The Valuation Handbook: Valuation Techniques from Today's Top Practitioners (Wiley Finance Series) / Edition 1

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In theory, valuation is a relatively simple process of discountinga firm's expected cash flows by investors' required rates ofreturn. In practice, valuation is highly complex because there arenumerous valuation models and techniques. So, how can financialprofessionals and consulting firms effectively value companies'They must choose the valuation models and techniques that are bestsuited for the situation at hand.

Given the extreme volatility of today's markets and thecontinuing economic uncertainty, valuation is a critical issue foranalysts, investors, and businesses. That's why you need TheValuation Handbook. Filled with in-depth insights and expertadvice, this reliable resource touches upon the essential aspectsof this field, including the valuation of public companies, privatecompanies, illiquid companies, start-ups, and business units. Italso covers the specific tools and techniques needed to excel atthis endeavor, rather than focusing on the underlying theoriesassociated with the valuation process. The information found hereapplies equally to investment firms where security analysts pickstocks and managers combine those stocks into diversifiedportfolios, as well as corporations where management seeks tocreate shareholder wealth in a highly competitive economy.

Written with the serious financial professional in mind, thisbook details a variety of important issues you must become familiarwith, including:

  • Valuation, valued-based management, governance, and drivers
  • Residual income
  • Cash return and net cash flow valuation methods
  • Specialized valuations and liquidity
  • And much more

The Valuation Handbook differs significantly from othersources of information on this subject because the contributors tothis guide are practitioners representing consulting and investmentfirms, plus academics—all who explain how they valuecompanies and other assets. Along the way, these leadingpractitioners and academics provide a unique perspective on how tovalue both publicly traded and privately held companies.

In these times of enormous economic stress, the financialprofession needs to rethink many of its assumptions and processesinvolving the core topic of valuation. The ValuationHandbook will help you achieve this goal and put you in abetter position to make more informed valuation decisions.

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Product Details

  • ISBN-13: 9780470385791
  • Publisher: Wiley
  • Publication date: 11/2/2009
  • Series: Wiley Finance Series, #480
  • Edition number: 1
  • Pages: 630
  • Product dimensions: 6.30 (w) x 9.10 (h) x 2.10 (d)

Meet the Author

Rawley Thomas is President of LifeCycle Returns, Inc. He isVice President of Practitioner Services for the FinancialManagement Association International (FMA) and Chairman of the FMAPDDARI (Practitioner Demand Driven Academic Research Initiative)Advisory Committee. Currently, Thomas serves on the NorthernIllinois Accountancy Board and chairs the FMA PDDARI as supportedby the CFA Society of Chicago.

Benton E. Gup, PhD, has served as a staff economist forthe Federal Reserve Bank of Cleveland and currently holds theRobert Hunt Cochrane/Alabama Bankers Association Chair of Bankingat the University of Alabama. Gup worked in bank research for theOffice of the Comptroller of the Currency while on sabbatical in1997. He is also the author or editor of a number of books in thearea of finance.

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Table of Contents


Valuations Are Important.

Valuation Challenges: Which Techniques to Apply.


Chapter Summaries.

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

Top-Down/Bottom-Up Analysis.

Life Cycle.




CHAPTER 2 The Value Edge: Reap the Advantage of DisciplinedTechniques (William J. Hass and Shepherd G. PryorIV).

Valuation Decisions Are Made Differently by DifferentPeople.

Techniques of Communicating Value Can Demonstrate a Commitmentto Value Building.

Analysts Beware: Once-Successful Public Companies Can Lose TheirWay.

Incentive Compensation Techniques Based on Value Are Better.

Valuation Techniques for Private Companies Are Also More DataDriven.

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 andDestroyers.

Better Valuation Frameworks Provide Discipline.

The Value Journey Has Many Steps along the Way.



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.




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 to2000).

Tests of DCF in a Holdout Sample (New Sample2000–2008).

Convergence Tests.

Straw Man Horse Races (Comparison of Three Models).





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.


Appendix: Academic Literature.



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

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

Valuation Perspectives: Economic Profit and Market ValueAdded.

Valuation Perspectives: The Magnifier.

Valuation Perspectives: Financial Drivers and Value ProfitMargin.

Value Analysis: The Proper Focus.


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.




CHAPTER 8 Modern Tools for Valuation: Providing theInvestment 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 ValuationModels.

Appendix B: How Our Dynamic Discounted Cash Flow ModelWorks.

Appendix C: Explanation of Risk/Reward Rating System.

Appendix D: NOPAT, Invested Capital, and WACC Calculations forAccenture.


CHAPTER 9 The Economic Profit Approach to SecuritiesValuation (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.




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

Current Environment.

Alternative Measures of Value Creation: A Quick Review.




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.


Appendix Market Derived Discount Rates and CAPM Beta Costs ofCapital.



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

Applying Economic Moats to Security Valuation.

Intrinsic Value.


CHAPTER 13 Valuing Real Options: Insights from CompetitiveStrategy (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.



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

A Theory of Stock Prices.


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.



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


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.




CHAPTER 16 The Valuation of Health Care ProfessionalPractices (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.



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


Fixed Asset Appraisal.

Ratio Analysis.

Trend Analysis.

USPAP Standards.




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

Publicly Traded Equivalent Value.

Discounts for lack of Marketability and Discount for lack ofLiquidity.

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 forLack Of Liquidity.

Three Option based Models.

Black-Scholes put (BSP).

Average Price Asian Put (AAP).

Look Back Put (LBP).



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

Creating and Standardizing Metrics.

Predicting Future Financial Results.

Organizational Decomposition.

Mathematical Models Guiding Practical Action.



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


Who Uses EBITDA and Why?

EBITDA in Financial Reporting.

EBITDA in Europe.

Impact on the U.S. Capital Market.

The Reporting Performance Project.




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

Investor Relations as a Service Function.

The Investment Relations Officer as the Resident InvestmentMarket 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.



CHAPTER 22 Lower Risk and Higher Returns: Linking StableParetian Distributions and Discounted Cash Flow (RawleyThomas, Dandan Yang, and Robert J. Atra).


Intrinsic Values and Distributions.

Automated Valuation Models.

Research Design and Empirical Results.


Appendix A: Synthesizing the Life Cycle Framework.

Appendix B: Technical Note—Ranges of BoundedRationality.



CHAPTER 23 Common Themes and Differences: Debates andAssociated Issues Facing the Profession (RawleyThomas).

Does Intrinsic Value Have Any Meaning?

Methodologies: Mark to Market, Mark to Model.

Illiquidity Crises and Market Meltdowns: Effect on QuantitativeStrategies.

Discounted Cash Flow Methodologies.

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

Appendix B: Examples of Assumptions and Theories DeservingDebate and Empirical Quantification.


About the Editors.

About the Contributors.


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