Table of Contents

Preface

Chapter 1: Overview of Valuation
Introduction The Nature of Major Investment Decisions Dealing with Complexity—Process and Discipline Case Study—CP3 Corporation, Inc.
Summing Up and Looking Forward Summary

PART I. PROJECT ANALYSIS USING DISCOUNTED CASH FLOW (DCF)

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Chapter 2: Forecasting and Valuing Cash Flows
Discounted Cash Flows and Valuation Defining Investment Cash Flows Comprehensive Example—Forecasting Project Free Cash Flows Valuing Investment Cash Flows Summary Problems

Chapter 3: Project Risk Analysis
Introduction Uncertainty and Investment Analysis Sensitivity Analysis—Learning More about the Project Decision Trees—Valuing Project Flexibility Summary Problems Appendix: An Introduction to Simulation Analysis and Crystal Ball

PART II. COST OF CAPITAL

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Chapter 4: Estimating a Firm’s Cost of Capital
Introduction Value, Cash Flows, and Discount Rates Estimating the WACC Summary Appendix: Extensions and Refinements of the WACC Estimate

Chapter 5: Estimating Required Rates of Return for Projects
Introduction The Pros and Cons of Multiple Risk-Adjusted Costs of Capital Choosing a Project Discount Rate Hurdle Rates and the Cost of Capital Summary Problems

PART III. ENTERPRISE VALUATION

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Chapter 6: Relative Valuation Using Market Comparables
Introduction Valuation Using Comparables Enterprise Valuation Using EBITDA Multiples Equity Valuation Using the Price-Earnings Multiple Pricing an Initial Public Offering Other Practical Considerations Summary Problems

Chapter 7: Enterprise Valuation
Introduction Using a Two-Step Approach to Estimate Enterprise Value Using the APV Model to Estimate Enterprise Value Summary Problems

Chapter 8: Valuation in a Private Equity Setting
Introduction Overview of the Market for Private Equity Valuing Investments in Start-ups and Deal Structuring Valuing LBO Investments Summary Problems

Chapter 9: Earnings Dilution, Incentive Compensation, and Project Selection
Introduction Project Analysis—Earnings per Share and Project Selection Economic Profit and the Disconnect between EPS and NPV Practical Solutions—Using Economic Profit Effectively Summary Problems

PART IV. FUTURES, OPTIONS, AND THE VALUATION OF REAL INVESTMENTS

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Chapter 10: Using Futures and Contractual Options to Value Real Investments
Introduction The Certainty-Equivalence Method Using Forward Prices to Value Investment Projects Using Option Prices to Value Investment Opportunities Caveats and Limitations—Tracking Errors Summary Problems Appendix A: Option Basics—A Quick Review Appendix B: Multi-Period Probability Trees and Lattices Appendix C: Calibrating the Binomial Option Pricing Model

Chapter 11: Managerial Flexibility and Project Valuation: Real Options
Introduction Types of Real Options Valuing Investments That Contain Embedded Real Options Analyzing Real Options as American-Style Options Using Simulation to Value Switching Options Mistakes Made in Real Option Valuation Summary Problems Appendix: Constructing Binomial Lattices

Chapter 12: Strategic Options: Evaluating Strategic Opportunities
Introduction Where Do Positive-NPV Investments Come From?
Valuing a Strategy with Staged Investments Strategic Value When the Future Is Not Well Defined Summary Problems

Epilogue Glossary Index