About the Authors ix

Preface xi

Acknowledgments xv

Part One Foundations of Value

1 Why Value Value? 3

2 Finance in a Nutshell 13

3 Fundamental Principles of Value Creation 23

4 Risk and the Opportunity Cost of Capital 49

5 The Alchemy of Stock Market Performance 63

6 The Stock Market and Economic Fundamentals 77

7 The Stock Market Is Smarter Than You Think 97

8 Return on Invested Capital 117

9 Growth 147

Part Two Core Valuation Techniques

10 Frameworks for Valuation 171

11 Reorganizing the Financial Statements 201

12 Analyzing Performance 235

13 Forecasting Performance 255

14 Estimating Continuing Value 283

15 Estimating the Cost of Capital 303

16 Moving from Enterprise Value to Value per Share 333

17 Analyzing the Results 355

18 Using Multiples 365

19 Valuation by Parts 385

Part Three Advanced Valuation Techniques

20 Taxes 407

21 Nonoperating Items, Provisions, and Reserves 423

22 Leases 439

23 Retirement Obligations 455

24 Measuring Performance in Capital-Light Businesses 465

25 CFROI and Other Ways to Measure Return on Capital 481

26 Inflation 491

27 Cross-Border Valuation 511

Part Four Managing for Value

28 Corporate Portfolio Strategy 531

29 Strategic Management: Analytics 551

30 Strategic Management: Governance, Processes, and Decision Making 573

31 Mergers and Acquisitions 589

32 Divestitures 617

33 Digital Initiatives and Companies 633

34 Sustainability 653

35 Capital Structure, Dividends, and Share Repurchases 671

36 Investor Communications 703

Part Five Special Situations

37 Leveraged Buyouts 729

38 Venture Capital 749

39 High-Growth Companies 763

40 Flexibility and Options 779

41 Emerging Markets 815

42 Cyclical Companies 833

43 Banks 843

Appendix A Discounted Economic Profit Equals Discounted Free Cash Flow 865

Appendix B Derivation of Free Cash Flow, Weighted Average Cost of Capital, and Adjusted Present Value 869

Appendix C Levering and Unlevering the Cost of Equity 875

Appendix D Leverage and the Price-to-Earnings Multiple 883

Appendix E Other Capital Structure Issues 887

Appendix F Technical Issues in Estimating the Market Risk Premium 891

Appendix G Global, International, and Local CAPM 895

Appendix H Two-Stage Formula for Continuing Value 903

Appendix I A Valuation of Costco Wholesale 905

Index 931