Investment Valuation: Tools and Techniques for Determining the Value of Any Asset delves into valuation techniques for a variety of different asset classes, including real options, start-up firms, unconventional assets, distressed companies and private equity, real estate, and many more, and explains how to choose the right model for any given asset valuation scenario. The models are presented with real-world examples so as to capture some of the problems inherent in applying these models, with discussion of differences and common elements between the models to provide readers with a holistic understanding of the subject matter.
Written by a professor of finance who is widely regarded as one of the best educators and thinkers on the topic of investment valuation, this newly revised and updated Fourth Edition explores topics including: - Understanding financial statements, the basics of risk, and tests and evidence for market efficiency - Estimating risk parameters and costs of financing, terminal value, and equity value per share - Using scenario analysis, decision trees, and simulations for probabilistic approaches in valuation
Investment Valuation: Tools and Techniques for Determining the Value of Any Asset is an essential resource for all investors and students of financial markets seeking an all-in-one guide to expand their valuation knowledge and make better investment decisions.
Table of Contents
DEDICATIONPREFACE
Chapter 1
Introduction to Valuation
A Philosophical Basis for Valuation
Pricing versus Valuation
The Bermuda Triangle of Valuation
Market Efficiency
The Role of Valuation
Conclusion
Chapter 2
Approaches to Valuation
Intrinsic Valuation
Pricing or Relative Valuation
Contingent Claim Valuation
Conclusion
Chapter 3
Understanding Financial Statements
The Basic Accounting Statements
Asset Measurement and Valuation
Measuring Financing Mix
Measuring Earnings and Profitability
Measuring Risk
Other Issues in Analyzing Financial Statements
Conclusion
Chapter 4
The Basics of Risk
What Is Risk?
Equity Risk and Expected Return
Alternative Models for Equity Risk
A Comparative Analysis of Equity Risk Models
Models of Default Risk
Conclusion
Chapter 5
Option Pricing Theory and Models
Basics of Option Pricing
Option Pricing Models
Extensions of Option Pricing
Conclusion
Chapter 6
Market Efficiency - Definition, Tests, and Evidence
Market Efficiency and Investment Valuation
What Is an Efficient Market?
Testing Market Efficiency
Cardinal Sins in Testing Market Efficiency
Some Lesser Sins That Can Be a Problem
Evidence on Market Efficiency
Time Series Properties of Price Changes
Market Anomalies
Evidence on Insiders and Investment Professionals
Conclusion
Chapter 7
Riskless Rates and Risk Premiums
The Risk-Free Rate
Equity Risk Premium
Default Spreads on Bonds
Conclusion
Chapter 8
Estimating Risk Parameters and Costs of Financing
The Cost of Equity and Capital
Cost of Equity
From Cost of Equity to Cost of Capital
Best Practices at Firms
Conclusion
Chapter 9
Measuring Earnings
The Lead in: From accounting data to financial information
Adjusting Earnings
Measuring Earnings Power: Clean up and Time Differences
Conclusion
Chapter 10
From Earnings to Cash Flows
The Tax Effect
Reinvestment Needs
Conclusion
Chapter 11
Estimating Growth
The Importance of Growth
Historical Growth
Outsourcing Growth
Fundamental Determinants of Growth
Top-Down Growth: From Revenue Growth to Free Cash Flows
Qualitative Aspects of Growth
Conclusion
Chapter 12
Closure in Valuation: Estimating Terminal Value
Closure in Valuation
The Survival Issue
Closing Thoughts on Terminal Value
Conclusion
Chapter 13
Narrative and Numbers - Story to Value
Valuation as a Bridge
From Story to Numbers: The Process
Narrative and Numbers across the Life Cycle
Story Resets, Changes and Breaks
Conclusion
Chapter 14
Equity Intrinsic Value Models
Equity Valuation
The Dividend Discount Model
The Augmented Dividend Discount Model
Potential Dividend or FCFE Models
FCFE Valuation Versus Dividend Discount Model Valuation
Conclusion
Chapter 15
Firm Valuation: Cost of Capital and Adjusted Present Value Approaches
Free Cash Flow to the Firm
Firm Valuation: The Cost of Capital Approach
Firm Valuation: The Adjusted Present Value Approach
Firm Valuation - Sum of the parts
Effect of Leverage on Firm Value
Conclusion
Chapter 16
Estimating Equity Value Per Share
Value of Nonoperating Assets
Firm Value and Equity Value
Stock-based Compensation
Value Per Share When Voting Rights Vary
Conclusion
Chapter 17
Fundamental Principles of Relative Valuation
Use of Relative Valuation
Standardized Values and Multiples
Four Basic Steps to Using Multiples
Reconciling Relative and Discounted Cash Flow Valuations
Conclusion
Chapter 18
Earnings Multiples
Price-Earnings Ratio
The PEG Ratio
Other Variants on the PE Ratio
Other Variants on the PE Ratio
Enterprise Value to EBITDA Multiple
Conclusion
Chapter 19
Book Value Multiples
Price-to-Book Equity
Value-to-Book Ratios
Tobin'S Q: Market Value/Replacement Cost
Conclusion
Chapter 20
Revenue Multiples and Sector-Specific Multiples
Revenue Multiples
Sector-Specific Multiples
Conclusion
Chapter 21
Valuing Financial Service Firms
Categories of Financial Service Firms
What Is Unique About Financial Service Firms?
General Framework for Valuation
Discounted Cash Flow Valuation
Relative Valuation
The Crisis Effect
Non-bank financial service firms
Conclusion
Chapter 22
Valuing Money Losing Firms
Negative Earnings: Consequences and Causes
Valuing Money-losing Firms
Conclusion
Chapter 23
Valuing Young or Start-Up Firms
Information Constraints
General Framework for Analysis
Value Drivers
Estimation Noise
The Expectations Game
Conclusion
Chapter 24
Valuing Private Firms
What Makes Private Firms Different?
Estimating Valuation Inputs at Private Firms
Valuation Motives and Value Estimates
Valuing Venture Capital and Private Equity Stakes
Pricing Private Businesses
Conclusion
Chapter 25
ACQUISITIONS AND TAKEOVERS
Background on Acquisitions
Steps in an Acquisition
Takeover Valuation: Biases and Common Errors
Structuring the Acquisition
Improving the Odds
Analyzing Management and Leveraged Buyouts
Conclusion
Chapter 26
Valuing Real Estate
Real Versus Financial Assets
Real Estate: The Underfollowed Investment class
Intrinsic Valuation of Real Estate
Comparable/Relative Valuation
Valuing Real Estate Businesses
Conclusion
Chapter 27
Valuing Other Assets
Investment classification
Cash-Flow-Producing Assets
Collectibles
Trophy Assets
Conclusion
Chapter 28
The Option to Delay and Valuation Implications
Real Options: Promise and Pitfalls
The Option to Delay a Project
Valuing a Patent
Natural Resource Options
Other Applications
Conclusion
Chapter 29
The Options to Expand and to Abandon: Valuation Implications
The Option to Expand
When Are Expansion Options Valuable?
Valuing a Firm with the Option to Expand
Valuing the Optionality in Users and Data
Value of Financial Flexibility
The Option to Abandon
Reconciling Net Present Value and Real Option Valuations
Conclusion
Chapter 30
Valuing Equity in Distressed Firms
Equity in Highly Levered Distressed Firms
Optionality in Valuation: A Corporate Life Cycle Perspective
Implications of Viewing Equity as an Option
Estimating the Value of Equity as an Option
Distressed Equity as an Option: Consequences for Decision Making
Conclusion
Chapter 31
Value Enhancement: A Discounted Cash Flow Valuation Framework
Value-Creating and Value-Neutral Actions
Ways of Increasing Value
Value Enhancement Chain
Closing Thoughts on Value Enhancement
Conclusion
Chapter 32
Value Enhancement: Economic Value Added, Cash Flow Return on Investment, and Other Tools
Economic Value Added
Cash Flow Return on Investment
A Postscript on Value Enhancement
Conclusion
Chapter 33
Probabilistic Approaches in Valuation: Scenario Analysis, Decision Trees, and Simulations
Scenario Analysis
Decision Trees
Simulations
An Overall Assessment of Probabilistic Risk-Assessment Approaches
Conclusion
Chapter 34
Overview and Conclusion
Scenario Analysis Choices in Valuation Models
Which Approach Should You Use?
Choosing the Right Intrinsic Valuation Model
Choosing the Right Pricing Model
When Should You Use the Option Pricing Models?
Conclusion
References
Index
