal and External Interactions
			Inability to Explain Absurd Valuations
			Model Risk
			Failure to Meet Assumptions
			Difficulty of Estimating Inputs
			Nontradability of the Underlying Asset
			Summary
		Empirical Evidence on the use and Accuracy of Real Options Valuation
			Direct and Indirect Tests
			The Use of Real Options Models by Practitioners
			Summary
		Summary and Conclusions
		Appendix 22A: Further Illustrations of Real Options in Investment Projects
			Option to Default
			Option to Contract
			Option to Shut Down
		Appendix 22B: Binomial Example of the Hokie Company's Investment Opportunity
		Glossary
		Notes
		References
	Chapter 23: Real-Options Valuation for a Biotechnology Company
		New-Drug Development
		Agouron Pharmaceuticals
		Assumptions
		Valuation Methods
		Decision-Tree Method
		Results
		Conclusion
		Note
		References
About the Contributors
Index
                        

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