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• Cover
• About the Authors
• Preface
• Acknowledgments
• Part One Foundations of Value
• Chapter 1 Why Value Value?
• What Does It Mean to Create Shareholder Value?
• Short-Termism Runs Deep
• Shareholder Capitalism Cannot Solve Every Challenge
• Can Stakeholder Interests Be Reconciled?
• Consequences of Forgetting Value-Creation Principles
• This Book
• Review Questions
• Notes
• Chapter 2 Finance in a Nutshell
• The Early Years
• A New Concept
• Should Lily and Nate Try to Maximize ROIC?
• Going Public
• Expansion into Related Formats
• Some Lessons
• Review Questions
• Notes
• Chapter 3 Fundamental Principles of Value Creation
• The Relationship of Growth, ROIC, and Cash Flow
• Balancing ROIC and Growth to Create Value
• Some Examples
• Implications for Managers
• Economic Profit Combines ROIC and Size
• Conservation of Value
• The Math of Value Creation
• Summary
• Review Questions
• Notes
• Chapter 4 Risk and the Cost of Capital
• Cost of Capital Is an Opportunity Cost
• Companies Have Little Control over Their Cost of Capital
• Create Better Forecasts, Not Ad Hoc Risk Premiums
• Decide How Much Cash Flow Risk to Take On
• Decide Which Types of Risk to Hedge
• Summary
• Review Questions
• Notes
• Chapter 5 The Alchemy of Stock Market Performance
• Why Shareholder Expectations Become a Treadmill
• The Treadmill’s Real-World Effects
• Decomposing TSR
• Understanding Expectations
• Implications for Managers
• Review Questions
• Notes
• Chapter 6 Valuation of ESG and Digital Initiatives
• A Common Framework
• Environmental, Social, and Governance (ESG) Concerns
• Digital Initiatives
• Closing Thoughts
• Review Questions
• Notes
• Chapter 7 The Stock Market Is Smarter Than You Think
• Markets and Fundamentals: A Model
• Markets and Fundamentals: The Evidence
• Myths about Earnings
• Myths about Earnings Management
• Myths about Diversification
• Myths about Company Size
• Myths about Market Mechanics
• Myths about Value Distribution
• Summary
• Review Questions
• Notes
• Chapter 8 Return on Invested Capital
• What Drives ROIC?
• Competitive Advantage
• Sustaining Return on Invested Capital
• An Empirical Analysis of Returns on Invested Capital
• Summary
• Review Questions
• Notes
• Chapter 9 Growth
• Drivers of Revenue Growth
• Growth and Value Creation
• Why Sustaining Growth Is Hard
• Empirical Analysis of Corporate Growth
• Summary
• Review Questions
• Notes
• Part Two Core Valuation Techniques
• Chapter 10 Frameworks for Valuation
• Enterprise Discounted Cash Flow Model
• Economic Profit-Based Valuation Models
• Adjusted-Present-Value Model
• Capital Cash Flow Model
• Cash-Flow-to-Equity Valuation Model
• Problematic Modifications to Discounted Cash Flow
• Alternatives to Discounted Cash Flow
• Summary
• Review Questions
• Notes
• Chapter 11 Reorganizing the Financial Statements
• Reorganizing the Accounting Statements: Key Concepts
• Reorganizing the Accounting Statements: In Practice
• Advanced Issues
• Review Questions
• Notes
• Chapter 12 Analyzing Performance
• Analyzing Returns on Invested Capital
• Analyzing Revenue Growth
• Credit Health and Capital Structure
• General Considerations
• Review Questions
• Notes
• Chapter 13 Forecasting Performance
• Determine the Forecast’s Length and Detail
• Components of a Good Model
• Mechanics of Forecasting
• Advanced Forecasting
• Concluding Thoughts
• Review Questions
• Notes
• Chapter 14 Estimating Continuing Value
• Recommended Formula for DCF Valuation
• Continuing Value Using Economic Profit
• Misunderstandings about Continuing Value
• Common Pitfalls
• Other Approaches to Continuing Value
• Closing Thoughts
• Review Questions
• Notes
• Chapter 15 Estimating the Cost of Capital
• Calculating the Weighted Average Cost of Capital
• Estimating the Cost of Equity
• Estimating the After-Tax Cost of Debt
• Forecasting Target Capital Structure to Weight WACC Components
• Estimating WACC for Complex Capital Structures
• Closing Thoughts
• Review Questions
• Notes
• Chapter 16 Moving from Enterprise Value to Value per Share
• The Valuation Buildup Process
• Valuing Nonoperating Assets
• Valuing Interest-Bearing Debt
• Valuing Debt Equivalents
• Valuing Hybrid Securities and Noncontrolling Interests
• Estimating Value per Share
• Review Questions
• Notes
• Chapter 17 Analyzing the Results
• Validating the Model
• Sensitivity Analysis
• Creating Scenarios
• The Art of Valuation
• Review Questions
• Notes
• Chapter 18 Using Multiples
• Value Multibusiness Companies as a Sum of Their Parts
• Use Forward Earnings Estimates
• Use Net Enterprise Value Divided by Adjusted EBITA or NOPAT
• Adjust for Nonoperating Items
• Use the Right Peer Group
• Alternative Multiples
• Summary
• Review Questions
• Notes
• Chapter 19 Valuation by Parts
• The Mechanics of Valuing by Parts
• Building Business Unit Financial Statements
• Cost of Capital
• Testing the Value Based on Multiples of Peers
• Summary
• Review Questions
• Notes
• Part Three Advanced Valuation Techniques
• Chapter 20 Taxes
• Estimating Operating Taxes
• Converting Operating Taxes to Operating Cash Taxes
• Deferred Taxes on the Reorganized Balance Sheet
• Valuing Deferred Taxes
• Closing Thoughts
• Review Questions
• Notes
• Chapter 21 Nonoperating Items, Provisions, and Reserves
• Nonoperating Expenses and One-Time Charges
• Provisions and Their Corresponding Reserves
• Closing Thoughts
• Review Questions
• Notes
• Chapter 22 Leases
• Accounting for Operating Leases
• Valuing a Company with Operating Leases
• Adjusting Historical Financial Statements for Operating Leases
• An Alternative Method for Valuing Operating Leases
• Closing Thoughts
• Review Questions
• Notes
• Chapter 23 Retirement Obligations
• Reorganizing the Financial Statements with Pensions
• Pensions and the Cost of Capital
• Relevering Beta to Estimate the Cost of Equity
• Incorporating Pensions into the Value of Equity
• Closing Thoughts
• Review Questions
• Notes
• Chapter 24 Measuring Performance in Capital-Light Businesses
• Capitalizing Expensed Investments
• When Businesses Need Little or No Capital
• Summary
• Review Questions
• Notes
• Chapter 25 Alternative Ways to Measure Return on Capital
• When ROIC Equals IRR
• When CFROI Equals IRR
• Choosing between ROIC and CFROI
• Flaws of Other Cash Returns on Capital
• Summary
• Review Questions
• Notes
• Chapter 26 Inflation
• Inflation Leads to Lower Value Creation
• Historical Analysis in Times of High Inflation
• Financial Projections in Real and Nominal Terms
• Summary
• Review Questions
• Notes
• Chapter 27 Cross-Border Valuation
• Forecasting Cash Flows
• Estimating the Cost of Capital
• Applying a Domestic- or Foreign-Capital WACC
• Incorporating Foreign-Currency Risk in the Valuation
• Using Translated Foreign-Currency Financial Statements
• Summary
• Review Questions
• Notes
• Part Four Managing for Value
• Chapter 28 Corporate Portfolio Strategy
• Bet on the Horse—or the Jockey?
• What Makes an Owner the Best?
• The Best-Owner Life Cycle
• Dynamic Portfolio Management
• The Myth of Diversification
• Constructing the Portfolio
• Summary
• Review Questions
• Notes
• Chapter 29 Strategic Management: Analytics
• Adopting a Granular Perspective
• Taking the Enterprise View
• Applying Value Drivers to Monitor Performance
• Setting Targets
• Monitoring Results
• Summary
• Review Questions
• Notes
• Chapter 30 Strategic Management: Mindsets and Behaviors
• Strong Governance
• Debiased Decision Making
• Synchronized and Streamlined Processes
• Closing Thoughts
• Review Questions
• Notes
• Chapter 31 Mergers and Acquisitions
• A Framework for Value Creation
• Empirical Results
• Archetypes for Value-Creating Acquisitions
• Longer-Odds Strategies for Creating Value from Acquisitions
• Estimating Operating Improvements
• How to Pay: With Cash or Stock?
• Focus on Value Creation, Not Accounting
• Characteristics of Better Acquirers
• Closing Thoughts
• Review Questions
• Notes
• Chapter 32 Divestitures
• Value Creation from Divestitures
• Why Executives Shy Away from Divestitures
• Assessing Potential Value from Divestitures
• Deciding on Transaction Type
• Summary
• Review Questions
• Notes
• Chapter 33 Capital Structure, Dividends, and Share Repurchases
• Practical Guidelines
• A Four-Step Approach
• Setting a Target Capital Structure
• Payouts to Shareholders
• Equity Financing
• Debt Financing
• Divestitures of Noncore Businesses
• Creating Value from Financial Engineering
• Summary
• Review Questions
• Notes
• Chapter 34 Investor Communications
• Objectives of Investor Communications
• Intrinsic Value vs. Market Value
• Which Investors Matter?
• Communicating with Intrinsic Investors
• Listening to Investors
• Earnings Guidance
• Meeting Consensus Earnings Forecasts
• Summary
• Review Questions
• Notes
• Part Five Special Situations
• Chapter 35 Emerging Markets
• Why Scenario DCF Is More Accurate than Risk Premiums
• Applying the Scenario DCF Approach
• Estimating Cost of Capital in Emerging Markets
• Other Complications in Valuing Emerging-Markets Companies
• Triangulating Valuation
• Summary
• Review Questions
• Notes
• Chapter 36 High-Growth Companies
• A Valuation Process for High-Growth Companies
• Uncertainty Is Here to Stay
• Summary
• Review Questions
• Notes
• Chapter 37 Cyclical Companies
• Share Price Behavior
• An Approach to Valuing Cyclical Companies
• Implications for Managing Cyclical Companies
• Summary
• Review Questions
• Notes
• Chapter 38 Banks
• Economics of Banking
• Principles of Bank Valuation
• Complications in Bank Valuations
• Summary
• Review Questions
• Notes
• Chapter 39 Flexibility
• A Hierarchy of Approaches
• Uncertainty, Flexibility, and Value
• Managing Flexibility
• Methods for Valuing Flexibility
• Four Steps to Valuing Flexibility
• Real-Option Valuation and Decision Tree Analysis: A Numerical Example
• Summary
• Review Questions
• Notes
• Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow
• Proof Using Perpetuities
• Generalized Proof
• Notes
• Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value
• Enterprise Discounted Cash Flow
• Adjusted Present Value
• Notes
• Appendix C Levering and Unlevering the Cost of Equity
• Unlevered Cost of Equity
• Levered Cost of Equity
• Levered Beta
• Unlevered Beta and Pensions
• Appendix D Leverage and the Price-to-Earnings Multiple
• Step 1: Defining Unlevered P/E
• Step 2: Linking Net Income to NOPAT
• Step 3: Deriving Levered P/E
• Appendix E Other Capital Structure Issues
• Pecking-Order Theory
• Market-Based Rating Approach
• Leverage, Coverage, and Solvency
• Notes
• Appendix F Technical Issues in Estimating the Market Risk Premium
• Calculate Premium Relative to Long-Term Government Bonds
• Use the Longest Period Possible
• Use an Arithmetic Average of Longer-Dated (e.g., Ten-Year) Intervals
• Notes
• Appendix G Global, International, and Local CAPM
• Global CAPM
• International CAPM
• Local CAPM
• Notes
• Appendix H A Valuation of Costco Wholesale
• Modeling the Financial Statements
• Reorganizing the Financial Statements
• Forecasting the Financials
• Estimating Continuing Value
• Estimating the Weighted Average Cost of Capital
• Valuing the Enterprise and Converting to Equity
• Putting the Model to Work
• Note
• Appendix I Two-Stage Formula for Continuing Value
• Note
• Index
• End User License Agreement