C

California Public Employees Retirement System, 8, 10 Call options, 396 Cap Cities/ABC, 176 Capital:

cost of (see Cost of capital) invested, 159-163

return on invested (ROIC), 165-166 (see also ROIC (return on invested capital)) Capital Asset Pricing Model (CAPM), 214-226, 366-371, 386 vs. arbitrage pricing model (APM), 226-228

criticism of (''is beta dead?"), 224-226 determining market risk premium, 216-217 determining risk-free rate, 215-216 estimating systematic risk (beta), 223-224 ex ante estimates of market risk premium, 221-223 geometric vs. arithmetic average, 218-221 historical period, 217 survivorship bias, 221 valuation outside United States, 366-371 Capital expenditures, 169 Capitalizing expensed investments, 181 Capital structure:

comparable companies, 209

estimating business-unit (multibusiness valuation), 307-311 estimating current (in developing market value weights), 204-209 retail bank, 442 wholesale bank, 445 Carrefour, 60, 61, 62 Case studies:

fundamental principles of value creation (Fred's Hardware), 47-54

Heineken (see Heineken case study)

Hershey Foods (see Hershey Foods case study)

insurance (see TransAmerica insurance company)

options, 415-419

value manager (see Value manager case study (EG Corporation)) Cash flow:

discounted (see Discounted cash flow (DCF))

drivers of, 137-143

excess cash as non-operating, 161

expected present value of, from investment, 400 forecasting, in subsidiary's home currency, 342-345 free (see Free cash flow) gross, 168

lost to competitors, 400 non-operating, 169-170 and tax credits, outside United States, 365 valuation (see Discounted cash flow (DCF); Valuation) CDNow, 317 CFROI, 55, 182-183 Chase Manhattan, 427 Chemical Bank, 427 Citicorp, 434-435 CitiGroup, 427 Coca-Cola, 280, 287, 392 Colgate Palmolive, 392 Colombia. See Emerging markets Comparables, reviewing capital structure of, 209 Compensation, 107 Competitive advantage, 235, 274-275 Competitive business system analysis, 238-239 Compound options, 402, 416-417 Compound rainbow option (learning option), 417-419

Conglomerates. See Multibusiness valuation Consolidation (outside United States), 360, 361 Consumer Price Index, 226 Continuing value, 267-287, 462-465 advanced formulas for, 285-286 aggressive formula variation on DCF approach, 282 approaches to, 269-271, 281-285 common pitfalls in estimating, 279-281 discounted cash flow (DCF) approaches to, 269-271, 281-283 economic profit valuation, recommended formula, 271-272 estimating, 267-287, 462-465 forecast horizon and, 273-274 free cash flow, 278 growth rate, 279 Heineken case study, 286-287 incremental ROIC, 278

insurance company example (TransAmerica), 267-287, 462-465

investment rate, 279

issues in interpretation of, 272-277

liquidation value approach, 283-284

market-to-book ratio approach, 284-285

naive base-year extrapolation, 279-280

naive overconservatism, 280-281

non-cash flow approaches, 283-285

NOPLAT, 278

parameters, estimating, 277-279 price-to-earnings (P/E) ratio approach, 284 purposeful overconservatism, 281 recommended formula for DCF evaluation, 269-271

recommended formula for economic profit valuation, 271-272 replacement-cost approach, 284 ROIC confusion, 274-275 WACC, 279

Convergence formula (variation on DCF approach to estimating continuing value), 281 Convertible securities, 207-208, 396, 419-425 cost of capital for, 423-425 interest rate environment, and valuing, 424 McKinsey's pricing model, 424 Corporate themes, 94 Cost(s), 456-457

Cost of capital, 201-232, 385-393

for callable, convertible bonds, 423-425 emerging markets, 385-393 estimating, 201-232 Heineken case study, 229-232 outside of United States, 365, 366-371 Cost of debt. See Debt

Cost of equity. See Equity, cost of Countries:

cross-border acquisitions/alliances, 126 emerging economies (see Emerging markets) European (see Europe) Country risks, 382-383 premium, 304, 389, 392 pros/cons of where to incorporate, 382-383 Coyne/Subramaniam Industry Model, 239-240 ''Creative destruction," 11 Credit:

debt/total investor funds, 175 dividend payout ratio, 175-176 health and liquidity, 173-176 interest coverage, 174 investment rate, 175 perspective, 157 risk, 226, 389 Credit Suisse, 59 CS First Boston, 73 Currency. See Foreign currency Customer segmentation analysis, 237-238 Customer value analysis (valuing dot.coms), 321-324 Cyclical companies, 327-334 approach to valuing, 332-334 DCF approach, 327-328 earnings forecasts and, 329-331 equity analysts incentives, 330 market vs. consensus forecast, 331-332 reality vs. theory, 327-328 share price behavior of, 327-332

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