Preface

Valuation is the essence of finance. It asks the question, “What is the ‘fair’ price to pay for an asset that has a set of uncertain future cash flows?” This book presents a practitioner-oriented view of the fundamentals of valuation in the context of mergers and acquisitions. Valuation is considered to be an art, not a science. Thus, the reader will find that there are many “rules of thumb” and few inviolable principles to guide them.

The metrics used for valuing companies are not well-defined, varying according to the objectives of the valuation, the characteristics of the company and its industry, and the preferences and expertise of the individual performing the valuation. Consequently, corporate executives and valuation analysts face many choices and dilemmas as they try to assess a company’s value. Throughout this book, we discuss a range of valuation methods, including multiples, discounted cash flow models, economic income models, and option pricing models. We offer practical solutions for helping the reader make informed choices and for dealing with common dilemmas. The valuation methods discussed are principally for use in non-financial companies; the topic of valuing financial companies is beyond the scope of this book.

To use this book effectively, the reader will need an understanding of the fundamentals of accounting and finance. Furthermore, a background in financial modeling with Excel is also beneficial.

Barbara S. Petitt and Kenneth R. Ferris
May 2013