This new sixth edition provides insights on the strategic advantages of value-based management, complete detailed instruction, and nuances managers should know about valuation and valuation techniques as applied to different industries, emerging markets, and other special situations. Valuation lies at the crossroads of corporate strategy and finance. This guide shows you everything you need to know, and gives you the understanding you need to be effective. Estimate the value of business strategies to drive better decision making Understand which business units a corporate parent is best positioned to own Assess major transactions, including acquisitions, divestitures, and restructurings Design a capital structure that supports strategy and minimizes risk As the valuation function becomes ever more central to long- and short-term strategy, analysts and managers need an authoritative reference to turn to for answers to challenging situations. Valuation stands ahead of the field for its reputation, quality, and prestige, putting the solutions you need right at your fingertips.
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The first is that the value of something is what someone is prepared to pay for that something. In the equity market this leads to statements such as the valuation of a stock is low if the current market pricing of the stock is historically low compared to, for example, the estimate of the near term future earnings. The other model is based on that a company has a fundamental intrinsic value that is On a basic level there are two competing mental models of stock values in the financial sector.
The other model is based on that a company has a fundamental intrinsic value that is separate from the market pricing of its equity.
This book is about both how to estimate this intrinsic value and also on how to create it. Out of all the books reviewed on this website Valuation is probably the one that sits on most shelves behind workstations of employees in the financial sector. The reason is that most of us have had it as a text book at university, but compared to all the other text books this one is also a handbook in corporate valuation that is used by practitioners. For those who use the concept of intrinsic value, cash flow valuation has become the standard methodology and Valuation is the standard source material.
The book is mandatory reading for persons within corporate finance, venture capital and private equity who are slightly less close to the public stock market. It is less widely used by portfolio managers or sell side analysts who often look to shorter time horizons. There are obviously competing text books on valuation such as Damodaran on Valuation. Two of the he authors of Valuation are employed by McKinsey and the main focus is on one specific method of valuation.
This is a fifth edition. Damodaran on Valuation is written by an academic, Valuation is written by consultants for daily use by CEOs and finance professionals. The intrinsic value in a DCF is based on cash flows, the growth in cash flows and the risk that these future cash flows will not materialize.
The cash flow in question differs; it might be dividends for stocks, coupons for bonds or after tax cash flows for businesses. The problem is that as the future is unknown the intrinsic value is unobservable. Any calculation of it is an act of faith. One strength of the DCF is that it is transparent.
It requires a large number of assumptions of future performance. Each such input has a range of reasonable values and the choice of inputs can be examined and criticized. Paradoxically the construction also opens up for psychological biases. If each and one of the many inputs are tweaked in a slightly more optimistic or pessimistic direction the multiplier effect of all those small but one by one reasonable changes will bring huge swings in the calculated intrinsic value.
The fact that a DCF could be made to show almost anything has created a mini revival for excess return valuations such as the Residual Income Model. These are close cousins to the DCF methodology, but use a the capital base of the company and b its ability to earn a return on capital that is higher than the cost of capital as the two main inputs.
Using the capital as the base for the valuation makes it potentially less dependent on estimates of an unknowable future. This book is unbeatable for the practitioner who needs the tools for valuing a company or must understand how other do just that.
More philosophical issues are to be sought elsewhere.
Valuation: Measuring and Managing the Value of Companies
Table of contents About the Authors ix Preface xi. Valuation, Fifth Edition is filled with expert guidance that managers at all levels, investors, and students can use to enhance their understanding of this important discipline. With Safari, you learn the way you learn best. This guide shows you everything you need to know, and gives you the understanding you need to be effective. Valuation is the single best guide of its kind, helping financial professionals worldwide excel at measuring, managing, and maximizing shareholder and company value.
Valuation: Measuring and Managing the Value of Companies, 6th Edition