Valuation Using Financial Statements

About the Authors
Preface
Chapter 1: The Link between Valuation and Financial Statement Analysis
Why Valuation?
Organization
Understanding the Business and the Business Environment
Summary
Questions
Multiple Choice
Mini-Exercises
Exercises
Chapter 2: Role of Accounting
Understanding the Relation between Accounting Earnings and Free Cash Flows
Operating Versus Financial Activities
Formalizing the Relation between Free Cash Flows and Accounting Numbers
The Statement of Cash Flows
Summary
Appendix 2A: Financial Statement Articulation and Free Cash Flows
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 3: Reformulation to Identify Operating Activities
Separation of Operating and Financial Activities
Identifying Net Operating Assets, NOA
The Equity Section of the Balance Sheet
Identifying Net Operating Profit after Tax, NOPAT
Financial Statement Linkages
Appendix 3A: A Detailed Example of Effects of Classification as Operating versus Financial Activities
Appendix Summary
Appendix References
Questions
Multiple Choice
Mini-Exercises
Exercises
Chapter 4: Use of Additional Information to Enhance Reformulation
Additional Information Related to Kooper Tire & Rubber's Balance Sheet
Additional Information Related to Kooper Tire & Rubber's Income Statement
More Information on Pension and Postretirement Benefits Other Than Pensions
Appropriate Tax Rate Assumption for Reformulating Kooper Tire & Rubber
Estimating the Cost of Debt Capital For Kooper Tire & Rubber
Summary
Appendix 4A: Detail on Incorporation of Additional Information
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 5: Adjusting Accounting Information
The Effect of Accounting Method Choices on Valuation Models
Adjustment A: Inventory Method
Adjustment B: Operating Leases
Adjustment C: Special-Purpose Entities
Adjustment D: Share-Based Compensation
Reformulation Updated for Additional Information and Adjustments
Appendix 5A: Operating Lease Adjustments under the Prior Standards
Appendix 5B: Example of Accounting for Share-Based Compensation
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 6: Analysis of Enterprise Operations
Evaluating Sales Growth
Evaluating Profitability of Operations
Disaggregating Return on Net Operating Assets
Trade-Off between Operating Profit Margin and Asset Turnover
Evaluating Financial Activities
Detailed Analysis of Operating Profit Margin
Detailed Analysis of Operating Asset Turnover
Understanding Profitability by Examining Other Companies
The Mapping from Return on Net Operating Assets to Return on Equity
Advantages and Disadvantages of Equity Versus Debt Financing
Appendix 6A: Decomposition of Return on Equity (ROE)
Appendix 6B: Critical Thinking in Ratio Analysis
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 7: Full-Information Forecasting for Valuation
Overview of the Forecasting Process
The Roles of Sales Growth, PM, and ATO
Limited-information Forecasting
Compiling Limited-information Forecasts
Introduction to Industry Analysis
Moving from Limited-information to Full-Information Forecasting
Preparing for Valuation
Suspect Accounting
Summary
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 8: Market Multiple Valuation
Use of Accounting Data in Market Multiples
Calculating Market Multiples
Implementing the Multiples Method for Valuing Kooper Tire & Rubber
Price-to-Earnings Ratios Observed in Practice
Valuation Using Other Multiples
Consideration of EBITDA Multiples
Combining Estimates from Differing Multiples
The Product of a Multiples Valuation
Perspective on Valuation Multiples and Fundamental Analysis
Summary
Questions
Multiple Choice
Mini-Exercises
Exercises
Chapter 9: Cost of Capital for Operations and Equity
Estimating the Cost of Capital
Diversifiable and Non-Diversifiable Risk
Estimating Cost of Equity Capital Using the Capital Asset Pricing Model
Cost of Debt Capital
Computing the Cost of Capital for Operations
Summary
Appendix 9A: Estimating the Cost of Equity Capital
Questions
Multiple Choice
Mini-Exercises
Exercises
Chapter 10: Valuation Using Forecasts of Cash Flows
Valuation of a Savings Account and Illustration of the Concept of Time-Value of Money
Cash Flow-Based Valuation of a Finite-Life Project
The Free Cash Flow Valuation Model
Forecasts of Free Cash Flows from Operations for Kooper Tire & Rubber
The Use of Continuing Values in the Free Cash Flow Model
Free Cash Flow Valuation of KOOPER TIRE & RUBBER'S Operations
Summary
Appendix 10A: Derivation of Continuing Values in the Free Cash Flow Model
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 11: Valuation Using the Residual Operating Income Valuation Model
Moving from Cash Flows to Accrual-Basis Accounting Data in Valuing a Finite-Life Project
Derivation of the Residual Operating Income Valuation Model
Project Valuation Using the Residual Operating Income Model
Effects of Accounting Choices on the Residual Operating Income Model
Determining Value Based on the Forecasts of Operations for Kooper Tire & Rubber
The Use of Continuing Values in the Residual Operating Income Valuation Model
Residual Operating Income Valuation of Kooper Tire & Rubber's Operations
Summary
Appendix 11A: Derivation of the Residual Operating Income Model
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 12: Valuation Using the Abnormal Operating Income Growth Model
Moving from Cash Flows to Accounting Data in Valuing a Finite-Life Project
Derivation of the Abnormal Operating Income Growth Valuation Model
Project Valuation Using the Abnormal Operating Income Growth Model
Effects of Accounting Choices on the Abnormal Operating Income Growth Model
Determining Value Based on the Forecasts of Operations for Kooper Tire & Rubber
The Use of Continuing Values in the Abnormal Operating Income Growth Valuation Model
Abnormal Operating Income Growth Valuation of Kooper Tire & Rubber's Operations Using Forecasts
Summary
Appendix 12A: Derivation of the Abnormal Operating Income Growth Model
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 13: Valuation of Equity
Calculating the Value of Equity from the Value of Operations
Valuation Formulas for Equity
Choosing between an Operations or Equity Valuation Model
Midyear Adjustment
Demonstration of Steps for Comparison of Value Estimate to Market Price
Demonstration of Steps for Comparison of Value Estimate to Market Price
Using Analysts' Forecasts as a Shortcut to Valuation
Summary
Questions
Multiple Choice
Mini-Exercises
Exercises
Problems
Chapter 14: Steady State and Forecast Horizon
Defining Steady State
Implementation of Steady State
Evaluating Valuation Models
Choice of Steady State Growth
Tying Market Multiples to Valuation Models
Summary
Questions
Multiple Choice
Mini-Exercises
Exercises
Quick Reference Guide for Chapters 1-14
Index