Contents

Valuation: Methods and Models in Applied Corporate Finance

Preface

Chaper 1 Introduction

1.1 Introduction

1.2 Present Value

1.3 Financial Statements and Analysis

1.4 Financial Forecasting

1.5 Free Cash Flows

1.6 Discount Rates

1.7 Valuation Frameworks

1.8 Summary

Endnotes

Chaper 2 Financial Statement Analysis

2.1 Introduction

2.2 Financial Statement Analysis

2.3 Cash Flow Statement

2.4 Market Value Balance Sheets

2.5 Financial Ratios

2.6 Financial Distress

Endnotes

Chaper 3 Financial Forecasting

3.1 Introduction

3.2 Constructing Pro Forma Financials

3.3 Bridging Financial Shortfalls

3.4 Financial Ratios

3.5 Sustainable Growth

Endnote

Chaper 4 Free Cash Flows

4.1 Introduction

4.2 Free Cash Flow Definition

4.3 Balance Sheet View of Free Cash Flow

4.4 Free Cash Flow Calculation: Sources/Uses of Cash

4.5 Free Cash Flow Calculation: A General Procedure

4.6 Free Cash Flow Calculation: Another View

Endnotes

Chaper 5 Cost of Capital

5.1 Introduction

5.2 Risk and Return

5.3 Risk Reduction through Diversification

5.4 Systematic Versus Unsystematic Risk

5.5 The Capital Asset Pricing Model

5.6 The Cost of Capital for a Traded Asset

5.7 The Cost of Capital for a Nontraded Asset

5.8 The Asset Cost of Capital Formula

Endnotes

Chaper 6 Putting It All Together: Valuation Frameworks

6.1 Introduction

6.2 APV

6.3 Terminal Value

6.4 Weighted Average Cost of Capital (WACC)

6.5 Flow to Equity

Endnotes

Index

Valuation for Mergers and Acquisitions, Second Edition

Preface

Chapter 1 Valuation: An Overview

Market View

1 Why Companies Merge or Acquire: A Historical Perspective

1.1 Mergers and Acquisitions Waves

1.2 Motivations for Mergers and Acquisitions

2 Do Mergers and Acquisitions Create Shareholder Value?

3 Merger and Acquisition Premiums

4 Valuation Process

5 Valuation Methods: An Overview

5.1 Relative Valuation Methods

5.2 Direct Valuation Methods

5.3 The Use of Valuation Methods

Summary

Endnotes

Chapter 2 Financial Review and Pro Forma Analysis

Market View

1 Financial Review

1.1 Ratio Analysis

1.2 Decomposition Analysis

1.3 Cash Flow Analysis

2 Pro Forma Analysis

2.1 Pro Forma Financial Statements

2.2 Sensitivity, Scenario, and Monte Carlo Simulation Analyses

Summary

Endnotes

Appendix 2A: Mattel’s Financial Statements

Appendix 2B: Preparation of a Cash Flow Statement

Cash Flow Fundamentals

Summary

Appendix 2C: Account Forecasting Alternatives

Chapter 3 Traditional Valuation Methods

Market View

1 Earnings Multiples

2 Discounted Cash Flow Models

2.1 Operational Dilemmas

2.2 Estimating the Entity Value and Equity Value

2.3 A Survey of Best Practices

2.4 Cross-Border Considerations

2.5 Illustration

Summary

Endnotes

Appendix 3: Some Frequently Asked Questions and Answers About the Free Cash Flow to the Firm Model and Earnings Multiples

Chapter 4 Alternative Valuation Methods

Market View

1 Relative Valuation Methods

1.1 Price Multiples

1.2 Enterprise Value Multiples

2 Direct Valuation Methods

2.1 Discounted Cash Flow Models

2.2 Economic Income Models

2.3 Real Option Analysis

Summary

Endnotes

Appendix 4: How to Use the Black-Scholes Model to Value a Red Option

Black-Scholes Model

Luehrman’s NPVq/Cumulative Volatility Approach

Chapter 5 Accounting Dilemmas in Valuation Analysis

Market View

1 Assessing Economic Reality

2 Income Statement Transformations: Forecasting Permanent Earnings and Free Cash Flows

2.1 Recurring and Nonrecurring Events

2.2 Revenue Recognition Policy

2.3 Inventory Costing Policy

2.4 Depreciation Policy

3 Balance Sheet Transformations: Forecasting the Equity Value of a Company

3.1 Asset Capitalization Policy

3.2 Asset Revaluation Policy

3.3 Off-Balance-Sheet Debt

4 Cash Flow Statement Transformations: Forecasting CFFO and Free Cash Flow

Summary

Endnotes

Chapter 6 Financial Reporting and Tax Considerations for Mergers and Acquisitions

Market View

1 Financial Reporting: To Combine or Not to Combine?

2 Consolidated Financial Reporting: Purchase Accounting

3 Noncontrolling Interest

4 Accounting for Goodwill

5 Tax Considerations of Mergers and Acquisitions

6 Tax Considerations of Goodwill

Summary

Endnotes

Chapter 7 Some Final Thoughts

Market View

1 Valuation: A Debriefing

2 Some Caveats to Consider

3 Closure

Endnote

Bibliography

Index