About the Book
Formerly published by Cambridge Business Publishers, now published by Sage
Corporate Valuation: Theory, Evidence & Practice, Second Edition equips students and practitioners with the knowledge and tools needed to value companies, business units, and securities in today’s complex financial environment. Drawing on decades of teaching experience at leading institutions and extensive professional practice, the book integrates valuation theory, empirical evidence, and detailed implementation. Designed for graduate and advanced undergraduate valuation courses, the text goes beyond high-level treatments found in many finance textbooks. It integrates relevant accounting information with finance theory and demonstrates—through detailed, step-by-step examples—how valuation frameworks are applied in practice using real company data.
Organized to support both classroom instruction and professional reference use, the Second Edition serves as a comprehensive guide for students preparing for careers in finance and for practitioners engaged in valuation, mergers and acquisitions, and security analysis.
Instructor Resources/Ancillaries: To access the resources
for this title—including the test bank, editable chapter PowerPoint®
slides, solution files, and supplementary materials—please follow these
easy steps:
- Visit mybusinesscourse.com.
-
Sign in with your instructor account. New to myBusinessCourse™?
Create an instructor account
here.
-
From your instructor dashboard, go to the Request Materials page and
request access to this title′s resources.
Verified instructors receive immediate access; new accounts are
typically verified within 48 business hours.
Table of Contents:
About the Authors
Preface
Brief Contents
Contents
Chapter 1: Introduction to Valuation
Introduction
1.1 What Do We Mean By “The Value of a Company”?
1.2 The Economic Balance Sheet: Resources Equal Claims on Resources
Review Exercise 1.1
1.3 Valuation Principles
Review Exercise 1.2
Review Exercise 1.3
1.4 Measuring the Value of the Firm
1.5 Measuring the Value of the Firm’s Equity
1.6 Real Options in Valuation
1.7 How Managers and Investors use Valuation Models
1.8 An Overview of the Valuation Process
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 2: Financial Statement Analysis
Introduction
2.1 Sources of Information
2.2 How We Use Financial Ratios in Valuation
2.3 Identifying a Company’s Industry and Its Comparable Companies
2.4 The Gap, Inc.-An Illustration of the Calculation and Analysis of Financial Ratios
2.5 Measuring a Company’s Performance Using Accounting Rates of Return
2.6 Disaggregating the Return on Assets
Review Exercise 2.1
2.7 Measuring a Company’s Cost Structure Using Expense Ratios
Review Exercise 2.2
2.8 Analyzing a Company’s Asset Utilization Using Turnover Ratios
Review Exercise 2.3
2.9 Summary of Disaggregating The Gap, Inc.’s Rates of Return
2.10 Analyzing A Company’s Working Capital Management
Review Exercise 2.4
2.11 Analyzing A Company’s Fixed Asset Structure And Capital Expenditures
2.12 Other Types Of Financial Statement Relations-Growth, Trends, Per Share, Per Employee
2.13 Analyzing A Company’s Financial Leverage And Financial Risk
2.14 Disaggregating The Return On (Common) Equity
Review Exercise 2.5
2.15 Assessing Competitive Advantage
2.16 Implementation And Measurement Issues
Summary and Key Concepts
Additional Reading and References
Solutions for Review Exercises
Chapter 3: Measuring Free Cash Flows
Introduction
3.1 Introduction To Measuring Free Cash Flows
3.2 The Bob Adams Company Example
Review Exercise 3.1
3.3 Cash Flow Statement Basics
Review Exercise 3.2
3.4 The Relationships Between The Free Cash Flow Schedule And The Cash Flow Statement
3.5 Differences Between Book And Tax Accounting And The Effect On Income Tax Rates
Review Exercise 3.3
Review Exercise 3.4
3.6 Understanding And Analyzing Income Tax Disclosures
3.7 Effects Of Interest Deduction Limitations And Net Operating Loss Carryforwards
Review Exercise 3.5
Review Exercise 3.6
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 4: Creating a Financial Model
Introduction
4.1 An Overview of the Process of Creating a Financial Mode
4.2 Forecasting Starbucks Corporation (Starbucks)
4.3 Selecting and Forecasting the Forecast Drivers for the Company’s Operations (Steps 2 and 3)
4.4 Creating a Financial Model for the Company’s Operations (Step 4)
Review Exercise 4.1
Review Exercise 4.2
Review Exercise 4.3
4.5 Stress Testing the Model and Assessing the Reasonableness of the Forecasts (Steps 5 and 6)
4.6 Incorporating the Company’s Capital Structure Strategy
Review Exercise 4.4
4.7 Sensitivity and Scenario Analyses and Simulations
4.8 Forecasting Required Cash and Valuing Excess Cash
4.9 Forecasting Income Tax Rates and Payments
4.10 More Detailed Forecasts of Revenues and Capital Expenditures
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 5: The Adjusted Present Value and Weighted Average Cost of Capital Discounted Cash Flow Value
Introduction
5.1 creating Value from Financing
5.2 The Adjusted Present Value and Weighted Average Cost of Capital Valuation Models
5.3 The Andy Alper Company
Review Exercise 5.1
Review Exercise 5.2
5.4 The Discounted Equity Free Cash Flow Valuation Method
Review Exercise 5.3
5.5 The Discounted Dividend Valuation Model
5.6 Useful Valuation Concepts to Keep in Mind
5.7 Comprehensive Example-Dennis Keller, INC.
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 6: Measuring Continuing Value Using the Constant-Growth Perpetuity Model
Introduction
6.1 The Constant-Growth Perpetuity Model
6.2 Estimating The Long-Term Growth Rate For The Constant-Growth Perpetuity Model
Review Exercise 6.1
Review Exercise 6.2
Review Exercise 6.3
6.3 Estimating The Base-Year Year Free Cash Flow
Review Exercise 6.4
6.4 Real Growth And Value Creation In The Constant-Growth Perpetuity Model
6.5 Assessing The Reasonableness Of The Continuing Value Estimate
Review Exercise 6.5
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 7: The Excess Earnings (Residual Income) Valuation Method
Introduction
7.1 The Excess Cash Flow Valuation Framework
Review Exercise 7.1
7.2 The Excess Earnings Valuation Framework
Review Exercise 7.2
7.3 The Weighted Average Cost of Capital Form of the Model
Review Exercise 7.3
7.4 The Adjusted Present Value Form of the Model
7.5 The Equity Discounted Excess Earnings Model
Review Exercise 7.5
7.6 Possible Information Advantages of the Excess Earnings Valuation Method
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 8: Estimating the Equity Cost of Capital
Introduction
8.1 The Capital Asset Pricing Model
Review Exercise 8.1
Review Exercise 8.2
8.2 An Overview on Estimating the Equity Cost of Capital Using the Capital Asset Pricing Model
8.3 Estimating Beta
Review Exercise 8.3
8.4 Adjusting Estimated Betas for Changes in Risk (Non-Stationary Betas)
Review Exercise 8.4
Review Exercise 8.5
8.5 Estimating the Market Risk Premium
8.6 Estimating the Risk-Free Rate of Return to Use in the Capm
8.7 Putting the Pieces Together
Review Exercise 8.6
8.8 Adjusting the Capital Asset Pricing Model for Market Capitalization
8.9 The Build-Up Method
8.10 Multi-Factor Models
Review Exercise 8.7
8.11 Implied Cost of Capital Estimates
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 9: Measuring the Cost of Capital for Debt and Preferred Securities
Introduction
9.1 Types of Non-Common-Equity Securities
9.2 Credit Ratings, Recovery Rates, Default Rates, and Yield to Maturity Versus the Cost of Debt
Review Exercise 9.1
9.3 Measuring The Debt and Preferred Stock Costs of Capital
Review Exercise 9.2
Review Exercise 9.3
9.4 Credit Rating Models
Review Exercise 9.4
Review Exercise 9.5
9.5 Bankruptcy Prediction and Financial Distress Models
Review Exercise 9.6
Summary and Key Concepts
Additional Reading and References
Appendix: An Overview of the Black-Scholes and Merton Option Pricing Models
Review Exercise A9.1
Exercises and Problems
Solutions for Review Exercises
Chapter 10: Levering and Unlevering the Cost of Capital and Beta
Introduction
10.1 An Overview of the Unlevering and Levering Process
10.2 Selecting the Discount Rate and Measuring the Value of Interest Tax Shields
10.3 Levering the Unlevered Cost of Capital
Review Exercise 10.1
10.4 Levering the Unlevered (Asset) Beta from the Capital Asset Pricing Model
Review Exercise 10.2
10.5 Unlevering the Equity Cost of Capital and Equity Beta
Review Exercise 10.3
Review Exercise 10.4
10.6 Using Comparable Companies to Estimate Betas
Review Exercise 10.5
10.7 Limitations of the Levering and Unlevering Formulas
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 11: Measuring the Weighted Average Cost of Capital and Related Valuation Issues
Introduction
11.1 The Weighted Average Cost of Capital-Overview
Review Exercise 11.1
11.2 Measuring Target Capital Structures and the Income Tax Rate for Interest Tax Shields
11.3 The Effects of Treating Liabilities as Debt Versus Operating Liabilities
Review Exercise 11.2
11.4 Converting Operating Leases to Finance (or Capital) Leases
Review Exercise 11.3
Review Exercise 11.4
11.5 Valuing a Company with Interest and Net Operating Loss Carryforwards
Review Exercise 11.5
Review Exercise 11.6
Review Exercise 11.7
Review Exercise 11.8
11.6 Other Factors that Affect the Value Created from Debt Financing
Summary and Key Concepts
Additional Reading and References
Appendix: Financial Statement and Free Cash Flow Effects of Leases
Review Exercise A11.1
Exercises and Problems
Solutions for Review Exercises
Chapter 12: The Effects of Stock-Based Compensation and Other Equity-Linked Securities on Discounted
Introduction
12.1 Adjusting Discounted Cash Flow Valuations for the Expected Issuance of Future Stock-Based Comp
Review Exercise 12.1
12.2 Adjusting a Discounted Cash Flow Valuation for Previously Issued and Outstanding Equity-Linked
Review Exercise 12.2
Review Exercise 12.3
12.3 Valuing Warrants, Employee Stock Options, and Other Option-Based Equity-Linked Securities
Review Exercise 12.4
Review Exercise 12.5
12.4 Measuring the Cost of Capital for Option-Based Equity-Linked Securities
Review Exercise 12.6
12.5 Convertible Debt
Review Exercise 12.7
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 13: Introduction to Market Multiple Valuation Methods
Introduction
13.1 The Market Multiple Valuation Process
13.2 Commonly Used Market Multiples
Review Exercise 13.1
13.3 Risk and Growth Value Determinants of Market Multiples
Review Exercise 13.2
Review Exercise 13.3
13.4 Additional Factors to Consider When Assessing Comparability
Review Exercise 13.4
Review Exercise 13.5
13.5 The Process for Identifying Comparable Companies
13.6 Transitory Shocks and Market Multiples
13.7 Analyzing and Measuring Continuing Value Multiples
Review Exercise 13.6
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 14: Market Multiple Measurement and Implementation
Introduction
14.1 First Principles for Measuring Market Multiples
14.2 Initial Financial Statement Review
14.3 Measuring Market Multiple “Numerators”
Review Exercise 14.1
14.4 Basics of Measuring Market Multiple “Denominators”
14.5 Adjusting Market Multiple Inputs for Non-Recurring Items
Review Exercise 14.2
14.6 Adjusting Market Multiple Inputs for Partially Owned Companies
14.7 Adjusting Market Multiple Inputs for Corporate Transactions
14.8 Comparison of Merck’s Market Multiples Based on Reported and Adjusted Inputs
Review Exercise 14.3
14.9 Adjusting Market Multiple Inputs for Leases and Discontinued Operations
Review Exercise 14.4
14.10 Selecting Among Alternative Market Multiples and Establishing a Range
Review Exercise 14.5
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 15: Leveraged Buyout Transactions
Introduction
15.1 Leveraged Buyout Activity, Deal Characteristics, and the Role of the Financial Sponsor
15.2 Potential Motivations, Economic Forces, and Economic Research
15.3 Steps in Assessing the Investment Value of Leveraged Buyout Transactions
15.4 The John Edwardson & Company Leveraged Buyout Transaction
Review Exercise 15.1
15.5 Using Discounted Cash Flow Valuation Models to Evaluate LBO Transactions (Steps 9 and 10)
Review Exercise 15.2
Review Exercise 15.3
Review Exercise 15.4
Review Exercise 15.5
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 16: Mergers and Acquisitions
Introduction
16.1 What Do We Know About Merger and Acquisition Transactions?
16.2 What Motivates Mergers and Acquisitions, and Do They Create Value?
16.3 Deal Structure, Income Taxes, and Other Contract Provisions
16.4 Synergies
Review Exercise 16.1
16.5 Overview Of How To Value Merger and Acquisition Transactions
16.6 Is the Merger and Acquisition Transaction Accretive or Dilutive?
Review Exercise 16.2
Review Exercise 16.3
16.7 Cash-Based Transactions-Negotiation Ranges and Allocation of Gains
Review Exercise 16.4
16.8 Stock-Based Transactions-Negotiation Ranges and Allocation of Gains
Review Exercise 16.5
16.9 The Xerox Corporation and Affiliated Computer Services, Inc. Merger
Review Exercise 16.6
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Chapter 17: Valuing Businesses Across Borders
Introduction
17.1 How Cross-Border Valuations Are Different
Review Exercise 17.1
17.2 Exchange Rate Basics
17.3 Exchange Rate Theories and Forecasting Methods
Review Exercise 17.2
Review Exercise 17.3
17.4 Overview Of Potential Income and Other Tax Issues in a Cross-Border Setting
Review Exercise 17.4
17.5 Measuring the Equity Cost of Capital
17.6 Cross-Border Valuation in Less Developed or Troubled Economies or Emerging Markets
Review Exercise 17.5
Review Exercise 17.6
17.7 Challenges Using Market and Transactions Multiples Across Borders
17.8 Exchange Rate Exposure and Hedging Basics
Review Exercise 17.7
Summary and Key Concepts
Additional Reading and References
Exercises and Problems
Solutions for Review Exercises
Index
About the Author :
Robert W. Holthausen is the Nomura Securities Company Professor of Accounting and Finance at The Wharton School of the University of Pennsylvania.
He has been on the faculty there since 1989. He is also the Chair of the faculty advisory committee for Wharton Research Data Services (WRDS). Prior to 1989, he was on the accounting and finance faculty at the Graduate School of Business of the University of Chicago for 10 years. Dr. Holthausen earned his doctorate at the University of Rochester, where he also earned his M.B.A. Prior to his academic career, Professor Holthausen worked as a C.P.A. for Price Waterhouse and as a financial analyst with Mobil.
His teaching has concentrated on the areas of investment management and valuation. Currently, his primary teaching responsibility is for the corporate valuation class he developed for Wharton, which he has taught for over 30 years. He has teaching experience at the undergraduate, M.B.A., and Ph.D. levels and has won teaching awards from both the undergraduate and M.B.A. programs at Wharton, including the David J. Hauck award for undergraduate teaching, awarded to one tenured faculty member per year. He has taught in many executive education programs at the Wharton School and is the academic director of Wharton’s Mergers and Acquisitions Executive Education program. Professor Holthausen is widely published in both finance and accounting journals. His research has studied the effects of management compensation and governance structures on firm performance, the effects of information on volume and prices, corporate restructuring and valuation, the effects of large block sales on common stock prices, and numerous other topics. His research has appeared in such journals as The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Journal of Finance, and Journal of Financial Economics. He was formerly an editor of the Journal of Accounting and Economics.
Professor Holthausen′s consulting experiences are varied. In the past, he has consulted with numerous companies on such diverse activities as serving as a compensation consultant, advising investment companies on the development of fundamental trading rules used to manage equity portfolios, and performing valuation analysis in a variety of situations. He served on the Board of Directors at Charles River Associates for ten years and was chair of their Audit Committee. MARK E. ZMIJEWSKI is the Charles T. Horngren Emeritus Professor of Accounting at The University of Chicago Booth School of Business. He has been a member of Chicago Booth since 1984. Professor Zmijewski earned his doctorate at the State University of New York at Buffalo, where he also earned his B.S. and M.B.A. degrees. Professor Zmijewski’s research focuses on the valuation of the firm and its parts, as well as the ways in which various capital market participants use information to value securities. He has published various articles in academic journals such as the Journal of Accounting Research and Journal of Accounting and Economics, and won the American Accounting Association’s Competitive Manuscript Award (1984). He has been an Associate Editor of The Accounting Review and on the editorial boards of both the Journal of Accounting Research and The Accounting Review.
In addition to his faculty duties at the University of Chicago, Professor Zmijewski also held the positions of Deputy Dean, Ph.D. Program faculty director, and the Center for Research in Security Prices faculty director. He teaches courses in valuation, mergers and acquisitions, financial analysis, accounting, and entrepreneurship and has won teaching awards for his teaching in both the M.B.A. and Executive M.B.A. programs at Booth.
Professor Zmijewski has consulted with numerous publicly traded and privately owned companies, as well as with entrepreneurs and private equity investors. Professor Zmijewski is a Senior Consultant to Charles River Associates, a consulting firm that provides economic, financial, and management consulting services. He is also a Senior Advisor to, and a member of, the Investment Committee at Patron Capital Partners, a private equity investment company. Professor Zmijewski is a founder of Chicago Partners, founded in 1994 and subsequently sold to Navigant Consulting, Inc. Within the time he conducted his consulting through Navigant Economics, he was Navigant Economics’ Practice Leader, a member of its management committee, and a member of Navigant Consulting Inc.’s corporate executive committee.
