Valuation And Common Sense (5th Edition)

Valuation And Common Sense (5th Edition)

Table Of Contents: Valuation And Common Sense (5th Edition)

Pablo Fernandez

University of Navarra – IESE Business School

November 1, 2015

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This document contains the index of the 45 chapters of a book (Valuation and Common Sense, 5th edition) that may be downloaded for free at the SSRN links that appear on the document.

The book explains the nuances of different valuation methods and provides the reader with the tools for analyzing and valuing any business, no matter how complex. The book uses 253 figures, 444 tables, 170 examples and more than 900 comments from readers to help the reader absorb these concepts.

Tables (with all calculations) and figures are available in excel format.

We have added questions at the end of each chapter.

Table Of Contents: Valuation And Common Sense (5th Edition) – Introduction

I would like to dedicate this book to my wife Lucia and my parents for their on-going encouragement, invaluable advice and for their constant example of virtues: hope, fortitude, good sense… I am very grateful to my children Isabel, Pablo, Paula, Juan, Lucia, Javier and Antonio for being, in addition to many other things, a source of joy and common sense.

The book explains the nuances of different valuation methods and provides the reader with the tools for analyzing and valuing any business, no matter how complex. The book uses 253 figures, 444 tables, and more than 170 examples to help the reader absorb these concepts.

This book contains materials of the MBA and executive courses that I teach in IESE Business School. It also includes some material presented in courses and congresses in Spain, US, Austria, Mexico, Argentina, Peru, Colombia, UK, Italy, France and Germany. The chapters have been modified many times as a consequence of the suggestions of my students since 1988, my work in class, and my work as a consultant specialized in valuation and acquisitions. I want to thank all my students their comments on previous manuscripts and their questions. The book also has results of the research conducted in the International Center for Financial Research at IESE.

This book would never have been possible without the excellent work done by a group of students and research assistants, namely Jose Ramon Contreras, Teresa Modrono, Gabriel Rabasa, Laura Reinoso, Jose Ma Carabias, Vicente Bermejo, Javier del Campo, Luis Corres, Pablo Linares, Isabel Fernandez-Acin and Alberto Ortiz. It has been 25 years since we began and their contribution has been essential. Chapters of the book have been revised by such IESE Finance Professors as Jose Manuel Campa, Javier Estrada and Ma Jesus Grandes, who have provided their own enhancements.

I want to thank my dissertation committee at Harvard University, Carliss Baldwin, Timothy Luehrman, Andreu Mas-Colell and Scott Mason for improving my dissertation as well as my future work habits. Special thanks go to Richard Caves, chairman of the Ph.D. in Business Economics, for his time and guidance. Some other teachers and friends have also contributed to this work. Discussions with Franco Modigliani, John Cox and Frank Fabozzi (from M.I.T.), and Juan Antonio Palacios were important for developing ideas which have found a significant place in this book.

I would like to express my deepest gratitude to Rafael Termes, Juanjo Toribio, Natalia Centenera, Jose Ma Corominas and Amparo Vasallo, CIF Presidents and CEOs respectively, for their on-going support and guidance throughout. The support provided by CIF’s own sponsoring companies is also greatly appreciated. Lastly, I want to thank Vicente Font (Professor of Marketing at IESE) and don Jose María Pujol (Doctor and Priest) for being wonderful teachers of common sense.


Ch1 Company valuation methods

1. Value and price. What purpose does a valuation serve?

2. Balance sheet-based methods (shareholders’ equity). 2.1. Book value. 2.2. Adjusted book value. 2.3. Liquidation value. 2.4. Substantial value. 2.5. Book value and market value

3. Income statement-based methods. 3.1. Value of earnings. PER. 3.2. Value of the dividends. 3.3. Sales multiples.

3.4. Other multiples. 3.5. Multiples used to value Internet companies

4. Goodwill-based methods. 4.1. “Classic”. 4.2. Simplified UEC. 4.3. Union of European Accounting Experts (UEC).

4.4. Indirect. 4.5. Anglo-Saxon or direct method. 4.6. Annual profit purchase method.

5. Cash flow discounting-based methods. 5.1. General method for cash flow discounting

5.2. Deciding the appropriate cash flow for discounting and the company’s economic balance sheet

5.2.1. The free cash flow. 5.2.2. The equity cash flow. 5.2.3. Capital cash flow

5.3. Free cash flow. 5.4. Unlevered value plus value of the tax shield. 5.5. Discounting the equity cash flow

5.6. Discounting the capital cash flow. 5.7. Basic stages in the performance of a valuation by cash flow discounting

6. Which is the best method to use? 7. The company as the sum of the values of different divisions. Break-up value

8. Valuation methods used depending on the nature of the company

9. Key factors affecting value: growth, margin, risk and interest rates

10. Speculative bubbles on the stock market. 11. Most common errors in valuations

Ch2 Cash flow is a Fact. Net income is just an opinion

1. Net income is just an opinion, but cash flow is a fact.

2. Accounting cash flow, equity cash flow, free cash flow and capital cash flow.

3. Calculating the cash flows.

4. A company with positive net income and negative cash flows.

5. When is profit after tax a cash flow?

6. When is the accounting cash flow a cash flow?

7. Equity cash flow and dividends.

8. Recurrent cash flows.

9. Attention to the accounting and the managing of net income

Ch3 Ten badly explained topics in most Corporate Finance Books

1. Where does the WACC equation come from? 2. The WACC is not a cost. 3. What is the WACC equation when the value of debt is not equal to its nominal value? 4. The term equity premium is used to designate four different concepts. 5. Textbooks differ a lot on their recommendations regarding the equity premium. 6. Which Equity Premium do professors, analysts and practitioners use? 7. Calculated (historical) betas change dramatically from one day to the next. 8. Why do many professors still use calculated (historical) betas in class? 9. EVA does not measure Shareholder value creation. 10. The relationship between the WACC and the value of the tax shields (VTS)

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