Elsevier S & T

Valuation Methods and Shareholder Value Creation

Fernandez, Pablo

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Table of contents
  • Title Pageiii
  • Copyright Pageiv
  • Contentsv
  • Prefacexxiii
  • Acknowledgmentsxxvii
  • Part I: Basics of Valuation Methods and Shareholder Value Creation1
  • Chapter 1. Shareholder Value Creation, Basic Concepts3
  • 1.1. Increase of Equity Market Value4
  • 1.2. Shareholder Value Added4
  • 1.3. Shareholder Return6
  • 1.4. Required Return to Equity7
  • 1.5. Created Shareholder Value8
  • 1.6. The ROE is not the Shareholder Return9
  • 1.7. Compariso of General electric with Other Companies10
  • 1.8. Value Creation and Value Destruction of the S&P 50019
  • 1.9. What Should the Shareholder return be Compared With?19
  • Reference20
  • Chapter 2. Company Valuation Methods21
  • 2.1. Value and Price. What Purpose Does a Valuation Serve?22
  • 2.2. Balance Sheet-Based Methods24
  • 2.3. Income Statement-Based Methods. Relative Valuation27
  • 2.4. Goodwill-Based Methods33
  • 2.5. Cash Flow Discounting-Based methods37
  • 2.6. Which is the Best Method to Use?47
  • 2.7. The Company as the Sum of the Values of Different Divisions: Break-Up Value48
  • 2.8. Valuation Methods Used Depending on the Nature of the Company48
  • 2.9. Key Factors Affecting Value: Growth, Return, Risk, and Interest Rates50
  • 2.10. Speculative Bubbles on the Stock Market51
  • 2.11 Most Common Errors in Valuations55
  • References56
  • Chapter 3. Price-Earnings Ratio, Profitability, Cost of Capital, and Growth57
  • 3.1. Evolution of the Per on the International Stock Markets58
  • 3.2. Factors Affecting the Per60
  • 3.3. Influence of Growth(g) on the Per64
  • 3.4. Influence of the Roe on the Per66
  • 3.5. Influence of the Required Return to Equity on the PER66
  • 3.6. Influence of Interest Rates on the PER67
  • 3.7. Growth Value and PER Due to Growth67
  • Summary69
  • Appendix 3.1: Price PER Share, Market Capitalization, Earnings PER Share (EPS), Dividend Yield and P70
  • Appendix 3.2: Breakdwon of the Price PER Share Between No-Growth Price and Growth Value; an Breakdwo73
  • Appendix 3.3: Relationship Between the PER and Growth (g), Required Return to Equity (Ke) and Return74
  • Chapter 4. Splitting the Price-Earnings Ratio. Franchise Factor, Growth Factor, Interest Factor, and77
  • 4.1 PER, Franchise Factor, and Growth Factor78
  • 4.2. PER*, Franchise Factor*, and Growth Factor79
  • 4.3. PER, Interest Factor, and Risk Factor80
  • 4.4. Value Generation Over Time in Companies with Growth82
  • 4.5. Influence of Growth on the Franchise Factor and on the Growth Factor84
  • 4.6. Influence of the ROE on the Franchise Factor85
  • 4.7. Influence of the Required Return to Equity on the Franchise Factor and on the PER86
  • Appendix 4.1: Splitting the PER88
  • Reference90
  • Chapter 5. Market Value and Book Value91
  • 5.1. Market Value and Book Value on the North American Stock Market91
  • 5.2. Market-To-Book Ratio on the International Stock Markets93
  • 5.3. Market-To-Book Ratio and Interest Rates on the North American Stock Market93
  • 5.4. Relationship Between the Market-To-Book Ratio and the PER and the ROE93
  • 5.5. Value Creation and the Difference Between Market Value and Book Value98
  • 5.6. Equity Book Value may be Negative. The Case of Sealed Air99
  • Summary103
  • References104
  • Appendix 5.1. Market Value (E) and Book Value (Ebv) of Selected U.S. Companies in December 1995 and106
  • Chapter 6. Dividends and market Value109
  • 6.1. Evolution of Dividends on the U.S. Stock Market109
  • 6.2. Increasingly Fewer Companies Distribute Dividends and More Buy Back Shares109
  • 6.3. Evolution of Dividends on the International Markets112
  • 6.4. The Share Value is the Present Value of the Expected Dividends112
  • 6.5. Share Value When Dividends have Constant Growth, Gordon and Shapiro Formula114
  • 6.6. Share Value when Dividends Grow at a Fixed Quantity Each Year117
  • 6.7. Binomial Valuation Model of Discounted Dividends118
  • 6.8. Trinomial Valuation Model of Discounted Dividends120
  • 6.9. The Share's Value when the Dividends have Two Growth Rates: The Two-Stage Growth Model122
  • 6.10. Stock Valuation when Dividends have Two Growth Rates: Model H10123
  • 6.11. Stock Valuation with Three Periods of Dividend Growth123
  • Appendix 6.1: Derivation of the Gordon and Shapiro Formula124
  • Appendix 6.2: Derivation of the Share Value Formula when the Dividend Grows at a Fixed Quantity Ever125
  • Appendix 6.3: Derivation of the Share Value Formula in the Additive Binomial Model126
  • Appendix 6.4: Derivation of the Share Value Formula in the Geometric Binomial Model127
  • Appendix 6.5: Derivation of the Share Value Formula in the Geometric Trinomial Model127
  • Appendix 6.6: Error Made with the Share Price Approximation when the Share's Dividends Grow at Two D128
  • Appendix 6.7: Error Made with the Share Price Approximation Using the Model H129
  • References130
  • Chapter 7. Interest Rates: Their Importance in the Valuation133
  • 7.1. Evolution of Interest Rates133
  • 7.2. Interest Rates With Different Maturities (Yield Curve)134
  • 7.3. Relationship Between Interest Rates and Share Prices136
  • 7.4. Relationship Between Interest Rates and the PER136
  • 7.5. Relationship Between Interest Rates and Dividend Yield in the United States138
  • 7.6. Equity Duration138
  • 7.7. Relationship Between the Yield of the S&P 500 and the Variation in Interest Rates139
  • 7.8. Risk and Required Return to Different Debt Issues140
  • 7.9. Rates of the Federal Reserve (United States) and the European Central Bank (Germany Before 1998144
  • Reference144
  • Chapter 8. Valuation Using Multiples. How Do Analysts Reach their Conclusions?145
  • 8.1. Valuation Methods Used by the Analysts145
  • 8.2. Most Commonly Used Multiples146
  • 8.3. Relative Multiples151
  • 8.4. The Problem with Multiples: Their Dispersion152
  • 8.5. Volatility of the Most Widely Used Parameters for Multiples158
  • 8.6. Analysts' Recommendations: Hardly Ever Sell159
  • 8.7.Strange Multiples161
  • References166
  • Chapter 9. Cash Flow and Net Income169
  • 9.1. Net Income is just an Opinion, but Cash Flow is a Fact169
  • 9.2. Accounting Cash Flow, Equity Cash Flow, Free Cash Flow,and Capital Cash Flow170
  • 9.3. Calculating the Cash Flows172
  • 9.4. A Company with Positive Net Income and Negative Cash Flows174
  • 9.5. When is Profit after Tax a Cash Flow?177
  • 9.6. When is the Accounting Cash Flow a Cash Flow?178
  • 9.7. Equity Cash Flow and Dividends179
  • 9.8. Recurrent Cash Flows180
  • Summary181
  • Appendix 9.1: Attention to the Accounting and the Managing of Net Income182
  • References184
  • Chapter 10. Inflation and Value185
  • 10.1. Campa Spain and Campa Argentina185
  • 10.2. Analysis of the Differences Between Campa Spain and Campa Argentina187
  • 10.3. Adjustments to Correct for the Effects of Inflation193
  • Summary197
  • Reference199
  • Chapter 11. Cost of Equity: Beta and Risk Premium201
  • 11.1. Betas and Volatilities202
  • 11.2. Volatility (cr) and Diversification203
  • 11.3. Beta (b)203
  • 11.4. Drawbacks of Betas and Volatilities. Instability and Period Dependence205
  • 11.5. Qualitative Calculation of the Beta211
  • 11.6. Market Risk Premium212
  • 11.7. Methods Proposed for Calculating the Market Risk Premium214
  • 11.8. Historical Differential Return of the Market Portfolio and the Risk-Free Rate in the U.S.219
  • 11.9. Return of Stocks Over Bonds in the U.S221
  • 11.10. Premium Over the Risk-Free Rate in Different Countries and Country Risk Premium226
  • 11.11. Premium of the North American Stock Market from the Gordon and Shapiro Equation227
  • 11.12. Recent Comparison of the Stock Market Evolution in Spain,Germany, Japan, and the U.S229
  • 11.13. Has the Market Risk Premium Decreased or is the Market Overvalued?230
  • 11.14. Does the Market Risk Premium Exist?232
  • Key Concepts236
  • References236
  • Chapter 12. Valuations of Internet Companies: The Case of Terra-Lycos239
  • 12.1. Twelve Valuations of Terra. Different Expectations241
  • 12.2. Some Comparisons Between the Projections and the Valuations245
  • 12.3. Valuation Performed By a Euroamerican Bank in April 2000: 104 Euros245
  • 12.4. Valuation Performed by a Spanish Bank in May 2000: 84.4 Euros250
  • 12.5. Valuation Performed by an American Broker in June 2000: 53 Euros254
  • 12.6. Valuation Performed by a Spanish Bank in September 1999:19.8 Euros257
  • 12.7. How Should Terra be Valued258
  • 12.8. An Anecdote on the "New Economy260
  • Reference261
  • Part II: Shareholder Value Creation263
  • Chapter 13. Proposed Measures of Shareholder Value Creation. EVA’, Economic Profit, MVA, CVA, CFRO265
  • 13.1. Book Profit (EP) and NVA266
  • 13.2. EVA’ and MVA268
  • 13.3. CVA and MVA269
  • 13.4. First Example: Investment Without Value Creation269
  • 13.5. Incorrect Interpretation of EVA, EP and CVA273
  • 13.6. Usefulness of EVA, EP, and CVA274
  • 13.7. CFROI, TSR, and TBR275
  • 13.8. Second Example: Investment with Value Creation278
  • 13.9. Conclusions281
  • Appendix 13.1: Verification that the EP (Economic Profit)Discounted at the Rate (Ke) is the MVA(Mark282
  • Appendix 13.2: Obtainment of the Formulas for EVA and MVA from the FCF and WACC285
  • Appendix 13.3: Verification that the CVA Discounted at the WACC is the MVA287
  • Appendix 13.4: Adjustments Sugggested by Stern Stewart & Co. for Calculating the EVA288
  • References289
  • Chapter 14. EVA, Economic Profit, and Cash Value Added do not Measure Shareholder Value Creation291
  • 14.1. Accounting-Based Measures Cannot MeasureValue Creation291
  • 14.2. EVA Does not Measure the Shareholder Value Creation byAmerican Companies292
  • 14.3. The CVA Does not Measure the ShareholderValue Creation of the World's 100 Most Profitable Comp299
  • 14.4. The Economic Profit Does not Measure the ShareholderValue Creation302
  • 14.5. Usefulness of EVA, EP, and CVA304
  • 14.6. Consequences of the Use of EVA, EP, or CVA for Executive Remuneration305
  • 14.7. Measures Proposed for Measuring Shareholder Return307
  • 14.8. What is Shareholder Value Creation?308
  • 14.9. An Anecdote about the EVA309
  • References311
  • Chapter 15. The RJR Nabisco Valuation313
  • 15.1. Background of the Company314
  • 15.2. Pre-Bid Strategy315
  • 15.3. The Management Group's Bid318
  • 15.4. Valuation of the Management Group's Strategy321
  • 15.5. KKR's Bid325
  • 15.6. Valuation of KKR's Strategy325
  • 15.7. Comparison of the Three Alternatives' FCF and CCF330
  • 15.8. EVA and the Two Alternatives' Value Creation333
  • 15.9. Final Bids and Outcome334
  • 15.10. Valuations Grouping all the Financial Instrumentsas Debt or Equity336
  • 15.11. Value Creation in Acquisitions and Mergers339
  • References339
  • Chapter 16.Valuation and Value Creation in Internet-Related Companies341
  • 16.1. Some Examples of Value Creation and Destruction342
  • 16.2. Amazon343
  • 16.3. Valuations of Amazon350
  • 16.4. America Online358
  • 16.5. On-Line Brokers. ConSors, Ameritrade, E*Trade, Charles Schwab, and Merrill Lynch360
  • 16.6. Microsoft366
  • 16.7. A Final Comment on the Valuation of Internet Companies369
  • References370
  • Part III: Rigorous Approaches to Discounted Cash Flow Valuation373
  • Chapter 17. Discounted Cash Flow Valuation Methods: Perpetuities, Constant Growth, and General Case375
  • 17.1. Introduction375
  • 17.2. Company Valuation Formulae, Perpetuities376
  • 17.3. DVTS in Perpetuities, Tax Risk in Perpetuities380
  • 17.4. Examples of Companies without Growth383
  • 17.5. Formulae for when the Debt's Book Value (N) is not the Same asits Market Value (D), (r=^ Kd)387
  • 17.6. Formula for Adjusted Present Value Taking into Account the Cost of Leverage387
  • 17.7. Valuing Companies Using Discounted Cash Flow, Constant Growth391
  • 17.8. Company Valuation Formulae, Constant Growth392
  • 17.9. Examples of Companies with Constant Growth395
  • 17.10. Tax Risk and DVTS with Constant Growth399
  • 17.11. Valuation of Companies by Discounted Cash Flow,General Cas400
  • 17.12. Company Valuation Formulae, General Case400
  • 17.13. Relationships Obtained from the Formulae,General Case401
  • 17.14. An Example of Company Valuation402
  • 17.15. Valuation Formulae when the Debt's Book Value (N) and its Market Value (D) are not Equal407
  • 17.16. Impact on the Valuation when D^N, Without Cost of Leverage408
  • 17.17. Impact on the Valuation when D ^ N, with Cost of Leverage, in a Real-Life Case408
  • Appendix 17.1: Main Valuation Formulae415
  • Appendix 17.2: A Formula for the Required Return to Debt417
  • Summary417
  • Reference418
  • Chapter 18. Optimal Capital Structure. Problems with the Harvard and Damodaran Approaches419
  • 18.1. Optimal Structure According to a Harvard Business School Technical Note420
  • 18.2. Critical Analysis of the Harvard Business School Technical Note425
  • 18.3. Boeing's Optimal Capital Structure Accoding to Damodaran437
  • References441
  • Chapter 19. Financial Literature about Discounted Cash Flow Valuation443
  • 19.1. A Brief Review of the Most Significant Papers444
  • 19.2. Main Formulae in the Most Significant Papers451
  • 19.3. The Basic Problem. The Value of the Tax Shield Due to the Payment of Interest (DVTS)455
  • 19.4. Differences in the Valuation According to the Most Significant Papers462
  • Appendix 19.1: In a World with No Leverage Cost the Value of Tax Shields is PV[Ku. D T Ku]467
  • References469
  • Chapter 20. Application of the Different Theories to RJR Nabisco471
  • 20.1. Valuation According to No-Cost-of-Leverage Theory471
  • 20.2. Valuation According to Damodaran (1994)479
  • 20.3. Valuation from the CCF According to Ruback482
  • 20.4. Valuation from the APV According to Myers482
  • 20.5. Differences in the Valuations, Summary490
  • References490
  • Chapter 21. Eight Methods and Seven Theories for Valuing Companies by Cash Flow Discounting491
  • 21.1. Eight Methods for Valuing Companies by Cash Flow Discounting492
  • 21.2. An Example: Valuation of the Company Delta Inc.496
  • 21.3. How is the Company Valued when it Reports Losses in One or More Years501
  • Appendix 21.1: Valuation Formulae According to the Main Theories (Market Value of the Debt = Nominal506
  • Appendix 21.2: Valuation Formulae According to the Main Theories when the Debt's Market Value (D) do508
  • References511
  • Part IV: Real Options and Brands513
  • Chapter 22. Real Options. Valuing Flexibility: Beyond Discounted Cash Flow Valuation515
  • 22.1. Real Options516
  • 22.2. Exploitation of Oil Reserves518
  • 22.3. Black and Scholes' Formula for Valuing Financial Options521
  • 22.4. Factors that Determine a Financial Option's Value523
  • 22.5. Replication of the Call524
  • 22.6. The Expectations Regarding an Increase in the Share's Price do not Affect the Value of a Repli526
  • 22.7. Value of a Call if it Cannot be Replicated528
  • 22.8. Differences Between a Financial Option and a Real Option529
  • 22.9. Applying Options Theory in a Firm532
  • 22.10. Use of the Binomial Method for Valuing Real Options534
  • 22.11. Frequently Made Errors When Valuing Real Options540
  • 22.12. Methods for Valuing Real Options546
  • Appendix 22.1: A Derivation of Black and Scholes' Formula549
  • Summary553
  • Reference553
  • Chapter 23. Valuation of Brands and Intangibles555
  • 23.1. Methods Used For Valuing Brands559
  • 23.2. Valuation of the Brand "For Whom" and "For What Purpose"560
  • 23.3. Valuation of the Brand Using the Difference in the Price to Sales Ratios562
  • 23.4. Valuations of the Kellogg and Coca-Cola Brands by Damodaran564
  • 23.5. Analysis of Damodaran's Valuations564
  • 23.6. Interbrand's Valuation Method568
  • 23.7. Comment on Interbrand's Method576
  • 23.8. Financial World's Valuation Method577
  • 23.9. Houlihan Valuation Advisors' Method577
  • 23.10. Other Methods Proposed by Different Consulting Firms579
  • 23.11. Brand Value Drivers, Parameters Influencing the Brand's Value580
  • 23.12. What is the Purpose of Valuing Brands?582
  • 23.13. Brand Value as a Series of Real Options582
  • 23.14. Brand Accounting583
  • 23.15. Valuation of Intellectual Capital584
  • References586
  • Appendix A. Capital Asset Pricing Model (CAPM)587
  • A.I. An Investor Forms an Optimal Portfolio587
  • A.2. Optimal Portfolio if all Investors have Homogeneous Expectations589
  • A.3. Basic Assumptions of the CAPM591
  • A.4. Basic Consequences of the CAPM591
  • A.5. When the Assumptions of the CAPM are not Met592
  • A.6. Empirical Tests of the CAPM593
  • A.7. Formulae for Calculating the Beta594
  • A.8. Relationship Between Beta and Volatility594
  • A.9. Important Relationships Derived from the CAPM595
  • Summary595
  • References595
  • Glossary597
  • Notation603
  • Company Index607
  • Name Index615
  • Subject Index619
Book details
  • Vendor Elsevier S & T
  • SKU 9780122538414
  • ISBN-13 9780080520377
  • Author Fernandez, Pablo
  • Category Business & Economics
  • Subject Corporate Finance

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Valuation Methods and Shareholder Value Creation provides a comprehensive examination of valuation tools and guidance for analyzing and valuing a business. It covers the basics of valuation methods and shareholder value creation in addition to rigorous approaches to discounted cash flow valuation and real options for valuing a company.

By examining eight different methods of discounted cash flow valuation and discussing the pros and cons of each method, Fernández offers thorough, accessible coverage of corporate valuation. With examples and case studies from international markets, this book provides well-structured guidance for students and executives alike.

* Highlights quantitative analyses of firm value
* Emphasizes qualitative management assessments
* Integrates data from international companies