Valuation Methods and Shareholder Value Creation 1st Edition by Pablo Fernandez ISBN 0122538412 9780122538414

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ISBN 10: 0122538412 
ISBN 13: 9780122538414
Author: Pablo Fernandez

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.

Valuation Methods and Shareholder Value Creation 1st Table of contents:

Part I: Basics of Valuation Methods and Shareholder Value Creation
Chapter 1. Shareholder Value Creation, Basic Concepts
1.1. Increase of Equity Market Value
1.2. Shareholder Value Added
1.3. Shareholder Return
1.4. Required Return to Equity
1.5. Created Shareholder Value
1.6. The ROE is not the Shareholder Return
1.7. Compariso of General electric with Other Companies
1.8. Value Creation and Value Destruction of the S&P 500
1.9. What Should the Shareholder return be Compared With?
Reference
Chapter 2. Company Valuation Methods
2.1. Value and Price. What Purpose Does a Valuation Serve?
2.2. Balance Sheet-Based Methods
2.3. Income Statement-Based Methods. Relative Valuation
2.4. Goodwill-Based Methods
2.5. Cash Flow Discounting-Based methods
2.6. Which is the Best Method to Use?
2.7. The Company as the Sum of the Values of Different Divisions: Break-Up Value
2.8. Valuation Methods Used Depending on the Nature of the Company
2.9. Key Factors Affecting Value: Growth, Return, Risk, and Interest Rates
2.10. Speculative Bubbles on the Stock Market
2.11 Most Common Errors in Valuations
References
Chapter 3. Price-Earnings Ratio, Profitability, Cost of Capital, and Growth
3.1. Evolution of the Per on the International Stock Markets
3.2. Factors Affecting the Per
3.3. Influence of Growth(g) on the Per
3.4. Influence of the Roe on the Per
3.5. Influence of the Required Return to Equity on the PER
3.6. Influence of Interest Rates on the PER
3.7. Growth Value and PER Due to Growth
Summary
Appendix 3.1: Price PER Share, Market Capitalization, Earnings PER Share (EPS), Dividend Yield and P
Appendix 3.2: Breakdwon of the Price PER Share Between No-Growth Price and Growth Value; an Breakdwo
Appendix 3.3: Relationship Between the PER and Growth (g), Required Return to Equity (Ke) and Return
Chapter 4. Splitting the Price-Earnings Ratio. Franchise Factor, Growth Factor, Interest Factor, and
4.1 PER, Franchise Factor, and Growth Factor
4.2. PER*, Franchise Factor*, and Growth Factor
4.3. PER, Interest Factor, and Risk Factor
4.4. Value Generation Over Time in Companies with Growth
4.5. Influence of Growth on the Franchise Factor and on the Growth Factor
4.6. Influence of the ROE on the Franchise Factor
4.7. Influence of the Required Return to Equity on the Franchise Factor and on the PER
Appendix 4.1: Splitting the PER
Reference
Chapter 5. Market Value and Book Value
5.1. Market Value and Book Value on the North American Stock Market
5.2. Market-To-Book Ratio on the International Stock Markets
5.3. Market-To-Book Ratio and Interest Rates on the North American Stock Market
5.4. Relationship Between the Market-To-Book Ratio and the PER and the ROE
5.5. Value Creation and the Difference Between Market Value and Book Value
5.6. Equity Book Value may be Negative. The Case of Sealed Air
Summary
References
Appendix 5.1. Market Value (E) and Book Value (Ebv) of Selected U.S. Companies in December 1995 and
Chapter 6. Dividends and market Value
6.1. Evolution of Dividends on the U.S. Stock Market
6.2. Increasingly Fewer Companies Distribute Dividends and More Buy Back Shares
6.3. Evolution of Dividends on the International Markets
6.4. The Share Value is the Present Value of the Expected Dividends
6.5. Share Value When Dividends have Constant Growth, Gordon and Shapiro Formula
6.6. Share Value when Dividends Grow at a Fixed Quantity Each Year
6.7. Binomial Valuation Model of Discounted Dividends
6.8. Trinomial Valuation Model of Discounted Dividends
6.9. The Share’s Value when the Dividends have Two Growth Rates: The Two-Stage Growth Model
6.10. Stock Valuation when Dividends have Two Growth Rates: Model H10
6.11. Stock Valuation with Three Periods of Dividend Growth
Appendix 6.1: Derivation of the Gordon and Shapiro Formula
Appendix 6.2: Derivation of the Share Value Formula when the Dividend Grows at a Fixed Quantity Ever
Appendix 6.3: Derivation of the Share Value Formula in the Additive Binomial Model
Appendix 6.4: Derivation of the Share Value Formula in the Geometric Binomial Model
Appendix 6.5: Derivation of the Share Value Formula in the Geometric Trinomial Model
Appendix 6.6: Error Made with the Share Price Approximation when the Share’s Dividends Grow at Two D
Appendix 6.7: Error Made with the Share Price Approximation Using the Model H
References
Chapter 7. Interest Rates: Their Importance in the Valuation
7.1. Evolution of Interest Rates
7.2. Interest Rates With Different Maturities (Yield Curve)
7.3. Relationship Between Interest Rates and Share Prices
7.4. Relationship Between Interest Rates and the PER
7.5. Relationship Between Interest Rates and Dividend Yield in the United States
7.6. Equity Duration
7.7. Relationship Between the Yield of the S&P 500 and the Variation in Interest Rates
7.8. Risk and Required Return to Different Debt Issues
7.9. Rates of the Federal Reserve (United States) and the European Central Bank (Germany Before 1998
Reference
Chapter 8. Valuation Using Multiples. How Do Analysts Reach their Conclusions?
8.1. Valuation Methods Used by the Analysts
8.2. Most Commonly Used Multiples
8.3. Relative Multiples
8.4. The Problem with Multiples: Their Dispersion
8.5. Volatility of the Most Widely Used Parameters for Multiples
8.6. Analysts’ Recommendations: Hardly Ever Sell
8.7.Strange Multiples
References
Chapter 9. Cash Flow and Net Income
9.1. Net Income is just an Opinion, but Cash Flow is a Fact
9.2. Accounting Cash Flow, Equity Cash Flow, Free Cash Flow,and Capital Cash Flow
9.3. Calculating the Cash Flows
9.4. A Company with Positive Net Income and Negative Cash Flows
9.5. When is Profit after Tax a Cash Flow?
9.6. When is the Accounting Cash Flow a Cash Flow?
9.7. Equity Cash Flow and Dividends
9.8. Recurrent Cash Flows
Summary
Appendix 9.1: Attention to the Accounting and the Managing of Net Income
References
Chapter 10. Inflation and Value
10.1. Campa Spain and Campa Argentina
10.2. Analysis of the Differences Between Campa Spain and Campa Argentina
10.3. Adjustments to Correct for the Effects of Inflation
Summary
Reference
Chapter 11. Cost of Equity: Beta and Risk Premium
11.1. Betas and Volatilities
11.2. Volatility (cr) and Diversification
11.3. Beta (b)
11.4. Drawbacks of Betas and Volatilities. Instability and Period Dependence
11.5. Qualitative Calculation of the Beta
11.6. Market Risk Premium
11.7. Methods Proposed for Calculating the Market Risk Premium
11.8. Historical Differential Return of the Market Portfolio and the Risk-Free Rate in the U.S.
11.9. Return of Stocks Over Bonds in the U.S
11.10. Premium Over the Risk-Free Rate in Different Countries and Country Risk Premium
11.11. Premium of the North American Stock Market from the Gordon and Shapiro Equation
11.12. Recent Comparison of the Stock Market Evolution in Spain,Germany, Japan, and the U.S
11.13. Has the Market Risk Premium Decreased or is the Market Overvalued?
11.14. Does the Market Risk Premium Exist?
Key Concepts
References
Chapter 12. Valuations of Internet Companies: The Case of Terra-Lycos
12.1. Twelve Valuations of Terra. Different Expectations
12.2. Some Comparisons Between the Projections and the Valuations
12.3. Valuation Performed By a Euroamerican Bank in April 2000: 104 Euros
12.4. Valuation Performed by a Spanish Bank in May 2000: 84.4 Euros
12.5. Valuation Performed by an American Broker in June 2000: 53 Euros
12.6. Valuation Performed by a Spanish Bank in September 1999:19.8 Euros
12.7. How Should Terra be Valued
12.8. An Anecdote on the “New Economy
Reference
Part II: Shareholder Value Creation
Chapter 13. Proposed Measures of Shareholder Value Creation. EVA’, Economic Profit, MVA, CVA, CFRO
13.1. Book Profit (EP) and NVA
13.2. EVA’ and MVA
13.3. CVA and MVA
13.4. First Example: Investment Without Value Creation
13.5. Incorrect Interpretation of EVA, EP and CVA
13.6. Usefulness of EVA, EP, and CVA
13.7. CFROI, TSR, and TBR
13.8. Second Example: Investment with Value Creation
13.9. Conclusions
Appendix 13.1: Verification that the EP (Economic Profit)Discounted at the Rate (Ke) is the MVA(Mark
Appendix 13.2: Obtainment of the Formulas for EVA and MVA from the FCF and WACC
Appendix 13.3: Verification that the CVA Discounted at the WACC is the MVA
Appendix 13.4: Adjustments Sugggested by Stern Stewart & Co. for Calculating the EVA
References
Chapter 14. EVA, Economic Profit, and Cash Value Added do not Measure Shareholder Value Creation
14.1. Accounting-Based Measures Cannot MeasureValue Creation
14.2. EVA Does not Measure the Shareholder Value Creation byAmerican Companies
14.3. The CVA Does not Measure the ShareholderValue Creation of the World’s 100 Most Profitable Comp
14.4. The Economic Profit Does not Measure the ShareholderValue Creation
14.5. Usefulness of EVA, EP, and CVA
14.6. Consequences of the Use of EVA, EP, or CVA for Executive Remuneration
14.7. Measures Proposed for Measuring Shareholder Return
14.8. What is Shareholder Value Creation?
14.9. An Anecdote about the EVA
References
Chapter 15. The RJR Nabisco Valuation
15.1. Background of the Company
15.2. Pre-Bid Strategy
15.3. The Management Group’s Bid
15.4. Valuation of the Management Group’s Strategy
15.5. KKR’s Bid
15.6. Valuation of KKR’s Strategy
15.7. Comparison of the Three Alternatives’ FCF and CCF
15.8. EVA and the Two Alternatives’ Value Creation
15.9. Final Bids and Outcome
15.10. Valuations Grouping all the Financial Instrumentsas Debt or Equity
15.11. Value Creation in Acquisitions and Mergers
References
Chapter 16.Valuation and Value Creation in Internet-Related Companies
16.1. Some Examples of Value Creation and Destruction
16.2. Amazon
16.3. Valuations of Amazon
16.4. America Online
16.5. On-Line Brokers. ConSors, Ameritrade, E*Trade, Charles Schwab, and Merrill Lynch
16.6. Microsoft
16.7. A Final Comment on the Valuation of Internet Companies
References
Part III: Rigorous Approaches to Discounted Cash Flow Valuation
Chapter 17. Discounted Cash Flow Valuation Methods: Perpetuities, Constant Growth, and General Case
17.1. Introduction
17.2. Company Valuation Formulae, Perpetuities
17.3. DVTS in Perpetuities, Tax Risk in Perpetuities
17.4. Examples of Companies without Growth
17.5. Formulae for when the Debt’s Book Value (N) is not the Same asits Market Value (D), (r=^ Kd)
17.6. Formula for Adjusted Present Value Taking into Account the Cost of Leverage
17.7. Valuing Companies Using Discounted Cash Flow, Constant Growth
17.8. Company Valuation Formulae, Constant Growth
17.9. Examples of Companies with Constant Growth
17.10. Tax Risk and DVTS with Constant Growth
17.11. Valuation of Companies by Discounted Cash Flow,General Cas
17.12. Company Valuation Formulae, General Case
17.13. Relationships Obtained from the Formulae,General Case
17.14. An Example of Company Valuation
17.15. Valuation Formulae when the Debt’s Book Value (N) and its Market Value (D) are not Equal
17.16. Impact on the Valuation when D^N, Without Cost of Leverage
17.17. Impact on the Valuation when D ^ N, with Cost of Leverage, in a Real-Life Case
Appendix 17.1: Main Valuation Formulae
Appendix 17.2: A Formula for the Required Return to Debt
Summary
Reference
Chapter 18. Optimal Capital Structure. Problems with the Harvard and Damodaran Approaches
18.1. Optimal Structure According to a Harvard Business School Technical Note
18.2. Critical Analysis of the Harvard Business School Technical Note
18.3. Boeing’s Optimal Capital Structure Accoding to Damodaran
References
Chapter 19. Financial Literature about Discounted Cash Flow Valuation
19.1. A Brief Review of the Most Significant Papers
19.2. Main Formulae in the Most Significant Papers
19.3. The Basic Problem. The Value of the Tax Shield Due to the Payment of Interest (DVTS)
19.4. Differences in the Valuation According to the Most Significant Papers
Appendix 19.1: In a World with No Leverage Cost the Value of Tax Shields is PV[Ku. D T Ku]References
Chapter 20. Application of the Different Theories to RJR Nabisco
20.1. Valuation According to No-Cost-of-Leverage Theory
20.2. Valuation According to Damodaran (1994)
20.3. Valuation from the CCF According to Ruback
20.4. Valuation from the APV According to Myers
20.5. Differences in the Valuations, Summary
References
Chapter 21. Eight Methods and Seven Theories for Valuing Companies by Cash Flow Discounting
21.1. Eight Methods for Valuing Companies by Cash Flow Discounting
21.2. An Example: Valuation of the Company Delta Inc.
21.3. How is the Company Valued when it Reports Losses in One or More Years
Appendix 21.1: Valuation Formulae According to the Main Theories (Market Value of the Debt = Nominal
Appendix 21.2: Valuation Formulae According to the Main Theories when the Debt’s Market Value (D) do
References
Part IV: Real Options and Brands
Chapter 22. Real Options. Valuing Flexibility: Beyond Discounted Cash Flow Valuation
22.1. Real Options
22.2. Exploitation of Oil Reserves
22.3. Black and Scholes’ Formula for Valuing Financial Options
22.4. Factors that Determine a Financial Option’s Value
22.5. Replication of the Call
22.6. The Expectations Regarding an Increase in the Share’s Price do not Affect the Value of a Repli
22.7. Value of a Call if it Cannot be Replicated
22.8. Differences Between a Financial Option and a Real Option
22.9. Applying Options Theory in a Firm
22.10. Use of the Binomial Method for Valuing Real Options
22.11. Frequently Made Errors When Valuing Real Options
22.12. Methods for Valuing Real Options
Appendix 22.1: A Derivation of Black and Scholes’ Formula
Summary
Reference
Chapter 23. Valuation of Brands and Intangibles
23.1. Methods Used For Valuing Brands
23.2. Valuation of the Brand “For Whom” and “For What Purpose”
23.3. Valuation of the Brand Using the Difference in the Price to Sales Ratios
23.4. Valuations of the Kellogg and Coca-Cola Brands by Damodaran
23.5. Analysis of Damodaran’s Valuations
23.6. Interbrand’s Valuation Method
23.7. Comment on Interbrand’s Method
23.8. Financial World’s Valuation Method
23.9. Houlihan Valuation Advisors’ Method
23.10. Other Methods Proposed by Different Consulting Firms
23.11. Brand Value Drivers, Parameters Influencing the Brand’s Value
23.12. What is the Purpose of Valuing Brands?
23.13. Brand Value as a Series of Real Options
23.14. Brand Accounting
23.15. Valuation of Intellectual Capital
References
Appendix A. Capital Asset Pricing Model (CAPM)
A.I. An Investor Forms an Optimal Portfolio
A.2. Optimal Portfolio if all Investors have Homogeneous Expectations
A.3. Basic Assumptions of the CAPM
A.4. Basic Consequences of the CAPM
A.5. When the Assumptions of the CAPM are not Met
A.6. Empirical Tests of the CAPM
A.7. Formulae for Calculating the Beta
A.8. Relationship Between Beta and Volatility
A.9. Important Relationships Derived from the CAPM

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