bindex 911 5 May 2020 10:25 AM
911
Index
Accelerated depreciation, 447Accounting:
changes and irregularities in, 259β261
financial institutions (see Banks)goodwill amortization, 647mergers and acquisitions (M&A),
655statements (see Financial
statements)Accounting standards. See Generally
Accepted Accounting Principles (GAAP)
Acquired intangibles, 448Acquisitions, 46β48. See also Mergers
and acquisitions (M&A)bolt-on, 166and conservation of value, 46β48in corporate portfolio strategy,
571β573effect on free cash flow, 247β237effect on ROIC, 156revenue growth through, 166β167
Active share, 715Adjusted present value (APV) model,
181β182, 199β200, 852β853tax shields, 202β203unlevered cost of equity, 200β202
Aggressive growth formula, 314Ainslie, Lee, 714Alphabet (Google), 11, 111, 144β145Amazon, 111, 132, 141, 145, 164,
165β166, 167, 409, 410, 415, 720Amazon Web Services (AWS), 568Analysts, sell-side, 717Analyzing performance. See Historical
performance analysisAnders, William A., 571Annual operating plan (AOP), 619β620Apple, 136, 144, 151, 509, 596, 636Arbitrage pricing model, 339β340Aspen Institute Business and Society
Program, 718, 725Asset-based valuations, 316Asset health metrics, 596Asset optimization, in ESG, 92Assets
gains and losses on sales of, 463traded vs. untraded, 826
AT&T, 660Automation, 96, 98, 144Aventis, 572
Balance sheet, 211, 212β213, 217, 283β286, 491β492. See also Income statements
COPYRIG
HTED M
ATERIAL
912 Index
bindex 912 5 May 2020 10:25 AM
Boston Scientific, 114, 456β459, 461β462
Bottom-up forecasting, 275β277Bristol-Myers Squibb, 660Bubbles, 105. See also Financial crisesBusiness models, in digital initiatives,
94β95Business value creation, 3Business Roundtable, 4, 12, 87
Cadbury, 667Capital asset pricing model (CAPM),
58β59, 322, 877β884applying in practice, 331β338beta, 332β337emerging markets, 743for foreign currencies, 546β554global, 546β549, 878β879international, 549β551, 879β880local, 549β550, 881β884market risk premium, 327β328risk-free rate, 328β329
Capital cash flow (CCF) model, 203Capital intensity, 761β762Capitalized expenses, 505β507Capitalized research and
development, 243Capital-light businesses, 499β513
capitalizing expenses investments, 499β507
economic profit as key value metric, 510β513
need for capital, 507and ROIC, 507β510
Capital productivity, 594Capital structure, 261β265, 675β707
complex, 348β349debt/equity tradeoffs, 683β687estimating current, 344β347financial engineering, 48β49,
703β706derivative instruments, 704hybrid financing, 706off-balance-sheet financing, 704β706
Banks, 779β804digital initiatives, 93β94economics of banking, 780β783fee- and commission-trading
activities, 803β804income sources for, 781β783interest-generating activities, 802trading activities, 802β803valuation complications, 796β797convergence of forward interest
rates, 796β797loan loss provisions, 798multibusiness banks, 802risk-weighted assets and equity risk
capital, 799β801valuation principles, 784β796analyzing and forecasting equity
cash flows, 786β787discounting equity cash flows,
787β789economic spread analysis, 791β795equity DCF method, 784β786value driver trees, 786β788, 794β795
Basel III guidelines, 799β801Becht, Marco, 630Below-investment-grade debt, 342β343Best ownership, 565Beta
in cross-border valuation, 547β548in emerging markets, 744, 745equity beta, 336estimating, 332β334, 428β429industry beta, 335β336levered, 860β861market portfolio, 331β338smoothing, 334unlevered, 332
Black, Fischer, 207n18BlackBerry, 143Black-Scholes value, 367Blume, Marshall, 327, 334, 876Bolt-on acquisitions, 166β167Bond ratings, 341β342Bonds, government, 340β342
Index 913
bindex 913 5 May 2020 10:25 AM
four-stage approach to developing, 678β601
guidelines, 676β678leverage, coverage, and solvency,
869β871market-based rating approach,
868β869payout and financing decisions,
693β703debt financing, 702β703equity financing, 701β702shareholder payouts, 693β700pecking-order theory, 867β868valuation metrics, 290β291
Capital turnover, and inflation, 531
Carve-outs, 669, 671β672Cash flow:
availability to investors, 238β239
foreign, forecasting, 541β546relationship to ROIC and growth,
29β33Cash flow perpetuity formula,
50Cash flow return on investment
(CFROI), 515, 517β522equaling IRR, 517β519vs. ROIC, 519β522
Cash flow risk, 63β66Cash flow statement. See Financial
statementsCash-flow-to-equity (CFE) valuation
model. See Equity cash flow (valuation model)
Cash return on capital invested (CROCI), 459
cash return on gross investment (CROGI), 459
cash return on assets (CashROA), 459
Ciba, 638β639Cisco Systems, 636Closet indexers, 713, 715
Coca-Cola, 135, 143, 144, 221, 312, 357β358, 490, 723
Colgate-Palmolive, 35Commercial health metrics, 595Commodity price risk, 66Comparables. See MultiplesCompass, 256β257Competitive advantage, 135β143
brand, 137cost and capital efficiency
advantages, 139customer lock-in, 137economies of scale, 140β141innovative business methods,
139β140innovative products, 136persistence of, 144price premium advantages, 136product life cycle, 143quality, 136β137rational price discipline,
137β138scalable product or process,
141β142unique resources, 140
Competitive advantage period, 308β310
Competitive Strategy (Porter), 133Confirmation bias, 616β617Conglomerate discount, 120β121Consensus EPS forecasts, 771Conservation of value principle,
42β49and acquisitions, 46β48and executive stock options, 44financial engineering, 48β49foundations of, 43β44managerial implications, 44and share repurchases, 44β46
Contingent liabilities, 366Contingent NPV, 819β820Contingent valuation. See Decision
tree analysis (DTA); Real-option valuation (ROV)
914 Index
bindex 914 5 May 2020 10:25 AM
Continuing value (CV) estimation, 299β317
asset-based valuations, 316Costco, 902discounted cash flow approaches,
313β315aggressive growth formula, 314convergence formula, 313β314key value driver formula, 300β302recommended formula, 300β303economic profit valuation formula,
303β304key value driver formula, 190β191misunderstandings about, 305β310effect of forecast length on value,
305β307length of competitive advantage
period, 308β310multiples (comparables), 315β316pitfalls in, 310β312naive base-year extrapolation,
310β312naive overconservatism, 312purposeful overconservatism, 312two-stage formula, 907β908
Convergence formula, 313β314Conversion value, 367Convertible bonds/preferred stock,
366β370Corporate growth. See Growth;
Revenue growthCorporate Horizon Index, 4Corporate portfolio strategy,
563β582acquisitions and divestitures,
571β573best-owner life cycle, 569β570constructing a portfolio ofbusinesses, 577β581diversification, 573β576dynamic portfolio management,
571β573ownership and value creation,
565β569
Cost and capital efficiency advantages, 139
Costco, 28, 35, 184, 211, 216β237, 240β243, 248β253, 263β265, 275, 323, 332β342, 346, 482β483, 885β906
Cost of capital, 55β59, 321β349. See also Weighted average cost of capital (WACC)
beta, 332β337capital structure, 344β348in emerging markets, 742β744estimating cost of debt, 340β344below-investment-grade debt,
342β343bond ratings and yield to maturity,
340β342interest tax shield, 343β344estimating cost of equity, 324β340adjusting for industry/company
risk, 330β331arbitrage pricing theory, 330β340capital asset pricing model (CAPM),
58β59, 331β338Fama-French three-factor model,
338β339market return, 324β330estimating in foreign currency, 546β554lack of control, 57β60in multiple business units, 428β430for operating leases, 480as opportunity cost, 56β57for pension obligations, 494β496target weights, 344β347
Cost of debt, estimating, 340β344Cost of equity:
capital asset pricing model (CAPM), 331β338
emerging markets, 744estimating, 324β340 (see also Cost
of capital, estimating cost of equity)
alternatives to capital asset pricing model (CAPM), 338β340
Index 915
bindex 915 5 May 2020 10:25 AM
beta and, 332β337(see also Beta)leverage and, 790β791levered/unlevered, 200β202,
855β862Cost of goods sold (COGS), 272Cost reduction
in digital initiatives, 95β96in ESG, 89β90
Costs, fixed vs. variable, 292Cost structure health metrics, 595Coughlin, Chris, 660Country risk premium, 736β738,
741β742, 745, 747, 750Coverage, 869β871Covidien, 659Credit health, 261β265Credit ratios, and inflation, 532Credit risk, 799Credit spreads, 692Cross-border valuation, 541β558.
See also Currency, foreigncurrency translation approaches,
555β557estimating beta, 547β548estimating cost of capital, 546β554forecasting cash flows, 541β546foreign currency risk, 552β554
Cross-listed shares, 123β124Cross-subsidization, 660Currency:
effects on revenue growth, 237, 256β257
foreign (see also Cross-border valuation)
forecasting cash flows, 541β546forward rate vs. spot rate,
542β546incorporating currency risk in
valuation, 552β554translation approaches, 555β557risk, 66β67
Customer experience, in digital initiatives, 96β97
Customer lock-in, 137β138
Cyclical companies, 769β776forecasting for, 771β774management implications, 775β776share price behavior, 769β774earnings forecasts, 771β774market and DCF valuations, 769β771valuation approach, 774β775
Data, in forecasting, 270β271Debt:
below-investment-grade, 342β343changes in, 239convertible, 702, 706debt-to-value ratio, 347β348defined, 225enterprise DCF model, 194estimating cost of, 340β344valuing, 345β347, 362β364
Debt equivalents, 213, 225, 239, 364β366Debt financing, 79, 702β73Decision making
in digital initiatives, 98β99strategic management, 610, 614β618
Decision tree analysis (DTA), 809, 820β825, 832β836
Deferred gains, 243β244Deferred taxes, 225β226, 287β288Depreciation:
accelerated, 447in forecasting, 279β280
Derivative instruments, 704Devilβs advocate, 615β616Diageo, 565Digital initiatives, 93β99
defined, 93performance improvements, 94cost reduction, 95β96customer experience improvements,
96β97decision-making improvement,
98β99new business models, 94β95new revenue sources, 97β98value measurement, 93β94
916 Index
bindex 916 5 May 2020 10:25 AM
Dimson, Elroy, 327, 328, 882Direct equity approach. See Equity
cash flow (valuation model)Disclosure. See TransparencyDiscounted cash flow (DCF), 20,
550β551alternatives to, 206β208in banking, 784β786conservation of value, 42cyclical companies, 769β771drivers of cash flow and value, 51and economic-profit valuation, 21,
41with extreme inflation, 531β532scenario DCF approach, 736β742valuation modelsadjusted present value (APV),
181β182, 199β200capital cash flow (CCF), 182decision tree analysis (DTA), 809,
820β825, 832β836economic profit, 181β182, 195β199enterprise DCF, 182β195 (see also
Enterprise discounted cash flow)
equity cash flow, 204β206real option valuation (ROV), 809real-option valuation (ROV),
818β819scenario approach, 382β386, 809scenario DCF approach, 753β754single-path DCF, 809stochastic simulation DCF, 809
Discount rate, 30. See also Cost of capital
Disentanglement costs, 665Diversification:
and conglomerate discounts, 120β121
effect on cost of capital, 57β58in portfolio of businesses, 573β576
Divestitures, 655β673assessing potential value from,
664β667
barriers to, 666β667conflict of interest and, 660in corporate portfolio strategy,
571β573costs associated with, 665β666deciding on, 668β673earnings dilution from, 662executive resistance to, 661β663exit prices, 667legal/regulatory issues, 666β667pricing/asset liquidity, 667research into, 657β658transaction structure choice,
669β673carve-outs, 669, 672β673IPOs, 669, 670, 672private vs. public transactions,
669β670spin-offs, 669, 670β671tracking stock, 669, 673β673value created vs. value forgone,
664value creation from, 657β667
Dividends, 239, 675, 694β695, 701Dot-com bubble, 3, 42β43, 44, 95,
337β338
Earnings per share (EPS), 112consensus earnings estimates, 119earnings volatility, 117β119effect of share repurchases on,
44β46from employee stock options,
115β116guidance, 119β120and investor communications,
723β726and mergers and acquisitions
(M&A), 114, 647β649and share repurchases, 113from write-downs, 114β115
eBay, 111, 122, 131β132, 170, 726, 727EBIT (earnings before interest and
taxes), 426n5
Index 917
bindex 917 5 May 2020 10:25 AM
EBITA (earnings before interest, taxes, and amortization), 227β230, 261β265, 456, 528, 640β641
EBITDA (earnings before interest, taxes, depreciation, and amortization), 227β228, 261β265
EBITDAR (earnings before interest, taxes, depreciation, amortization, and rental expense), 261β265. See also Multiples
Economic profit, 21capital-light businesses, 510β513for continuing value (CV)
estimation, 303β304discounted free cash flowequivalence, 843β847ROIC and size, 40β42valuation models based on,
181β182, 195β199Economic spread analysis, 791β794Economies of scale, 140β141, 636β637,
650Edmans, Alex, 91Elanco, 565Emerging markets, 735β751
estimating cost of capital, 742β744after-tax cost of debt, 745country risk premium, 745weighted average cost of capital
(WACC), 745estimating the cost of equity, 744exchange rate movements, 745incorporating risk in valuationcountry risk premium, 736β738,
741β742scenario DCF approach, 736β739other complications, 745β747triangulating valuation, 747β751
Employee productivity, ESG, 91β92Employee stakeholders, 12Employee stock options, 115β116, 194,
370β372
Employment growth, correlation with TRS, 14
Energy companies, 10Enron, 112, 353Enterprise discounted cash flow,
182β195, 849β852four steps of, 184nonequity claims, identifying/
valuing, 184, 193β195nonoperating assets, identifying/
valuing, 184, 193operations valuation, 184valuing equity, 184, 195valuing operations, 185β193
Enterprise value:converting to value per share,
353β373defined, 353n1in multiples, 394β399, 406β407relationship to equity value,
182β183Environmental, social, and
governance (ESG), 86β88cash flow link, 88common valuation framework, 86overlapping criteria, 87value creation, 87β88cost reductions, 89β90employee productivity uplift, 81β92investment and asset optimization,
92regulatory and legal intervention
reduction, 90revenue growth, 88β89
Equity:defined, 225valuing (DCF model), 195
Equity beta, 336Equity cash flow (valuation model),
204β206, 784β786Equity equivalents, 213, 225β226Equity financing, 701β702Equity investments, 223Equity risk capital, 791, 799β801
918 Index
bindex 918 5 May 2020 10:25 AM
Equity value:contingent liabilities, 366convertibles, 366β367debt, 362β364employee stock options, 370β372noncontrolling interests, 372β373operating leases, 365pension liabilities, 497postretirement liabilities, 365β366provisions, 364β365relationship to enterprise value,
182β183ESG. See Environmental, social, and
governanceEvent trees, 826β827, 828β829Excess capacity, reducing, 634β635Excess cash, 222β223, 356Executive stock options, 44Exercise value approach, 371Expectations:
decomposing TRS, 74β80treadmill analogy, 70β73, 81β82understanding, 80β81
Expected rate of return on new invested capital. See Return on new invested capital (RONIC)
Extraordinary dividends, 701
Facebook, 111, 142, 149Fair value, 367Fama, Eugene, 326Fama-French three-factor model,
59n6, 338β339Farfetch, 755β756FASB (Financial Accounting
Standards Board) accounting rules, 42β43, 251, 443, 444
Fayard, Gary, 723Federal Reserve Bank of Philadelphia,
326FedEx, 90, 121, 222, 243Fee and commission income,
781Finance subsidiaries, 359β360
Financial Accounting Standards Board (FASB) accounting rules, 42β43, 259, 473, 474
Financial crisis of 2007β2009, 3, 110β111, 328
Financial engineering, 48β49, 703β706derivative instruments, 704hybrid financing, 706off-balance-sheet financing, 704β706
Financial institutions. See BanksFinancial projections
inflation and, 532β538operating lease and, 479
Financial statements. See also Balance sheet; Income statements
in forecasting, 271β272in multiple business units, 420β421operating leases, 482β483reconciliation to net income, 233reorganizing, 186β188, 211β244calculating NOPAT, 227β233capitalized research and
development, 243case study (Costco), 216β239cash flow available to investors,
238β239computing total funds invested,
222β225deferred gains, 243β244
free cash flow, 233β239invested capital, 212β214, 217β212key concepts, 211β216operating leases, 240β242pensions and postretirement
benefits, 242β243reconciliation to net income, 233reconciling total funds invested,
224β225pension obligations, 489β490
Financial subsidiaries, 223Flexibility, 807β840
managing, 815β817recognizing, 815β816structuring, 816
Index 919
bindex 919 5 May 2020 10:25 AM
vs. uncertainty, 810β813valuation, four-step process, 826β831valuation examples, 827β840valuation methods, 808β810compared, 809, 821β822decision tree analysis (DTA), 809,
820β825, 832β836real-option valuation (ROV), 809,
818β819, 821β822, 827β831, 836β840
risk-neutral valuation, 819β820value and, 810β813
Forecasting, 269β294components of a good model,
270β272consensus EPS forecasts, 771in continuing value (CV)
estimation, 305β307CostCo, 894β908costs, fixed vs. variable and, 292cyclical companies, 771β774forecast ratios, 271, 277β278inflation and, 293β294length/deal determination, 269β270mechanics of, 272β294step 1 (prepare/analyze historical
financials), 273β275step 2 (revenue forecasting), 275β277step 3 (income statement
forecasting), 277β283step 4 (invested capital and
nonoperating assets forecast), 283β288
step 5 (investor funds forecasting), 288β291
step 6 (ROIC and FCF calculating), 291
nonfinancial operating drivers, 291β292
stock vs. flow approach, 284Foreign currency. See Currency,
foreignFrameworks. See Valuation
frameworks
Free cash flow (FCF), 233β239 See also Cash flow
defined, 49, 211discounted economic profit
equivalence, 843β847effects of inflation on, 528β530in forecasting, 272, 291key concepts, 215β216operating leases, 478β479projecting, 190β192valuing at unlevered cost of equity,
200β202and weighted average cost of
capital, 192β193, 843β847French, Kenneth, 326Fundamental investors, 103
General Dynamics, 571Generally Accepted Accounting
Principles (GAAP), 116, 356β357, 91, 555β556, 647
General Mills, 92, 331, 565Goodwill amortization, 647Goodwill and acquired intangibles,
221β222, 237, 249β250, 286β287Google, 11, 111, 144β145Governance. See also Environmental,
social, and governance (ESG)and strategic management,
611β612Gross, Bill, 101Gross cash flow, 234β235Gross merchant value (GMV), 757, 760Groupthink, 615β616Growth. See also Revenue growth
across industries, 173β174balancing with ROIC, 24β25components of, 162β163decay analysis, 175β176defined, 50empirical analysis of, 171β176interaction between ROIC and,
27β29, 36β40portfolio treadmill, 171
920 Index
bindex 920 5 May 2020 10:25 AM
real revenue growth vs. GDP, 172β173
relationship to ROIC and cash flow, 29β33
sustaining, 167β171, 175β176trends, 172β173value creation and, 162β167variation in, 173
Growth companies. See High-growth companies
Growth strategies, 38Guidant, 114
Hedging, 66β67Heineken, 66β67High-growth companies, 753β767
uncertainty of, 765β767valuation process, 754β764estimating operating margin,capital intensity, and ROIC, 761β762scenario development, 763β764scenario weighting, 764sizing market, 758starting from future viewpoint,
754β762working backward to current
performance, 762β763Historical analysis, in forecasting, 271Historical market risk premium,
327β328 Historical performance analysis,
247β266credit health and capital structure,
261β265DCF-based models, 812β185guidelines, 266revenue growth, 255β261ROIC, 247β255
Home Depot, 80β81, 118β119Hotel partnerships with REITs, 48Hybrid financing, 706Hybrid securities, 227, 348β349, 355,
366β373
IBM, 166, 220, 635Income statements, 211, 227, 277β283,
492β493. See also Financial statements
Income taxes. See TaxesIndex membership, 122β123Inflation, 525β538
distortion of financial indicators, 531β532
effect of passing on to customers, 527β530
extreme, historical analysis of, 531β532
and financial projections, 532β538in forecasting, 293β294and lower value creation, 525β530
Informed investors, 102β103Initial public offerings (IPOs), 394,
668, 766β767Innovative business methods, 139β140Innovative products, 136Interest expense/income, 281β282Interest expenses, 238Interest tax shield (ITS), 202β203,
348β349Internal rate of return (IRR), 516β519International Financial Reporting
Standards (IFRS), 356β357, 491, 555β567, 647
Internet dot-com bubble, 3, 42β43, 44, 95, 337β338
Intrinsic investors, 713, 714, 718β719Intrinsic value, 22β23, 711β712Invested capital, 214
case illustration (Costco), 217β227defined, 49goodwill and acquired intangibles,
221β222investments in, 236β237key concepts, 212β214in multiple business units, 427β428multiples of, 408operating working capital, 218β220
Growth. (continued)
Index 921
bindex 921 5 May 2020 10:25 AM
other assets and liabilities, 220β221production equipment and
facilities, 220Investment-grade debt, 362β363Investment rate (IR), 50Investment returns, in ESG, 91β92Investments, option to defer, 808,
811β814Investor communications, 709β730
and consensus earnings forecasts, 726β729
earnings guidance, 723β726and intrinsic investors, 718β719intrinsic value vs. market value,
711β712listening to investors, 722β723objectives of, 710targeting by segment, 716β717transparency, 718, 719β722understanding investor base, 709,
712β717Investor funds, forecasting, 288β290Investors:
classification of, 713β717closet indexers, 715intrinsic, 713, 714, 718β719mechanical, 713, 715opinions of, 722β723segmentation of, 713β715traders, 713, 714β715
IPOs (initial public offerings), 394, 668, 766β767
J&J Snack Foods, 72β73, 79β80, 81Johnson & Johnson, 46, 391, 628β565,
689Joint ventures, 668
Kellogg, 491β497, 628Key value driver formula,
300β302
Leases. See Operating leasesLegal interventions, and ESG, 90
Leverage, 263β264, 869β871and beta, 861β862capital structure and credit ratings,
687β692and cost of equity, 790β791and the price-to-earnings multiple,
863β866Line item analysis, 252β253, 277Litigation charges, 462β463Loss aversion, 617β618Loweβs, 721Lucent, 660LyondellBasell, 57
Marathon Petroleum, 572Market access, accelerating, 635Market bubbles, 105Market price, 367Market return, estimating, 324β330Market risk, 799Market risk premium, 547β548, 744,
873β876Market share performance, defined,
160Market value, 711β712Mars, 92, 143, 144Marsh, Paul, 327, 328, 882Marshall, Alfred, 3Mathematical formulas in value
creation, 49β52McKinsey & Co. research, 4, 8, 89,
141n6, 571, 576, 629, 630, 640, 658, 661, 666, 718, 725
Mechanical investors, 715, 716Merger Management Practice,
McKinsey, 640Mergers and acquisitions (M&A),
625β652better-acquirer characteristics,
649β652priority themes, 649β650reputation management, 650strategic vision, 651buying cheap, 639β640
922 Index
bindex 922 5 May 2020 10:25 AM
consolidation, 634β635, 638defined, 160earnings from, 113effects on revenue growth, 257β258empirical research on success of,
628β633estimation of operating
improvements, 640β644cost and capital savings, 640β643implementation issues, 644revenue improvements, 643β644payment method (cash/stock),
644β646performance improvement
reassessment, 651β652roll-up strategies, 637β638transformational mergers, 638β639value creation and, 626β628value creation strategies for,
633β640value creation vs. accounting focus,
646β649Merton, Robert, 207Microsoft, 95, 111, 112, 142β143, 147,
689, 701Miller, Merton, 43, 199, 335, 855Mitchell, Mark, 629β630Modigliani, Franko, 43, 199, 335, 855Molson Coors, 728Multibusiness companies. See
Valuation by partsMultiple expansion, 47Multiples, 389β411
adjusting for nonoperating items, 380β404
alternative multiples, 406β411as alternative to discounted cash
flow, 207comparables analysis, 389β390in continuing value (CV)
estimation, 315β316EBITA vs. EBITDA, 398β399in emerging markets, 705β706
enterprise value to EBIT, 396β397enterprise value to EBITA (or
NOPAT), 394β397enterprise value to revenues,
406β407forward-looking, 392β394of invested capital, 408NOPAT vs. EBITA, 400β401of operating metrics, 408β411peer group selection, 404β406PEG ratios, 407β408price to earnings, 395β396principles, 390β391sum-of-parts valuation, 391
Naive overconservatism, 312NestlΓ©, 133Net capital expenditures, 236Netflix, 117, 144, 194, 409β410Net income, reconciliation to, 233Net interest income, 780β781,
795β796Net investment, defined, 49Net operating profit after taxes
(NOPAT), 49Net operating profit less adjusted
taxes. See NOPLATNet present value (NPV), 810β813. See
also Contingent NPVNetscape Communications, 110Network effects, 95, 143, 761Neutrogena, 46Noise investors, 103Nonconsolidated subsidiaries, 223Noncontrolling interests, 194β195,
227, 372β373. See also Nonconsolidated subsidiaries
Nonequity claims, 184, 193β195, 353Nonfinancial operating drivers,
291β292Nonfundamental investors, 102Nonoperating assets, 222β224,
355β359discontinued operations, 360
Mergers and acquisitions (continued)
Index 923
bindex 923 5 May 2020 10:25 AM
excess cash and marketable securities, 356
excess pension assets, 361excess real estate, 360finance subsidiaries, 359β360forecasting, 287β288identifying/valuing, 184, 193loans to other companies, 359nonconsolidated subsidiaries,
356β359tax loss carryforwards, 361β362
Nonoperating expenses, 455β470amortization of acquired
intangibles, 460β463asset write-offs, 461defined, 353, 455gains/losses on sale of assets, 463intangibles, 460β463litigation charges, 460β463one-time vs. ongoing, 455β456persistence of special items, 459reorganizing income statement, 465restructuring charges, 461β462separating from operating expenses,
455β456, 456β458special items, 459
Nonoperating income, 238, 280β281Nonoperating taxes, 238NOPAT (net operating profit
aftertaxes), 219β220calculating, 227β233continuing value and, 302β303,
314β315defined, 49, 211, 212key concepts, 214β215in multiple business units, 426for operating leases, 477β478
Novartis, 638β639
Off-balance-sheet financing, 704β706One-time expenses, 455β456Operating analysis, 253β255Operating cash flows, projecting/
testing, 679β680
Operating-cost productivity, 594Operating expenses:
forecasting, 279separating from nonoperating
expenses, 455β456, 456β458Operating leases, 240β242, 365,
473β485accounting for, 474β476alternative method for, 483β484capitalized, 241β242enterprise DCF model, 194enterprise valuation with, 476β478as form of debt, 476free cash flow, 478β479incorporating into financial
projections, 479valuing, 483β484
Operating margins:in high-growth companies, 761β762and inflation, 531
Operating metrics, multiples of, 408β411Operating taxes:
accrual-based, 445β447converting to operating cash taxes,
445β449deferred, 449β451on reorganized balance sheet,
449β450valuing, 450β451determining, 439β445public statements, 441β443Walmart, 444β445estimating, 230β232forecasting, 282β283
Operating working capital, 218β220, 236, 285β286
Operational risk, 800Operations valuation, 185β193Opportunity cost, cost of capital as,
56β57Optimism, excessive, 616β617Options, real, 207β208Organizational health, 597Overconservatism, 312
924 Index
bindex 924 5 May 2020 10:25 AM
Payout ratio, 256β265Pecking-order theory, 867β868Peer groups, 404β406PEG ratios, 407β408Pensions and postretirement benefits,
223β224, 242β243, 361, 365β366analyzing and valuing,
489β494cost of capital, 494β496expected return and earnings
manipulation, 493β494forecasting, 287β288overfunded, 223β224unfunded, 457β497value of equity, 497
PepsiCo, 312, 490, 628Percentage of property, plant, and
equipment (PP&E), 286Performance analysis. See Historical
performance analysisPerformance review, 620β622Perpetuities, 843β845Petajisto, Antti, 715Phillips, 572, 671Pillsbury, 565Planning
annual operating plan (AOP), 619β620
strategic, 619Polo, Andrea, 630Porter, Michael, 133Portfolio management,
571β573Portfolio momentum, 160Portfolio treadmill, 171Pottruck, David, 618PP&E (percentage of property, plant,
and equipment), 286Preferred stock, 194Pre-mortem, 617Price premium advantages, 136Price-to-earnings ratio (P/E)
leverage, 864β866stock returns, 106β107
Principles of Corporate Finance (Brealey, Myers, and Allen), 43
Privately held subsidiaries, 358β359Procter & Gamble (P&G), 35, 57, 89,
133β134, 144β145, 164β165, 547, 566β567, 573, 635β636, 693β694
Productivity, and ESG, 91β92Property, plant, and equipment
(PP&E), 286Provisions, 463β469
defined, 463income-smoothing, 365, 468β469long-term operating, 365, 466β467nonoperating, 365ongoing operating, 364, 465β466restructuring provisions, 467β468taxes and, 469
Purposeful overconservatism, 312
Quality, 136β137
R&D. See Research and developmentRational price discipline, 148β149Real options, 207β208, 814, 817Real-option valuation (ROV), 809,
817β820, 836β840Regulation, and ESG, 90REITS (real estate investment trusts),
48Replicating portfolios, 207, 818β819Reputation management, 650Rerating, 47Research and development (R&D), 6,
243Reserves. See ProvisionsRestructuring reserves, 239Retirement liabilities, unfunded, 194,
489β497Return on assets (ROA), 248Return on invested capital (ROIC),
18β19, 20β21, 131β156, 247β255, 308
alternative measures of, 515β523
Index 925
bindex 925 5 May 2020 10:25 AM
cash flow return on investment (CFROI), 517β519
analyzinggoodwill and acquired intangibles,
249β250balancing with growth, 24β25capitalizing expenses investments,
499β507capital-light business models,
507β510competitive advantage and, 135β143cost and capital efficiency
advantages, 139decay analysis, 154β156decomposing, 250β255defined, 49β50, 211differences across industries,
148β152drivers of, 132β135effect of acquisitions on, 156empirical analysis, 145β156equaling IRR, 516β517focus on high- vs. low-ROIC
companies, 28in forecasting, 272, 291in high-growth companies,
761β762historic trends, 145β146interaction between growth and,
27β29, 36β40and length of product life cycle, 143line item analysis, 252β253managerial implications, 36β40operating analysis, 253β255persistence by industries, 152β154production outsourcing and,
509β510and product renewal potential,
144β145projecting, 190β192relationship to growth and cash
flow, 29β33stability of, 152β156stock returns, 108β109
Return on new invested capital (RONIC), 302, 308, 312
Revenue forecasting, 275β277Revenue growth, 159β176. See also
Growthanalyzing, 255β256accounting changes and
irregularities, 259currency effects, 256β257mergers and acquisitions, 257β258from attracting new customers, 165and balance with ROIC, 159decay analysis, 175β176decomposing, 259β261and digital initiatives, 97β98drivers of, 160β162empirical analysis, 171β176and ESG, 88β89historical trends, 172β173from increasing market share, 165from new product development,
164from persuading existing customers
to buy more product, 164β165projecting, 190β192rates across industries, 173β174sustaining, 167β171, 175β176through acquisitions, 166β167through incremental innovation,
165through price increases, 166through product pricing and
promotion, 165β166transition probability, 176β177and value creation, 162β167value of major types of, 163variation in, by industry, 161variation in, over product life cycle,
143volatile, by industry, 173
Risk:cash flow risk, 63β66diversifiable vs. nondiversifiable,
822β825
926 Index
bindex 926 5 May 2020 10:25 AM
exposure level, 63β66hedging, 66β67price of, 57β59
Risk-free rate, 328β330, 744Risk-neutral valuation, 819β820Risk-weighted assets (RWA), 799β801Robotic process automation (RBA),
93, 96Rockwell Automation, 35ROIC. See Return on invested capital
(ROIC)Roll-up strategies, 637β638RONIC (return on new invested
capital), 302, 303, 308, 312Rossi, Stefano, 630RSC, 46Ruback, Richard, 203Ryanair, 135
Sale-leaseback transactions, 48β49, 243
Sales productivity, 594Sanofi Aventis, 572Scalability of products/processes,
141β142Scenario analysis, 60β61, 377, 382β386Scenario DCF approach, 736β742,
753β754, 809Scenario development, 763β764Scenario weighting, 764Scholes, Myron, 207Securities and Exchange Commission,
69Securitized receivables, 473Sell-side analysts, 717Sensitivity analysis, 377, 380β382Service Corporation International,
637β638Shareholder capitalism, 9β11Shareholder payouts, 693β700Shareholder returns. See Total
shareholder returns (TSR)Shareholder value creation, 5β6Share repurchases, 44β46, 239, 675,
677, 696β701
EPS growth, 113Shiller, Robert, 101Short-termism, 6β9Siemens, 223, 658β6597, 667, 670Simplified intermediate forecast, 270Single-path DCF, 809Social responsibility, 11β12Sodexo, 12, 256β257, 259Solvency, 870β871Spin-offs, 668, 669β670Split-offs, 668, 669Stability bias, 614Stafford, Erik, 629β630Stakeholder interests, 11β14Statement on the Purpose of a
Corporation (Business Roundtable), 4, 12, 87
Staunton, Mike, 327, 328, 882Stochastic simulation DCF, 809Stock market, 101β128
bubbles, 105 (see also Financial crises)
cross-listings, 123β124diversification, 120β121earnings (see Earnings per share
(EPS))fundamentals of, 102β111index membership impact on
company, 122β123informed investors vs. noise
investors, 102β103market mechanics, 122relationship of company size to
value, 121β122stock splits, 125β126total returns to shareholders (see
Total shareholder returns (TSR))
understanding expectations, 80β81Stock splits, 125β126Stranded costs, 665β666Strategic health, 596Strategic management
analytics, 585β607adopting granular perspective,
586β588
Risk: (continued)
Index 927
bindex 927 5 May 2020 10:25 AM
monitoring results, 605β607setting targets, 604β605simpler alternative, 589β592taking enterprise view, 588β589three processes, 586value drivers, 592β597, 607value driver trees, 598β604, 607mindsets, behaviors, and processes,
586, 609β622debiased decision making, 614β618spending to maximize value, 609strong governance, 611β614synchronized processes, 618β622three elements, 610β611
Strategic vision, 651Strategy, streamlined process in, 619Subsidiaries, 194β195Synchronized processes, 611, 618β622
Tapestry, 249Target-setting, 604β605Target weights, 344β347Taxes, 439β452
deferred, 225β226, 449β451forecasting, 282β283operating, 439β449 (see also
Operating taxes)provisions and, 469
Tax loss carryforwards, 224, 361β362Tax-loss carryforwards, 450β451Tax on a maturity mismatch (TMM), 792Tax penalty on equity, 791Tax shields, valuing, 202β203Technology bubble, 104, 105, 110β111Thaler, Richard, 101Top-down forecasting, 275β277Total debt, 281Total funds invested
computing, 222β224reconciling, 224β227
Total shareholder return (TSR), 6, 69β82
correlation with employment growth, 14
decomposing, 74β80defined, 69
diversification and, 575earnings guidance and, 724enhanced approach to analyzing, 77expectations treadmill, 70β73impact of debt financing on, 79key drivers of, 76managerial implications, 81β82as measure of management
performance, 77β80and spin-offs, 670traditional approach to analyzing,
74β77traditional vs. enhanced
decomposition, 77Tracking stock, 668, 672β673Traders, 715β716Trade sales, 669Transformational mergers, 638β639Transparency, 718, 719β722Triangulation, 750β751TSR. See Total shareholder returns Tyco, 659, 660Tyson Foods, 72β74, 79β80, 81
Uncertainty. See FlexibilityUnilever, 89, 122, 133, 415, 547, 696Unique resources, 140United Parcel Service (UPS), 121, 122,
141, 220, 225, 230, 279, 404, 594United Rentals, 46Unlevered cost of equity, 857β858
Valero Energy, 572Valuation by parts, 415β433
corporate overhead costs, 421β422cost of capital, 428β430enterprise to equity value buildup,
418β419estimating invested capital,
427β428estimating NOPAT, 426β428financial subsidiaries, 425β426individual unit financial statements,
420β428intercompany receivables and
payables, 424β425
928 Index
bindex 928 5 May 2020 10:25 AM
intercompany sales and profits, 422β424
intercompany transactions, 422β425mechanics of, 416β420multiples of peers valuation,
430β432public information, 426ROIC breakdown, 418valuation summary, 428
Valuation frameworks, 181β208chart of, 182DCF alternatives, 206β208DCF-based approachesadjusted present value (APV),
181β182, 199β200capital cash flow, 203economic profit, 181β182, 195β199enterprise discounted cash flow,
182β195(see also Enterprise discounted cash flow)
equity cash flow, 204β206digital initiatives, 95ESG and digital initiatives, 86
Valuation metrics, 265, 290β291Valuation results, analyzing, 377β386
art of valuation, 386consistency check, 378β380model validation, 377β380plausibility check, 380β381scenario analysis, 382β386sensitivity analysis, 380β382
Valuation summary, in forecasting, 272
Valuedefined, 4β5spending to maximize value, 609
Value conservation principle. See Conservation of value principle
Value creation:from acquisitions (see Mergers and
acquisitions (M&A))balancing ROIC and growth, 24β25economic profit, 40β42
and ESG, 85β86examples, 17β25, 35β36fundamentals, 27β53importance, vs. value distribution,
127math of, 49β52and revenue growth, 162β167ROIC and growth, 27β29senior management tasks, 585and share repurchases, 113
Value distribution, 127Value drivers, 592β597, 607
flexibility, 814β815long-term, 596β597medium-term, 595β596short-term, 594β595
Value driver trees, 593, 598β603, 607, 794β795
Value measurement, in digital initiatives, 93β94
Value per share, calculating, 353, 373
WACC. See Weighted average cost of capital (WACC)
Walmart, 444β4445Webvan, 131β132Weighted average cost of capital
(WACC), 56β57calculating, 322β323components of, 321Costco, 902defined, 50discounting free cash flow at,
192β193in emerging markets, 745in forecasting, 271, 290β291in operating leases, 480
Whole Foods, 132, 720WorldCom, 112Write-downs, 114β115, 461Write-offs, 455
Zeneca, 572Zimmer, 660
Valuation by parts (continued)
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