k k
Index
Accounting pension expense, removal, 83
Accounting rules, change (impact), 21
Accruals, inclusion, 75 Acquirer, value creation, 111 Adjusted present value (APV)
equation, 35 model, usage, 35 Advisory fees, 115
After-tax net, deduction. See Unfunded pension liabilities Analytics. See Strategic management Antitrust regulation, impact, 112 Arbitrage pricing theory, 55 Assets
common size entries, 43 health, measures, 103 leasing, 81
pricing/liquidity, 115 value, equation, 81 Balance sheet, balancing, 63 Balance sheet invested capital,
forecast, 47 Bankruptcy, 119 Banks, 135
activities, statements (construction), 135
equity risk capital needs, 135 multibusiness companies,
equivalence, 135 questions, 135–138
answers, 229–230
Behaviors. See Strategic management behavioral biases, impact, 108 Best owner principle, 115 Biases, impact, 108
Board of directors, managers (tension), 123
Business
cycle, midpoint, 51 erosion, 119
expansion options, identification, 99
models, discovery, 19
parent/owner advantages, 99 portfolio, construction, 99 risks, modeling, 127
value creation characteristics, evaluation, 99
Buyers, bargaining power, 27 Capital budgeting system, 1032 cost, 11 expenditures, optimization, 19 flow, controls, 127
COPYRIGHTED MATERIAL
k k
Capital (contd.)
investments, requirement, 129 markets, illiquidity, 127 measurement, alternatives (See
Return on capital measurement) norms, differences, 39 productivity, 103
required capital investments, estimation, 129
turnover
adjustments, 85 overestimation, 91
Capital asset pricing model (CAPM), 55
Capitalized expenses, inclusion, 85 Capital-light business performance,
measurement, 85 questions, 86–87 answers, 195–196 Capital structure, 119 change, 35 impact, 67
long-term capital structure, design, 120 management, 119 benefits/costs, 120 methods, 120 questions, 120–121 answers, 217–218 target capital structure,
development, 120 Carve-outs, 115 parents/subsidiaries, market-adjusted long-term performance, 115 Cash, availability, 131 Cash flow company generation, 3
determination, revenue growth (usage), 43
impact, 7
Cash flow return on investment (CFROI), 89
ROIC, trade-offs, 90
Cash returns on capital, failure, 90 Chief executive officer (CEO),
resource allocation, 107 Commercial health, measures, 103 Commodity price risk, management,
12
Common size entries, usage, 43 Company
built-in biases, 108 risk profile, executive
consideration, 12 share, 129
share prices, volatility, 131 share value, intrinsic value
(equivalence), 5 statutory tax rate, usage, 75 Compensation frameworks, 103 Competition, impact, 27
Competitive advantages, sources/sustainability (identification), 99
Competitive position, analysis, 43 questions, 44–46
answers, 167–168 Confirmation bias, 108 Contingent liabilities, 59
Continuing value (CV) equation, 51, 52, 135
Continuing value (CV) estimation, 51–52
methods, 52 questions, 52–54
answers, 173–174 Contractual barriers, 115 Convertible debt stock, 59 Convertible preferred stock, 59 Corporate growth, long-term
historical evidence, 129 Corporate overhead costs,
allocation, 71
Corporate portfolio strategy, 99 questions, 100–101
k k
Corporate strategy, implementation, 108
Corporate taxes, impact, 55 Cost of capital, 11, 103
questions, 12–13 answers, 151–152
Cost of capital, estimation, 55, 95 questions, 56–58
answers, 175–176
Cost of equity, estimation/equation, 55
Cost of sales, accounting pension expense (removal), 83 Costs/benefits, inclusion, 55 Costs, reduction, 3, 19 Cost structure health,
measure, 103 Credit ratios, distortion, 91 Cross-border valuation, 95
questions, 95–97 answers, 203–205 Cross-listing, benefit, 21
Currency. See Foreign currencies fluctuations, 31
risk, adjustment (absence), 95 Current method, 95
inflation-adjusted current method, 95 Customer lock-in, 27 satisfaction, improvement, 3 Cycle scenario, construction/valuation, 131 Cyclical companies, 131 questions, 132–133 answers, 227–228
Cyclical firm, evaluation (steps), 131 Cyclicality, manager behavior (role),
131
Days ratio, equation, 43 Debt after-tax cost, 55 components, 59 equivalents, 59 financing, choice, 119 obligations, 81
target weight (D/V), equation component, 55
Debt-to-EBITA ratio, 119 Decision makers, information
(provision), 12 Decision making
bias, absence, 107 improvement, 19
Decision tree analysis (DTA), usage, 139
Deferred-tax assets/liabilities, classification, 75 Deferred tax liabilities (DTLs),
increase (subtraction), 75 Demand growth, 131
Demergers. See Spin-offs Digital initiatives, 19
questions, 19–20 answers, 155–156 Discounted cash flow (DCF)
approach, 127 bank valuation, 135 basis, 5, 67 estimation, 91 formula, 51 model, usage, 35 valuation, 127
method, application (problems), 135 Discretionary value-creating activities, reduction, 3 Disentanglement costs, 115 Distribution channels, 67 Diversification, benefits, 99
Divested assets, liquidity level (role), 115 Divestitures, 115 questions, 115–117 answers, 215 Divestments, impact, 115 Dividends, 119
k k Dividends (contd.) change, 120 questions, 120–121 answers, 217–218 yield, 15 Domestic-capital currency, application, 95
Domestic currencies, forecasts, 95 Double counting, avoidance, 59, 111 Drivers, changes (impact), 63 Earnings
forward estimates, usage, 67 nonoperating gains/losses,
impact, 67 percent change, 15
Earnings per share (EPS), manager emphasis, 3
Earnings targets, meeting, 3 EBITA-to-interest ratio, 119 Economic cycles, exposure, 11 Economic logic, mechanical
errors/flaws, 63 Economic profit (EP)
equation component, 35, 51 formula, 51 maximization strategies, 5 Economic-profit-based valuation models, 35 Economic-profit formula, 51 Economic rationale, development,
131
Economic return, 89
Economic spread analysis, usage, 135
Economies of scale, 27
Embedded one-time items, notes (search), 77 Emerging markets, 127 questions, 127–128 answers, 223–224 Employee demoralization, 123 morale, decline, 123 motivation, 107 productivity, increase, 19 Employee stock options,
adjustments, 59
Enterprise resource allocation, implementation, 108 Enterprise value
accounting pension expense, removal, 83
determination, 36 Enterprise value, shift, 59
questions, 59–62 answers, 177–178 Environmental, social, and
governance (ESG) valuation, 19 questions, 19–20 answers, 155–156 Equity DCF valuation method, application (problems), 135 financing, choice, 119 target weight, equation
component, 55
EV/NOPAT multiples, comparison, 15
EV-to-EBITDA multiple, 52 Excess capacity, removal, 111 Excess cash, change, 63
Excess pension assets. See Pension assets
Explicit forecast period, length (impact), 51–52
Fama-French three-factor model, 55 Finance, 5
questions, 6 answers, 147
Financial Accounting Standards Board (FASB), guideline changes, 81
Financial statement reorganization, 35, 39
k k questions, 40–42 answers, 165–166 Financial statements building, 71 nominal terms, 91 real terms, 91 creation, 71 methods, 95
off-balance sheet items, basis, 81 translated foreign-currency financial statements, usage, 95 Financial subsidiaries, understanding, 71 Firm
capital structure, change, 35 value, equation, 35
Firm value (increase), growth increase (impact), 7 First-in, first-out (FIFO), 21 Fiscal changes, 115
Flexibility, 139 questions, 139–141
answers, 231–232
Forecasting process, steps, 47 Forecast period, length (impact),
51–52 Foreign-capital currency, application, 95 Foreign currencies forecasts, 95 risk, incorporation, 95 translated foreign-currency
financial statements, usage, 95 Foreign markets, expansion, 31 Forward-rate method, usage, 95 Free cash flow (FCF)
calculation, usage, 47 equation, 39
forecasts, 55
real/nominal terms, 91 generation, 55
new free cash flow, basis, 81 projection, 35
Future expected cash flows, present value (maximization), 5 Generally accepted accounting principles (GAAP), IFRS (convergence), 95 Goodwill, change, 21 Governance
environmental, social, and governance (ESG) valuation, 19
improvement, 99 strength, 107
Gross domestic product (GDP), publicly traded company median growth
(contrast), 31 Groupthink, 108 Growth, 31
corporate growth, long-term historical evidence, 129 demand growth, 131 expectations, 21 historical economy-wide evidence, 47 increase, impact, 7 long-term growth, 103 organic growth, 31
organic revenue growth, contrast, 43 overstatement, 91 questions, 31–33 answers, 161–162 rates, decay, 31 ROIC, combination, 5 sustaining, 31 types, 7–8
value creation driver, 21 Hedging, impact/avoidance, 12 High-growth companies, 129
questions, 129–130 answers, 225–226
k k
Historical data, basis, 67
Historical financial statements/data, preparation/analysis, 47 Historical investment
(representation) accuracy (increase), 85
Historical performance, analysis, 35 Human beings, built-in biases, 108 Hybrid securities, 59
Illiquid capital markets, 127 Income smoothing provisions, 40 provisions, usage, 77 Income statement forecast, 47 reorganization, 77
Index listing/delisting, long-term effects (absence), 21
Inertia, 108 Inflation, 91
expectations, 55
inflation-adjust current method, 95
questions, 91–93 answers, 199–201
Initial public offerings (IPOs), 115 Inorganic factors, effects, 31 Intangibles (investments),
capitalization (reasons), 85 Intercompany transactions, 71 Interest rates, 95
Interest tax shield, 55
Internal rate of return (IRR), 89 International Accounting Standards
Board (IASB), guideline changes, 81
International Financial Reporting Standards (IFRS), GAAP (convergence), 95
Intrinsic value creation, stock prices (reaction), 112
Invested capital cash excess, 39
equation, 39
nonoperating assets, sum, 63 research and development,
inclusion, 40 Investments expenditures, optimization, 19 opportunities, rejection, 11 overinvestment, discouragement, 119 risk profile, 11 Investor communications, 123 questions, 123–125 answers, 219–221 Investors, opportunity cost
(inclusion), 55
J&J Snack Foods, company/stock performance (comparison), 15 Labor costs per unit, equation, 43 Last-in, first-out (LIFO), 21 Leased assets, implied value, 40 Leases, 81 questions, 81–82 answers, 189–191 Legal barriers, 115 Legal fees, 115 Leverage effects, 135 norms, differences, 39 ratios, WACC adjustment, 81 Liquidation value, estimates, 52 Long-term capital structure, design,
110
Long-term growth, 103 Long-term investments,
performance (improvement), 85
Long-term operating provisions, 40, 77
Long-term strategic goals, strategic management culture focus, 107
k k
Long-term value drivers, 103 understanding, 63
Long-term value, strategy (connection), 107–108 Loss aversion, 12, 108 Macroeconomic uncertainty, 127 Managers, motivation, 107 Manufacturing, 111 Market access, creation, 111 attractiveness, assessment, 99 market-based weights, usage, 55 share, performance, 32
Marketing, 111
expenditures, reduction, 107 Medium-term value drivers, 103 Mergers and acquisitions (M&As),
31, 111 questions, 112–114 answers, 213–214 Metrics change, 123 selection, 103 Mindsets. See Strategic
management Mispricing, sources, 21
Monetary asset value (reduction), inflation (impact), 91 Money, time value, 52 Multibusiness companies banks, equivalence, 135 valuation, 67 Multiples, usage, 67 questions, 67–69 answers, 181–182
Net income growth, margin change (impact), 15
Net income to market value, starting ratio, 15
Net operating deferred tax liabilities (DTLs), increase
(subtraction), 75
Net operating profit after taxes (NOPAT), 39, 75
equation component, 7, 51, 52 EV/NOPAT multiples, 15 invested capital, relationship, 85 treatment, 79
Net Operating Profit Less Adjusted Taxes (NOPLAT), 35
ROIC, relationship, 89 Net present values (NPVs)
calculation, 139
cancellation, option (absence), 139 equation, examples, 139
New free cash flow, basis, 81 Noncontrolling interests,
adjustments, 59 Nonoperating assets
entries, forecast, 47 invested capital, sum, 63 value, addition, 35
Nonoperating charges, impact assessment (steps), 77 Nonoperating dependencies, value,
59
Nonoperating gains/losses, impact, 67
Nonoperating items, 77
income statement reorganization, 77 multiple, adjustment, 67 questions, 77–79 answers, 187–188 Nonoperating provisions, 40, 59, 77 questions, 77–79 answers, 187–188 Nonoperating reserves, 77 questions, 77–79 answers, 187–188 Nonoperating restructuring provisions, 77
Off-balance sheet items, basis, 81 Ongoing operating provisions, 40, 77 Operating cost productivity, 103
k k
Operating items, income statement reorganization, 77 Operating leases, 59 adjustment, 81 Operating margins estimation, 129 overstatement, 91 Operating provisions, 59 Operating taxes estimates, 75 net operating DTL, subtraction, 75 Operations shaping, 108 value estimation, 35 Opportunity cost, 11 inclusion, 55 Optimism, excess, 108 Organic growth, 31
Organic revenue growth, growth (contrast), 43 Outsourcing, effects, 31 Overinvestment, discouragement, 119 Overreaction/underreaction, combination (impact), 21 Peak level, attainment (acceleration),
112
Peer group, selection, 67 Pension assets, excess, 40
after-tax net, deduction, 83 company reporting, 83 identification, 83
Pension shortfalls, excess, 40 Performance reporting, 103 review, 103, 108 Performance forecasting, 47 questions, 48–50 answers, 169–171
Performance position, analysis, 43 questions, 44–46
answers, 167–168
Political risk, 127
Portfolio momentum, 31 Present value, equation, 51 Price-to-earnings-growth (PEG)
ratio, 67
Price to earnings ratio (P/E ratio), 15, 21
capital structure, impact, 67 change, 15 decrease, 91 excess, 21 percent change, 15 Probability-weighted scenarios, usage, 127 Processes, synchronization, 107 Procurement, 111 Production methodology, 67 Products addition, 112 innovation, 27 life, extension, 112 natural life cycles, 31
Profit-and-loss structure, basis, 103 Public information, completeness
(absence), 71 Public transactions, types,
115
Rate of return, earning, 47 Rational price discipline, 27
Real-option valuation (ROV), usage, 139
Regulatory barriers, 115
Regulatory/legal interventions, minimization, 19
Reinvestment ratio, 47
Replacement costs, estimates, 52 Required capital investments,
estimation, 129
Research and development (R&D), 67, 111
activity, reduction, 3 inclusion, 40
k k
investments, capitalization (reasons), 85
spending, reduction, 107
Reserves. See Nonoperating reserves Resource allocation
enterprise resource allocation, implementation, 108 mastery, 107
Retirement obligations, 83 questions, 84
answers, 193–194
Return, inputs estimation, 129 Return on capital measurement,
alternatives, 89 questions, 90
answers, 197
Return on equity (ROE), equation, 43 Return on invested capital (ROIC),
5, 7, 27 adjustments, 85 analysis, goodwill (absence/presence), 43 bias, 81 calculation, usage, 47 CFROI, trade-offs, 90 definition, 85 equation, 27, 39, 43 component, 51, 67 estimation, 129 expectations, 67 increase, importance, 7 projection, 35 questions, 27–29 answers, 159–160 value creation driver, 21 weakness, 89
Return on new equity (RONE), impact, 135
Return on new invested capital (RONIC), 51, 135
Revenue
analysis, explicit/implicit considerations, 111–112 common size entries, 43
forecast, building, 47 increase, 112
sources, discovery, 19 Revenue growth, 7
cash flow determinant, 43 performance, 15
projection, 35
Reversal/momentum, combination (impact), 21
Risk, 11
mitigation, strategy development, 12
questions, 12–13 answers, 151–152 Rockwell Automation, ROIC
increase (importance), 7 Sales, 111
expenditures, reduction, 107 increase, 111–112
productivity, 103
Savings, allocations (categories), 111 Scenarios analysis, 63 outcomes, range, 12 probabilities, assigning, 131 usage, advantages, 12 Sensitivity analysis, 63 Service cost, usage, 83 Shareholders
annual returns, 7 returns, factors, 5 Share prices, volatility, 131 Share repurchases, 119, 120
questions, 120–121 answers, 217–218
Shortfalls, company responsibility, 83
Short-term budgets, 103 Short-term cash flow volatility
(reduction), hedging (impact), 12
Short-term earnings, manipulation (prevention), 85
k k
Short-term earnings targets, meeting, 3
Short-term value drivers, 103 Single cash flow projections, usage,
139
Skills, acquisition, 111 Spin-offs (demergers), 115 Split-offs, 115
Spot-rate method, usage, 95 Stakeholders, influence, 99 Statutory tax rate, usage, 75 Stockholders, benefits, 112 Stock market intelligence, 21
questions, 21–25 answers, 157
Stock market performance, 15 questions, 16–17
answers, 153–154 Stocks
overpricing, 123 prices, reaction, 112 splits, change (impact), 21 Stranded costs, 155
Strategic management (analytics), 103 questions, 104–105 answers, 209–210 Strategic management (mindsets/behaviors), 107 questions, 108–109 answers, 211–212
Strategic management systems, 1032 Strategic-planning situations,
behavioral biases (impact), 108
Structure-conduct-performance (SCP) framework, 27 Synchronized processes, 107 Target capital structure,
development, 120 Taxes, 75 questions, 75–76 answers, 185–186 Technological trends, embracing/ignoring (risks), 19 Technologies, acquisition, 111 Technology bubble, causes, 21 changes, 131 Temporal method, 95
Total funds invested, equation, 39 Total shareholder return (TSR),
delivery, 15
Tracking stock, issuance, 115
Translated foreign-currency financial statements, usage, 95
Trend line scenario,
construction/valuation, 131 Triangulation approach, usage, 127 Tyson Foods, company/stock
performance (comparison), 15 Unfunded liabilities, identification,
83
Unfunded pension liabilities, 59 after-tax net, deduction, 83 Valuation cross-border valuation, 95 foreign-currency risk, incorporation, 95 Valuation by parts, 71 questions, 71–73 answers, 183–184 Valuation frameworks, 35 questions, 36–37 answers, 163–164
Valuation model construction, 47 questions, 48–50
answers, 169–171 Valuation model,
economic-profit-based valuation models, 35
Valuation model, results analysis, 63 questions, 63–65
k k
Value
drivers, 103 estimation, 127
increase, ROIC increase (impact), 7 long-term value, strategy
(connection), 107–108 manager creation, 119 questions, 3–4 answers, 145 real/nominal terms, 91 source, determination, 135 swings, potential, 63 value-destroying activities, 123 Value creation, 5 acquisitions, impact, 111 characteristics, evaluation, 99 cost savings, impact, 111 determination, cash flows
(impact), 7 divestments, impact, 115 drivers, 21 equation, 111 failure, 31 ideas, 5 inflation, impact, 91
long-term vision, CEO/executive team pursuit, 107–108 occurrence, 3
sources, 135 strategy, 31
Value creation principles, 7 questions, 7–9
answers, 149–150 Value driver formula, 7
modification, usage, 135 Value per share, 59
questions, 59–62 answers, 177–178 Value-to-EBITA ratio, 67 Value-to-EBITDA ratio, 67 Value-to-EBIT ratio, 67
Weighted average cost of capital (WACC) adjustment, 81 equation, 55 component, 7, 51, 52, 67 estimation, 71 usage, 35
