About the Author
Peter C. Stimes, CFA, is a retired vice president and principalof Flaherty & Crumrine Incorporated. During his sixteen yearswith F&C, Stimes acted as a portfolio manager, head ofquantitative research and securities analysis, and spent severalyears as treasurer and CFO of the closed-end funds managed byF&C. Stimes is actively involved with the CFA program and hasbeen part of the CFA Voluntary Continuing Education Program since1985. He has written and coauthored papers presented before the CFAInstitute and various regulatory and legislative bodies. Stimesreceived both his undergraduate degree and his MBA from theUniversity of Chicago.
Table of ContentsForeword.
About the Author.
Chapter 1. Introduction.
Theoretical Precision or Theoretical Resilience?
Practical Difficulties as Well.
Overview of Our Analysis.
Chapter 2. Inflation Protected Bonds as a ValuationTemplate.
The Formulas Behind the Intuition.
TIPS versus Traditional Fixed-Rate Bonds – Measuring theDifferences.
A Peek Ahead.
Chapter 3. Valuing Uncertain, Perpetual Income Streams.
The Mathematical Development of Un-leveraged Firm Valuation.
What Does the Valuation Formula Tell Us About Sensitivity toInflation?
Sensitivity to Real Discount Rates and Growth Factors.
The Comparison with a Traditional Model of Firm Valuation.
Chapter 4. Valuing a Leveraged Equity Security.
Leverage in the Presence of Corporate Income Taxes.
From Theory to Practice – Valuing an Enterprise When theDiscount Rates are Known
From Theory to Practice Part II – "Reverse Engineering" orInferring Discount Rates from Observed Market Prices.
Chapter 4 Supplement: The Relationship between the LeveragedEquity Discount Rate and the Debt to Capital Ratio for HighlyLeveraged Companies.
Chapter 5. Case Studies in Valuation during the RecentDecade.
Case 1: Coca-Cola ("KO").
Case 2: Intel ("INTC").
Case 3: Procter & Gamble ("PG").
Case 4: Enron ("ENE").
Tying Up the Package: The Practical Lessons from All FourCases.
Chapter 6. The Treatment of Mergers and Acquisitions.
Generalizing from the P&G/Gillette Example.
Applicability of the Results under Alternate Merger Terms.
Analytical Postscript 1: Common Stock Buybacks and IssuancesOutside the Merger Framework.
Analytical Postscript 2: A Brief Word on Executive Stock OptionGrants.
Chapter 7. A Fair Representation? Broad Sample Testing Over aTen-Year Market Cycle.
Sample Descriptive Data.
The Basic Valuation Results.
Predictive Strength of the Model, the Whole Period.
Predictive Strength of the Model, Sub-Periods.
Chapter 8. Price Volatility and Underlying Causes.
Deriving the Formula for Price Changes.
Translating the Price Change Formula into VolatilityEstimates.
Digression: The Impact of Debt Leverage on EquityVolatility.
Obtaining the Volatility of the Underlying Variables.
Chapter 9. Constructing Efficient Portfolios.
Extracting Expected Equity Returns from Observed Price/EarningsRatios – Part I.
Extracting Expected Equity Returns from Observed Price/EarningsRatios – Part II.
Extracting Expected Equity Returns from Observed Price/EarningsRatios – Part III.
Creating Efficient Portfolios – The UnconstrainedCase.
Creating Efficient Portfolios – The Case Where AssetWeights Are Required To Be Non-Negative.
Computing the Variance/Covariance Matrix Inputs.
Chapter 10. Selecting among Efficient Portfolios; Making DynamicRebalancing Adjustments.
Reconciling Portfolio Desirability and Feasibility.
Turning Theory into Easily Calculated Results.
Adjusting for Changes in Long-Term Expected Returns on CommonEquity.
Adjusting for More General Changes in Risk-Adjusted ExpectedReturns.
Recapitulation and an Important Caveat.
Chapter 11. How Did We Arrive Here Historically? Where Might WeGo Prospectively?
The Next Crises of Confidence.
Some Answers Begin to Emerge.
What if Everyone Followed this Type of Model and Investing?
The Next Steps.
Appendix A. Mathematical Review of Growth Rates for Earnings,Dividends, and Book Value per Share.
Constant Growth Rate Characterization.
Transition from One Long-Term Growth Rate to Another.
Focus on Share Growth Impacts.
Appendix B. Sustainable and Non-Sustainable Inflation Rates.
The Impact of Monetary Policy and Interest Rates on Price LevelChanges.
The Impact of "Real Shocks" on Measured Price Level Changes.
Drawing Correct Inferences.
Appendix C. Deriving the "Equity Duration" Formula.
Appendix D. The Traditional Growth/Equity Valuation Formula.
Appendix E. Adjustments Required to the TraditionalGrowth/Equity Valuation Formula in Order to Preserve InflationNeutrality.
Appendix F. Brief Recapitulation of the Miller 1977 CapitalStructure Irrelevance Theorem.
Appendix G. Time Series Charts of Un-leveraged, InflationAdjusted Discount Rate Estimates.
Appendix H. Comparison of Volatility of Pre-Tax and After-TaxIncome.
Appendix I. Relationship between Observed P/E Ratios and NominalInterest Rates.
Appendix J. Additional Background on Mathematical OptimizationSubject to Constraint Conditions.
Appendix K. Derivation of Asset Class Covariances.
Appendix L. Expected Return and Variance/Covariance InputsUnderlying Chapter 9 and Chapter 10 Portfolio Examples.