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The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

ISBN: 978-0-470-38579-1
630 pages
November 2009
The Valuation Handbook: Valuation Techniques from Today

The definitive guide to valuation written by a who's who of today's top practitioners

The Valuation Handbook differs significantly from other related books on this topic because the contributors are practitioners, academics, and investment firms that explain how they value companies and other assets. It concentrates on specific and innovative valuation techniques, rather than the theoretical approaches more generally accepted and discussed. Given the extreme volatility of the stock market, valuation is a critical issue for analysts, investors, and businesses. Here, various professional contributors explain how their firms approach the valuation process, while academic contributors share their valuation consulting and research experience.

  • Examines how to value assets in today's dynamic market setting
  • Offers a broad spectrum of ideas from some of the top practitioners and academics in this field
  • Highlights state-of-the-art approaches to company valuation

Filled with in-depth insights and expert advice, The Valuation Handbook puts this difficult discipline in perspective.

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Preface.

Valuations Are Important.

Valuation Challenges: Which Techniques to Apply.

Contributors.

Chapter Summaries.

CHAPTER 1 Two Frameworks for Understanding Valuation Models (Benton E. Gup).

Top-Down/Bottom-Up Analysis.

Life Cycle.

Firms.

Conclusion.

Notes.

CHAPTER 2 The Value Edge: Reap the Advantage of Disciplined Techniques (William J. Hass and Shepherd G. Pryor IV).

Valuation Decisions Are Made Differently by Different People.

Techniques of Communicating Value Can Demonstrate a Commitment to Value Building.

Analysts Beware: Once-Successful Public Companies Can Lose Their Way.

Incentive Compensation Techniques Based on Value Are Better.

Valuation Techniques for Private Companies Are Also More Data Driven.

Estimates of Value May Differ Depending on Data Integrity.

Finance Theory and Corporate Value.

The Value Edge Begins at the Strategic Business Unit Level.

The Waterfall of Value Identifies Value Creators and Destroyers.

Better Valuation Frameworks Provide Discipline.

The Value Journey Has Many Steps along the Way.

Acknowledgments.

References.

CHAPTER 3 Applying a Systems Mindset to Stock Valuation (Bartley J. Madden).

Choice 1: A Systems Mindset.

Choice 2: Firms’ Competitive Life Cycle.

Choice 3: Inflation Adjustments and Economic Returns.

Choice 4: Denominator Depends on the Numerator.

Choice 5: Insights and Plausibility Judgments.

Back to the Future.

Searching for Failures and Successes.

Conclusion.

Notes.

References.

CHAPTER 4 Comparing Valuation Models (Thomas E. Copeland).

Literature Review.

Brief Description of the Valuation Models That Are Compared.

An Expert System That Does Valuation.

Goodness of Fit: Initial Sample (1,395 Valuations, 1993 to 2000).

Tests of DCF in a Holdout Sample (New Sample 2000–2008).

Convergence Tests.

Straw Man Horse Races (Comparison of Three Models).

Convergence.

Conclusion.

Notes.

References.

CHAPTER 5 Developing an Automated Discounted Cash Flow Model (Robert J. Atra and Rawley Thomas).

Models Examined.

Data and Initial Parameterization.

Measurement Principles.

Proprietary Models.

Conclusion.

Appendix: Academic Literature.

Notes.

References.

CHAPTER 6 The Essence of Value-Based Finance (Roy E. Johnson).

Introducing Value-Based Finance (a Transition from Accounting to Economics).

Valuation Perspectives: Economic Profit and Market Value Added.

Valuation Perspectives: The Magnifier.

Valuation Perspectives: Financial Drivers and Value Profit Margin.

Value Analysis: The Proper Focus.

Note.

CHAPTER 7 Residual Income and Stock Valuation Techniques: Does It Matter Which One You Use? (Benton E. Gup and Gary K. Taylor).

Economic Value Added (EVA).

Residual Income Method of Valuation.

Abnormal Earnings Growth Model.

Numerical Example of RI and AEG.

Conclusion.

Notes.

References.

CHAPTER 8 Modern Tools for Valuation: Providing the Investment Community with Better Tools for Investment Decisions (David Trainer).

Identifying the Problem.

What Drives Stock Market Valuation?

Our Valuation Methodology—Providing a Solution.

Theory Meets Practice.

General Notes on Stock Picking.

Appendix A: Definitions of Key Terms Used in Our Valuation Models.

Appendix B: How Our Dynamic Discounted Cash Flow Model Works.

Appendix C: Explanation of Risk/Reward Rating System.

Appendix D: NOPAT, Invested Capital, and WACC Calculations for Accenture.

Notes.

CHAPTER 9 The Economic Profit Approach to Securities Valuation (James L. Grant).

Basics of Economic Profit Valuation.

Economic Profit Models.

Reconciliation of EVA Models.

Cost of Capital Effects.

Pricing Implications.

EVA Accounting Adjustments.

Invested Capital.

EVA Application: JLG Dow Fundamental.

EVA Link to FCF Valuation.

FCF Valuation: Horizon Years.

FCF Valuation: Residual Years.

Summary.

Notes.

Reference.

CHAPTER 10 Valuation for Managers: Closing the Gap between Theory and Practice (Dennis N. Aust).

Current Environment.

Alternative Measures of Value Creation: A Quick Review.

Conclusions.

Note.

References.

CHAPTER 11 The LifeCycle Returns Valuation System (Rawley Thomas and Robert J. Atra).

Converting Accounting Information to Economic Returns.

Converting Economic Returns to Intrinsic Values.

Converting Intrinsic Values to Investment Decisions.

Summary.

Appendix Market Derived Discount Rates and CAPM Beta Costs of Capital.

Notes.

References.

CHAPTER 12 Morningstar’s Approach to Equity Analysis and Security Valuation (Pat Dorsey).

Applying Economic Moats to Security Valuation.

Intrinsic Value.

Conclusion.

CHAPTER 13 Valuing Real Options: Insights from Competitive Strategy (Andrew G. Sutherland and Jeffrey R. Williams).

Overview of Option Pricing for Financial Securities.

Basic Option Pricing Applications for Real Assets.

Advanced Option Pricing Applications for Real Assets.

Conclusion and Future Research.

Note.

References.

CHAPTER 14 GRAPES: A Theory of Stock Prices (Max Zavanelli).

A Theory of Stock Prices.

Arbitrage.

The Beginning of All Things.

The Model and System.

GRAPES System for Valuing Companies.

The Pricing of Risk.

Appendix: Examples of McDonald’s and Wal-Mart.

Notes.

References.

CHAPTER 15 Portfolio Valuation: Challenges and Opportunities Using Automation (Randall Schostag).

Background.

Methods Adoption Implications.

Accounting Pronouncements.

SEC Guidance.

Accounting Pronouncements and the FASB.

XBRL Format.

Emerging Best Practices.

International Standards.

Producing Portfolio Valuations.

Using Automation in Valuations.

Conclusion.

Notes.

References.

CHAPTER 16 The Valuation of Health Care Professional Practices (Robert James Cimasi and Todd A. Zigrang).

Basic Economic Valuation Tenets.

The Value Pyramid.

Buy or Build? Value as Incremental Benefit.

Standard of Value and Premise of Value.

Valuation Adjustments for Risk.

Classification of Assets and Determination of Goodwill.

Impact of Competitive Forces.

Valuation Approaches, Methods, and Techniques.

Analysis of Risk.

Level of Value: Discounts and Premiums.

Conclusion.

Notes.

CHAPTER 17 Valuing Dental Practices (Stanley L. Pollock).

Normalization.

Fixed Asset Appraisal.

Ratio Analysis.

Trend Analysis.

USPAP Standards.

Summary.

Notes.

References.

CHAPTER 18 Measures of Discount for Lack of Marketability and Liquidity (Ashok Abbott).

Publicly Traded Equivalent Value.

Discounts for lack of Marketability and Discount for lack of Liquidity.

Benchmarking Methods.

Empirical Studies.

Liquidity as a Pricing Factor.

Distinction between Holding Period and Liquidation Period.

Quantitative Approaches based on CAPM and Time Value.

Historical Market Liquidity Statistics.

Price Pressure and Market failure.

Measuring Asset Liquidity.

Application of Time/Volatility (Option) Models to Discount for Lack Of Liquidity.

Three Option based Models.

Black-Scholes put (BSP).

Average Price Asian Put (AAP).

Look Back Put (LBP).

Conclusions.

References.

CHAPTER 19 An Economic View of the Impact of Human Capital on Firm Performance and Valuation (Mark C. Ubelhart).

Creating and Standardizing Metrics.

Predicting Future Financial Results.

Organizational Decomposition.

Mathematical Models Guiding Practical Action.

Note.

Reference.

CHAPTER 20 EBITDA: Down but Not Out (Arjan J. Brouwer and Benton E. Gup).

What Is EBITDA?

Who Uses EBITDA and Why?

EBITDA in Financial Reporting.

EBITDA in Europe.

Impact on the U.S. Capital Market.

The Reporting Performance Project.

Conclusions.

Notes.

References.

CHAPTER 21 Optimizing the Value of Investor Relations (William F. Mahoney).

Investor Relations as a Service Function.

The Investment Relations Officer as the Resident Investment Market Expert.

Building Investor Respect as Well.

It’s All about Information of Value.

The Information Advantage.

Working with One Key Investor at a Time.

Working with the Primary Investors.

What It Takes to Do the Job.

Identifying the Information That Determines Intrinsic Value.

Focus on the Value Drivers.

Linking Intrinsic Value to Stock Price.

Numerous Vital Lessons from This Book.

Wrapping It Up.

Note.

References.

CHAPTER 22 Lower Risk and Higher Returns: Linking Stable Paretian Distributions and Discounted Cash Flow (Rawley Thomas, Dandan Yang, and Robert J. Atra).

Background.

Intrinsic Values and Distributions.

Automated Valuation Models.

Research Design and Empirical Results.

Conclusion.

Appendix A: Synthesizing the Life Cycle Framework.

Appendix B: Technical Note—Ranges of Bounded Rationality.

Notes.

References.

CHAPTER 23 Common Themes and Differences: Debates and Associated Issues Facing the Profession (Rawley Thomas).

Does Intrinsic Value Have Any Meaning?

Methodologies: Mark to Market, Mark to Model.

Illiquidity Crises and Market Meltdowns: Effect on Quantitative Strategies.

Discounted Cash Flow Methodologies.

Appendix A: Financial Management Association Practitioner Demand Driven Academic Research Initiative (FMA PDDARI).

Appendix B: Examples of Assumptions and Theories Deserving Debate and Empirical Quantification.

References.

About the Editors.

About the Contributors.

Index.

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Rawley Thomas is President of LifeCycle Returns, Inc. He is Vice President of Practitioner Services for the Financial Management Association International (FMA) and Chairman of the FMA PDDARI (Practitioner Demand Driven Academic Research Initiative) Advisory Committee. Currently, Thomas serves on the Northern Illinois Accountancy Board and chairs the FMA PDDARI as supported by the CFA Society of Chicago.

Benton E. Gup, PhD, has served as a staff economist for the Federal Reserve Bank of Cleveland and currently holds the Robert Hunt Cochrane/Alabama Bankers Association Chair of Banking at the University of Alabama. Gup worked in bank research for the Office of the Comptroller of the Currency while on sabbatical in 1997. He is also the author or editor of a number of books in the area of finance.

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