Valuation: Theories and Concepts

Valuation: Theories and Concepts provides an understanding on how to value companies that employ non-standard accounting procedures, particularly companies in emerging markets and those that require a wider variety of options than standard texts provide.

The book offers a broader, more holistic perspective that is perfectly suited to companies and worldwide markets. By emphasizing cases on valuation, including mergers and acquisition valuation, it responds to the growing expectation that students and professionals must generate comprehensive perspectives based on thorough investigations and a library of valuation theories.

Readers will gain a better understanding of the development of complete analyses, including trend analysis of financial parameters, ratio analysis, and differing perspectives on valuation and strategic initiatives. Case studies include stock market performance and synergies and the intrinsic value of the firm are compared with offer price. In addition, full data sets for each chapter are available online.

Provides an understanding on how to value companies that employ non-standard accounting procedures, particularly companies in emerging marketsGives readers the ability to compare the intrinsic value of the firm with the offer priceShowcases a variety of valuation techniques and provides details about handling each part of the valuation processEach case has data in excel spreadsheets for all companies, and data sets for each chapter are available online

• Part I: Theories and Concepts
  • 1. Perspectives on value and valuation
    • Abstract
    • 1.1 Introduction
    • 1.2 Application of valuation
    • 1.3 Approaches to valuation
    • 1.4 Steps in value creation
    • 1.5 Value drivers
    • 1.6 Empirical evidence on value drivers
    • 1.7 Strategic models of valuation
    • 1.8 Stock price maximization
    • 1.9 Linkage between strategic management and shareholder value
    • 1.10 Challenges in valuing intangibles
    • 1.11 Innovation and value creation
    • 1.12 Review of research studies on usage of valuation methods
    • 1.13 Challenges for valuation
    • 1.14 Review on theories of valuation
    • 1.15 Most valuable companies
    • Appendix: Financial statement analysis
    • Analysis of growth potential
    • Fundamentals of valuation
    • Bond valuation and interest rates
    • Basics of stock valuation
    • Summary highlights of stock valuation
    • References
  • 2. Risk and return
    • Abstract
    • 2.1 Introduction
    • 2.2 Accounting and risk measures
    • 2.3 Measures of returns
    • 2.4 Risk premium
    • 2.5 Models of risk and return
    • References
  • 3. Efficient capital markets and its implications
    • Abstract
    • 3.1 Introduction
    • 3.2 Forms of efficient market hypothesis
    • 3.3 Tests of EMH
    • 3.4 Review of research studies on market efficiency
    • 3.5 Anomalies of EMH
    • 3.6 Implications of EMH
    • 3.7 Behavioral finance
    • References
  • 4. Estimation of cost of capital
    • Abstract
    • 4.1 Introduction
    • References
  • 5. Principles of cash flow estimation
    • Abstract
    • 5.1 Introduction
    • 5.2 Adjustments to financial statements
    • 5.3 Adjustments of expensed investments
    • 5.4 Reflections on managed earnings
    • 5.5 Estimating reinvestment needs for valuation
    • 5.6 Forecasting growth
    • References
  • 6. Discounted cash flow valuation models
    • Abstract
    • 6.1 Introduction
    • 6.2 Dividend discount model
    • 6.3 FCF valuation models
    • 6.4 Adjusted present value method
    • 6.5 Value of nonoperating assets
    • 6.6 Estimation of total value of firm
    • 6.7 Theoretical perspectives on free cash flow valuation
    • 6.8 Research studies on FCF models
    • 6.9 Estimation of value of Hyundai Motors through FCFE and FCFF valuation models
    • 6.10 Estimation of value of Sasol through the two-stage FCFF model
    • References
  • 7. Relative valuation
    • Abstract
    • 7.1 Introduction
    • 7.2 Advantages and disadvantages of relative valuation
    • 7.3 Drivers of relative valuation
    • 7.4 Steps in relative valuation
    • 7.5 Relative valuation techniques
    • 7.6 Industry-specific multiples
    • 7.7 Research studies on relative valuation
    • 7.8 Principles of relative valuation
    • 7.9 Cases of relative valuation
    • References
  • 8. Mergers and acquisition valuation
    • Abstract
    • 8.1 Introduction
    • 8.2 Types of mergers and acquisitions
    • 8.3 Synergies in mergers
    • 8.4 Drivers of value creation in different types of M&A
    • 8.5 Empirical evidence on value creation in M&A
    • 8.6 M&A valuation
    • 8.7 Valuation of M&A synergies
    • 8.8 Payment to target firms
    • 8.9 Bootstrapping
    • 8.10 Empirical studies involving methods of payment
    • 8.11 Empirical studies on performance of merged companies
    • 8.12 Principles of evaluation of bids
    • 8.13 Illustration of financial variables in merger analysis
    • References
  • 9. Real options valuation
    • Abstract
    • 9.1 Introduction
    • 9.2 Real options as strategic investments
    • 9.3 Limitations of discounted cash flow methods
    • 9.4 Different types of real options
    • 9.5 Solution approach to option valuation
    • 9.6 Real options in different industry sectors
    • 9.7 Factors affecting the value of real growth options
    • 9.8 Real options in mergers and acquisitions
    • 9.9 Empirical studies on real options
    • 9.10 Real option valuation using decision tree approach
    • 9.11 Real option valuation using Black Scholes model
    • References
  • 10. Valuation of different industry sectors
    • Abstract
    • 10.1 Valuation of internet companies
    • 10.2 Valuation of financial institutions
    • 10.3 Valuation of biotechnology companies
    • 10.4 Valuation of real estate and construction sectors
    • 10.5 Valuation of oil companies
    • References
  • 11. Valuation issues
    • Abstract
    • 11.1 Valuation of closely held or private companies
    • 11.2 Valuing firms with negative earnings
    • 11.3 Valuing cyclical firms
    • 11.4 Valuing startup firms
    • 11.5 Valuing multibusiness firms
    • 11.6 Valuation in emerging markets
    • 11.7 Valuing high growth companies
    • 11.8 Errors in valuation
    • References
• Part II: Case Studies on Valuation
  • 12. Valuation of Walmart
    • Abstract
    • 12.1 Financial highlights
    • 12.2 Equity value creation
    • 12.3 Ratio analysis
    • 12.4 Standardized income statements of Walmart
    • 12.5 Valuation of Walmart
    • 12.6 Discounted cash flow valuation
    • 12.7 Two stage FCFE model
    • 12.8 Relative valuation
    • References
  • 13. Valuation of Tata Motors
    • Abstract
    • 13.1 Global industry trends
    • 13.2 Business overview
    • 13.3 Competitor analysis
    • 13.4 Financial performance analysis
    • 13.5 Wealth creation in stock market
    • 13.6 Ratio analysis
    • 13.7 Estimation of cost of equity and WACC
    • 13.8 Valuation of Tata Motors
    • 13.9 Valuation using dividend discount models
    • 13.10 FCFE valuation
    • 13.11 Stable stage or constant growth model
    • 13.12 Valuation using FCFF model
    • 13.13 Relative valuation (Tables 13.16–13.18)
    • References
  • 14. Valuation of Samsung Electronics
    • Abstract
    • 14.1 Strategies for growth
    • 14.2 Growth trend analysis
    • 14.3 Ratio analysis (Tables 14.6–14.12)
    • 14.4 Stock market wealth creation (Tables 14.13 and 14.14)
    • 14.5 Discounted cash flow valuation
    • 14.6 Estimation of cost of equity and cost of capital
    • 14.7 Dividend discount model
    • 14.8 Constant growth DDM
    • 14.9 FCFE valuation
    • 14.10 Estimation of adjusted net capital expenditure (Table 14.19)
    • 14.11 Estimation of noncash working capital in millions of krw
    • 14.12 Estimation of two stage FCFE valuation
    • 14.13 Constant growth FCFE model
    • 14.14 Zero growth FCFE model
    • 14.15 FCFF valuation model (Tables 14.24 and 14.25)
    • 14.16 Two stage FCFF valuation model
    • 14.17 Stable phase inputs
    • 14.18 FCFF one stage growth model
    • 14.19 FCFF zero growth model
    • 14.20 Relative valuation
  • 15. Valuation of Industrial and Commercial Bank of China (ICBC)
    • Abstract
    • 15.1 Business segments
    • 15.2 Strategy
    • 15.3 Growth analysis (Tables 15.2–15.13)
    • 15.4 Stock market wealth creation (Tables 15.14–15.16)
    • 15.5 Valuation of ICBC
    • 15.6 DDM
    • 15.7 Relative valuation (Tables 15.18–15.26)
    • References
  • 16. Valuation of Gazprom
    • Abstract
    • 16.1 Growth rate analysis (Table 16.4)
    • 16.2 Ratio analysis (Tables 16.5–16.9)
    • 16.3 Stock wealth creation (Tables 16.10 and 16.11)
    • 16.4 Estimation of cost of capital
    • 16.5 WACC estimation
    • 16.6 Valuation using discounted cash flow valuation
    • 16.7 FCFE valuation
    • 16.8 Relative valuation
    • References
  • 17. Valuation of Singapore airlines
    • Abstract
    • 17.1 Growth rate analysis (Tables 17.10–17.12)
    • 17.2 Ratio analysis (Tables 17.13–17.16)
    • 17.3 Stock wealth creation
    • 17.4 Excess value added (Table 17.18)
    • 17.5 Estimation of cost of capital
    • 17.6 Valuation models
    • 17.7 Stable stage dividend discount model
    • 17.8 Stable stage FCFE and FCFF models
    • 17.9 Estimation of FCFE in year 2014
    • 17.10 Estimation of FCFF
    • 17.11 Relative valuation (Tables 17.19 and 17.20)
    • 17.12 Enterprise value multiples
    • Reference
  • 18. Wells Fargo
    • Abstract
    • 18.1 Current financial highlights
    • 18.2 Financial highlights
    • 18.3 Growth analysis (Tables 18.4 and 18.5)
    • 18.4 Stock wealth creation
    • 18.5 Dividend discount model
    • 18.6 Estimation of growth rate from fundamentals (Table 18.11)
    • 18.7 Relative valuation (Tables 18.13–18.15)
    • References
  • 19. Valuation of China life insurance
    • Abstract
    • 19.1 Financial highlights
    • 19.2 Solvency ratio
    • 19.3 Gross written premium
    • 19.4 Analysis of cash flows
    • 19.5 Estimation of embedded value
    • 19.6 Stock return analysis
    • 19.7 Estimation of cost of equity
    • 19.8 Discounted cash flow model
    • 19.9 Relative valuation
    • References
  • 20. Valuation of Franklin resources
    • Abstract
    • 20.1 Types of SIPs
    • 20.2 Types of investment management and related services
    • 20.3 Investment products
    • 20.4 Stock wealth creation
    • 20.5 Estimation of cost of equity
    • 20.6 Valuation
    • 20.7 Stable phase inputs
    • 20.8 Relative valuation
    • References
  • 21. Valuation of Pfizer
    • Abstract
    • 21.1 Growth perspective of Pfizer
    • 21.2 Performance analysis
    • 21.3 Stock wealth creation
    • 21.4 Estimation of cost of equity and WACC
    • 21.5 Valuation models
    • 21.6 Relative valuation
    • Reference
• Part III: Case Studies on Mergers and Acquisition Valuation
  • 22. Google’s acquisition of Motorola—a valuation perspective
    • Abstract
    • 22.1 Introduction
    • 22.2 Merger highlights
    • 22.3 Strategic reasons for the acquisition
    • 22.4 Financial breakdown of Motorola deal
    • 22.5 Valuation perspectives
    • 22.6 Returns analysis for different time windows of acquisition announcement
    • 22.7 Cumulative abnormal return analysis
    • 22.8 Valuation—operating performance analysis
    • 22.9 Two-stage valuation model for Motorola Mobility (Figure 22.10, Table 22.5)
    • 22.10 Zero growth or perpetuity model valuation for Motorola
    • 22.11 Relative valuation for Google Inc.
    • 22.12 Cash flow to market value model
    • Appendix 1: Cumulative returns for Google Inc.
    • Appendix 2: Cumulative returns for Motorola Mobility Holdings
    • Appendix 3: Cumulative abnormal returns (CAR) for Google Inc.
    • Appendix 4: Cumulative abnormal returns (CAR) for Motorola Mobility Holdings
    • References
  • 23. HP Compaq merger—valuation
    • Abstract
    • 23.1 Industry overview
    • 23.2 Company highlights
    • 23.3 Merger highlights
    • 23.4 Expected synergies
    • 23.5 Impact of merger announcement on wealth creation
    • Reference
  • 24. Tata’s acquisition of Corus—a valuation analysis
    • Abstract
    • 24.1 Highlights of Corus
    • 24.2 Highlights of Tata Steel
    • 24.3 The bidding war
    • 24.4 Market reaction during the acquisition process
    • 24.5 Strategic reasons for the acquisition
    • 24.6 Valuation perspective
    • References
• Glossar