Damodaran on valuation security analysis for investment and corporate finance

Contents Preface Chapter 1: Introduction to Valuation A Philosophical Basis for Valuation Inside the Valuation Process Approaches to Valuation Role of Valuation Conclusion Part One: Discounted Cash Flow Valuation Chapter 2: Estimating Discount Rates What is Risk? Cost of Equity From Cost of Equity to Cost of Capital Conclusion Chapter 3: Measuring Cash Flows Categorizing Cash Flows Earnings Tax Effect Reinvestment Needs From Firm to Equity Cash Flows Conclusion Chapter 4: Forecasting Cash Flows Structure of Discounted Cash Flow Valuation Length of Extraordinary Growth Period Detailed Cash Flow Forecasts Terminal Value Estimation Approaches Conclusion Chapter 5: Equity Discounted Cash Flow Models Dividend Discount Models FCFE (Potential Dividend) Discount Models FCFE Versus Dividend Discount Model Valuation Per Share Versus Aggregate Valuation Conclusion Chapter 6: Firm Valuation Models Cost of Capital Approach Adjusted Present Value Approach Excess Return Models Capital Structure and Firm Value Conclusion Part Two: Relative Valuation Chapter 7: Relative Valuation: First Principles What is Relative Valuation? Ubiquity of Relative Valuation Reasons for Popularity and Potential Pitfalls Standardized Values and Multiples Four Basic Steps to Using Multiples Reconciling Relative and Discounted Cash Flow Valuations Conclusion Chapter 8: Equity Multiples Definitions of Equity Multiples Distributional Characteristics of Equity Multiples Analysis of Equity Multiples Applications of Equity Multiples Conclusion Chapter 9: Value Multiples Definition of Value Multiples Distributional Characteristics of Value Multiples Analysis of Value Multiples Applications of Value Multiples Conclusion Part Three: Loose Ends in Valuation Chapter 10: Cash, Cross Holdings, and Other Assets Cash and Near-Cash Investments Financial Investments Holdings in Other Firms Other Nonoperating Assets Conclusion Appendix 10.1: Industry Averages: Cash Ratios—January 2005 Chapter 11: Employee Equity Options and Compensation Equity-Based Compensation Employee Options Restricted Stock Conclusion Chapter 12: The Value of Intangibles Importance of Intangible Assets Independent and Cash-Flow-Generating Intangible Assets Firmwide Cash-Flow-Generating Intangible Assets Intangible Assets with Potential Future Cash Flows Conclusion Appendix 12.1: Option Pricing Models Chapter 13: The Value of Control Measuring the Expected Value of Control Manifestations of the Value of Control Conclusion Chapter 14: The Value of Liquidity Measuring Illiquidity Cost of Illiquidity: Theory Cost of Illiquidity: Empirical Evidence Dealing with Illiquidity in Valuation Consequences of Illiquidity Conclusion Chapter 15: The Value of Synergy What is Synergy? Valuing Synergy Dubious Synergies Evidence on Synergy—Value Created and Added Common Errors in Valuing Synergy Conclusion Chapter 16: The Value of Transparency An Experiment Defining Complexity Sources of Complexity Reasons for Complexity Measuring Complexity Consequences of Complexity Dealing with Complexity Cures for Complexity Conclusion Appendix 16.1: Standard & Poor’s Transparency and Disclosure Index: Key Questions Appendix 16.2: Measuring Complexity with a Score—An Example Chapter 17: The Cost of Distress Possibility and Consequences of Financial Distress Discounted Cash Flow Valuation Relative Valuation From Firm to Equity Value in Distressed Firms Conclusion Chapter 18: Closing Thoughts Choices in Valuation Models Which Approach Should We Use? Choosing the Right Discounted Cash Flow Model Choosing the Right Relative Valuation Model When should We Use the Option Pricing Models? Ten Steps to Better Valuations Conclusion Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more For a list of available titles, visit our Web site at www.WileyFinance.com 10 operating synergies real options Systematic risk Taiwan Semiconductor Takeover(s) See also Acquisitions; Friendly takeovers; Hostile acquisitions/takeovers Target Target debt ratios Target firms, see Acquisition(s); Mergers; Synergy valuation Taxation Tax-free locales Tax planning Tax rate(s): cash flow forecasts cash flow measurement discount rate estimates distressed companies employee equity options 1359 firm valuation models intangible assets liquidity and significance of synergy transparency value multiples Technology boom Technology companies/firms Technology sector Technology stocks Telecom Italia Telecommunications sector Tender offers: characteristics of interfirm two-tier 1360 10-K filings 10-Q reports Terminal value: cash flow forecasts cash flow measurement control and distressed companies employee equity options equity discounted cash flow models equity multiples firm valuation models liquidity and synergy Term structure Time, equity multiples comparison Time horizon Time series analysis 1361 Time to expiration Time Warner/AOL acquisition Timing of cash flow Titan Cement Tobin’s Q Todhunter Int’l Toyota Motor Corporation Trademarks Trading volume Trailing: P/E revenues 12-month revenues/earnings Transaction costs Transaction prices Transfer pricing Transitional phase 1362 Transparency: accounting standards business concerns business mix business structure complexity and conglomerate discount consequences of complexity control and dealing with complexity deceit disclosure indexes disclosure rankings financial choices financial statements governance indexes growth strategies 1363 information-based index information disclosure lack of measurement of operating concerns regulatory framework relative valuation Price Waterhouse opacity index tax benefits Transparent firms, characteristics of See also Complexity; Transparency Treynor, Jack T Rowe Price Trust preferred stock Tsingtao Breweries t-statistics Turnover rate Turnover ratio Tyco 1364 Uncertainty Underlevered companies/firms Underlying assets: distressed companies intangible assets liquidity and significance of Undervaluation: cash flow measurement characteristics of control and discount rate estimates distressed companies equity discounted cash flow models equity multiples liquidity and relative valuation 1365 synergy transparency value multiples Undeveloped reserves Undiversified investors Uniformity, relative valuation multiples Unique businesses United States (U.S.): dividend payout ratio dollar equity markets exchanges government securities stock exchanges stock market Treasury bills Treasury bonds 1366 Treasury notes Treasury stock, option-based compensation Unlevered betas Unlevered firms Unprofitable firms Unrealized gains and losses Unrelated businesses Unrestricted stock Unutilized assets Upside risk Utilities Valuation, see specific types of securities and valuations approaches to bias complexity of garnishing parsimony principle 1367 philosophical basis ranges role of uncertainty Value creation Value investing Value investors Value Line, as information resource Value multiples: analysis of applications characteristics of cross holdings defined determinants of distributional characteristics estimation of 1368 forward revenues market comparisons relationship with fundamentals scaling variable value measurement Value/operating earnings multiples Value-to-book capital ratio Value-to-book ratios Value-to-net book capital Value-to-sales multiples Variable costs Variance Venture capital Venture Economics Veto power Viacom/Paramount merger Volatile businesses 1369 Volatility Voting: rights shares, premium for Vulture investors Wal-Mart Warrants Wasting asset, defined Wasting cash Wealth, transfer of Weekend effect Weekly returns Weighted average(s) Weighted average cost of capital (WACC) Weighting Wells Fargo/First Interstate merger Whispered earnings 1370 Whitman Corp Williamette Associates Williams Energy Wilshire 5000 Workforce, size of See also Human capital Working capital: cash flow forecasts cash flow measurement distressed companies equity discounted cash flow models firm valuation models significance of transparency WorldCom Worst-case scenarios Worthless equity Write-offs 1371 Yahoo! Yahoo! Finance Yield: corporate bonds curve dividend equity multiples maturity multiple selection Young companies/firms Zacks Zarowin, Paul Zero-beta portfolio Zero coupon: bonds debt default-free bond 1372 Zero-risk investments Z-score 1373 ...Contents Preface Chapter 1: Introduction to Valuation A Philosophical Basis for Valuation Inside the Valuation Process Approaches to Valuation Role of Valuation Conclusion Part One: Discounted... Cataloging-in-Publication Data: Damodaran, Aswath Damodaran on valuation : security analysis for investment and corporate finance / Aswath Damodaran. —2nd ed p cm.—(Wiley finance series) Includes... Firm Value Conclusion Part Two: Relative Valuation Chapter 7: Relative Valuation: First Principles What is Relative Valuation? Ubiquity of Relative Valuation Reasons for Popularity and Potential