Index
A
adjusted present value (APV), 10, 128-131. See also WACC (weighted average cost of capital)
amortization of intangible assets, 22
analysis. See financial statement analysis
APV (adjusted present value), 10, 128-131. See also WACC (weighted average cost of capital)
asset cost of capital formula, 128
asset turnover, 43
assets
amortization of intangible assets, 22
asset cost of capital formula, 118-123, 128
asset turnover, 43
capital asset pricing model (CAPM), 103-108
current assets, 18
debt-to-assets ratio, 36
purchased intangible assets, 18
relationship between assets, liabilities, and shareholders’ equity, 21-42
ROA (return on assets), 35-43, 64-65
total asset value, 154
valuation frameworks
APV (adjusted present value), 10, 128-131. See also WACC (weighted average cost of capital)
enterprise value, 155
total asset value, 154
WACC (weighted average cost of capital), 144-150
B
balance sheets
balance sheet view of free cash flows, 71-73
example of, 18
liabilities, 21
market value balance sheets, 32-33
projected balance sheets, 8-12
relationship between assets, liabilities, and shareholders’ equity, 21-42
relationship with cash flow and income statements, 16-42
tax shields, 128
terms, 18
bridging financial shortfalls, 68-64
business decisions, role of valuation in, 1-3
C
calculations. See equations
capital, cost of. See also discount rates
asset cost of capital formula, 118-123, 128
capital asset pricing model (CAPM), 103-108
compounding, 124
credit spread, 123
present value relation, 91
for projects, 155
risk reduction through diversification, 97-100
systematic versus unsystematic risk, 101-103
WACC (weighted average cost of capital), 4-13, 128, 144-150
capital asset pricing model (CAPM), 103-108
capital expenditures and depreciation, 83
CAPM (capital asset pricing model), 103-108
cash, 18
cash flow statements. See also cash flows
overview, 42
sources/uses of cash statement, 73-77
cash flow statements
overview, 42
relationship with balance sheets, 16-42
free cash flows, 127
calculating with sources/uses of cash, 73-77
compared to accounting definition of cash flow, 87-88
present value relation, 69
probability distributions, 5-12
COGS (cost of goods sold), 81
cost of capital. See also discount rates
asset cost of capital formula, 118-123, 128
capital asset pricing model (CAPM), 103-108
compounding, 124
credit spread, 123
present value relation, 91
for projects, 155
risk reduction through diversification, 97-100
systematic versus unsystematic risk, 101-103
WACC (weighted average cost of capital), 4-13, 128, 144-150
cost of goods sold (COGS), 81
credit spread, 123
current assets, 18
current liabilities, 18
current ratio, 37
D
debt-to-assets ratio, 36
debt-to-equity ratio, 36
short-term borrowings, 88
debt-to-assets ratio, 36
debt-to-equity ratio, 36
decision trees, role of valuation in, 1-3
deferred revenue, 18
discount rates, 9-10, 12. See also cost of capital
distress (financial), 41
diversification, risk reduction through, 97-100
E
earnings before interest after taxes (EBIAT), 79-80
earnings before interest and taxes (EBIT), 81
earnings before interest, depreciation, and after taxes (EBIDAT), 86
earnings before interest, taxes, depreciation, and amortization (EBITDA), 155
EBIAT (earnings before interest after taxes), 79-80
EBIDAT (earnings before interest, depreciation, and after taxes), 86
EBIT (earnings before interest and taxes), 37, 81
EBITDA (earnings before interest, taxes, depreciation, and amortization), 155
employee compensation, 18
enterprise value, 155
APV (adjusted present value), 129-131
capital expenditures and depreciation, 83
cash cycle, 40
cost of capital
asset cost of capital formula, 118-123, 128
credit spread, 123
free cash flows, 127
balance sheet centric approach, 78-85
income statement centric approach, 86-87
present value relation, 3-5, 45, 69, 91, 127
projected financial shortfalls, 61-68
relationship between assets, liabilities, and shareholders’ equity, 42-22
Sharpe ratio
capital asset pricing model (CAPM), 103-108
portfolio diversification and, 98-100
summation of infinite series, 123
systematic versus unsystematic risk, 101-103
total asset value, 154
growing perpetuity value, 136-141
WACC (weighted average cost of capital), 144-150
equipment. See PPE (Property, Plant, and Equip.)
equity
debt-to-equity ratio, 36
ROE (return on equity), 33-35, 64-65
stockholders’ equity, 55, 60-61
expected rate of return. See cost of capital
F
financial distress, 41
financial forecasting
bridging financial shortfalls, 68-64
explained, 7
financial ratios, 64
leverage ratios, 65
present value relation, 45
pro forma financials
projected financial shortfalls, 61-68
terms, 55
financial ratios, 64
turnover and cash cycle, 38-40
financial shortfalls
financial statement analysis, 16-42
balance sheets
balance sheet view of free cash flows, 71-73
example of, 18
liabilities, 21
market value balance sheets, 32-33
projected balance sheets, 8-12
relationship between assets, liabilities, and shareholders’ equity, 21-42
relationship with cash flow and income statements, 16-42
tax shields, 128
terms, 18
cash flow statements
overview, 42
relationship with balance sheets, 16-42
financial distress, 41
financial ratios
turnover and cash cycle, 38-40
income statements
terms, 22
projected balance sheets, 8-12
sources/uses of cash statement, 73-77
terms, 55
financing interest, 22
flow to equity (FTE), 13, 128, 150-154
forecasting (financial)
bridging financial shortfalls, 68-64
explained, 7
financial ratios, 64
leverage ratios, 65
present value relation, 45
pro forma financials
projected financial shortfalls, 61-68
terms, 55
formulas
APV (adjusted present value), 129-131
cash cycle, 40
cost of capital
asset cost of capital formula, 118-123, 128
credit spread, 123
free cash flows, 127
balance sheet centric approach, 78-85
present value relation, 3-5, 45, 69, 91, 127
projected financial shortfalls, 61-68
relationship between assets, liabilities, and shareholders’ equity, 22-42
Sharpe ratio
capital asset pricing model (CAPM), 103-108
portfolio diversification and, 98-100
summation of infinite series, 123
systematic versus unsystematic risk, 101-103
total asset value, 154
growing perpetuity value, 136-141
WACC (weighted average cost of capital), 144-150
frameworks (valuation). See valuation frameworks
free cash flows, 127
calculating with sources/uses of cash, 73-77
compared to accounting definition of cash flow, 87-88
equations for
balance sheet centric approach, 78-85
income statement centric approach, 86-87
present value relation, 69
FTE (flow to equity), 13, 128, 150-154
G-H
generalizing cash flow statements, 31-32
goodwill, 18
growing perpetuity value, 136-141
I
income statements
relationship with balance sheets, 16-42
terms, 22
infinite series, summation of, 123
interest (net), 22
inventory days, 39
J-K-L
leveraged buyouts, 125
liabilities
current liabilities, 18
explained, 21
relationship between assets, liabilities, and shareholders’ equity, 21-42
long-term financing receivables, 18
M
market value balance sheets, 32-33
N
net earnings, 22
net interest, 22
NRP (Net Revenue from Products), 55
NRS (Net Revenue from Services), 55
nontraded assets, cost of capital, 115-118
NRP (Net Revenue from Products), 55
NRS (Net Revenue from Services), 55
O-P
plant. See PPE (Property, Plant, and Equip.)
PPE (Property, Plant, and Equip.), 55, 80-81
present value relation, 3-5, 45, 69, 91, 127
pro forma financials
probability distributions of cash flows, 5-12
projected balance sheets, 8-12
projected financial shortfalls, 61-68
Property, Plant, and Equip. (PPE), 55, 80-81
provision for taxes, 55
purchased intangible assets, 18
Q-R
quick ratio, 38
R&D. See research and development
required rate of return. See cost of capital
research and development, 22, 55
restructuring charges, 22
return on assets (ROA), 35-43, 64-65
return on equity (ROE), 33-35, 64-65
risk
probability distribution of cash flows, 12-5
risk reduction through diversification, 97-100
systematic versus unsystematic risk, 101-103
ROA (return on assets), 35-43, 64-65
ROE (return on equity), 33-35, 64-65
S
SE. See stockholders’ equity
Selling, General, and Admin. (SGA), 54-57
SGA (Selling, General, and Admin.), 54-57
shareholders’ equity
relationship between assets, liabilities, and shareholders’ equity, 21-42
Sharpe ratio
capital asset pricing model (CAPM), 103-108
portfolio diversification and, 98-100
short-term borrowings, 18, 55, 88
sources/uses of cash statement, 73-77
statements. See financial statement analysis
stockholders’ equity, 55, 60-61
summation of infinite series, 125
T
tax shields, 128
taxes on earnings, 18
growing perpetuity value, 136-141
TNR (Total Net Revenue), 55
total asset value, 154
Total Net Revenue (TNR), 55
total stockholders’ equity, 18
traded assets, cost of capital, 109-115
turnover and cash cycle, 38-40
growing perpetuity value, 136-141
U-V
U.S. Securities and Exchange Commission, 25
APV (adjusted present value), 10, 128-131. See also WACC (weighted average cost of capital)
enterprise value, 155
growing perpetuity value, 136-141
total asset value, 154
WACC (weighted average cost of capital), 144-150
values
APV (adjusted present value), 10, 128-131
enterprise value, 155
market value balance sheets, 32-33
present value relation, 3-5, 69, 127
tax shields, 128
growing perpetuity value, 136-141
total asset value, 154
volatility, 95
W-X-Y-Z
WACC (weighted average cost of capital), 4-13, 128, 144-150