Jan Viebig, CFA, is a Managing Director at DWS Investment GmbH in Frankfurt, Germany, where he manages two long / short equity hedge funds. With [...] billion under management, DWS is the largest asset manager in Germany. DWS is part of Deutsche Asset Management (DeAM). Jan holds a Diploma and a PhD degree in Business Administration from the University of the Armed Forces in Munich and a Master of International Management (Post-MBA) degree from Thunderbird, School of Global Management. He is a lecturer at the University of Bremen. His research interests are in the field of hedge funds and equity valuation.

Thorsten Poddig has studied business administration, economics, and computer sciences. He received his PhD degree at the University of Bamberg. His work on concepts in Artificial Intelligence and its application to decision theory and decision making in business administration was followed by analyzing, modeling and forecasting financial markets with neural networks at the University of Freiburg. Since 1996, he has been Professor of Business Administration and Finance at the University of Bremen. His research interests cover all aspects of asset management, including financial market modeling and forecasting, portfolio optimization and asset allocation, equity valuation, capital market theory and empirical finance.

Armin Varmaz studied business administration and economics. In his PhD thesis he analyzed the profitability, the competition and the efficiency in the German banking sector, using panel data approaches and data envelopment analysis. Since 2006 he has been a post-doctoral research fellow at the University of Bremen. His main interests and research experience include valuation theory, optimization in economics and empirical finance. He is currently working on advanced quantitative methods for analyzing, modeling and simulating long-term developments in financial markets.

Foreword xiii Preface xvii Acknowledgments xxiii Abbreviations xxv Part I Discounted Cash Flow (DCF) Models 1Jan Viebig and Thorsten Poddig 1 Introduction 3 2 The Fundamental Value of Stocks and Bonds 5 3 Discounted Cash Flow Models: The Main Input Factors 11 3.1 Analytical balance sheets and free cash flow discount models 11 3.2 The dividend discount model 14 3.3 The free cash flow to the firm (FCFF) model 21 3.3.1 Stirling Homex: why cash is king! 21 3.3.2 FCFF during the competitive advantage period 27 3.3.3 Weighted average cost of capital (WACC) 35 3.3.4 Terminal value calculation 45 References 49 Part II Monte Carlo Free Cash Flow to the Firm (MC-FCFF) Models (Deutsche Bank/DWS) 53Jan Viebig and Thorsten Poddig 4 Introduction 55 5 Standard FCFF Model 57 5.1 Net revenues 59 5.2 Cost structure and operating income 63 5.3 Reconciling operating income to FCFF 66 5.4 The financial value driver approach 71 5.5 Fundamental enterprise value and market value 76 5.6 Baidu's share price performance 2005-2007 79 6 Monte Carlo FCFF Models 85 6.1 Monte Carlo simulation: the idea 85 6.2 Monte Carlo simulation with [...] 88 6.2.1 Monte Carlo simulation with one stochastic variable 88 6.2.2 Monte Carlo simulation with several stochastic variables 98 6.3 Disclaimer 103 References 105 Part III Beyond Earnings: A User's Guide to Excess Return Models and the HOLT CFROI® Framework 107Tom Larsen and David Holland 7 Introduction 109 8 From Accounting to Economics - Part I 113 9 From Economics to Valuation - Part I 115 10 Where Does Accounting Go Wrong? 117 11 From Accounting to Economics: CFROI 119 11.1 The basics 119 11.1.1 Return on net assets (RONA) or return on invested capital (ROIC) 120 11.1.2 Return on gross investment (ROGI) 121 11.1.3 Cash flow return on investment (CFROI) 121 11.2 CFROI adjustments using Vodafone's March 2005 annual report 123 11.2.1 Gross investment 123 11.2.2 Non-depreciating assets 131 11.2.3 Project life 135 11.2.4 Gross cash flow 137 11.3 CFROI calculation for Vodafone 140 11.4 A comment on goodwill 141 12 From Accounting to Economics: Economic Profit 145 12.1 The basics 145 12.2 Caveats 147 12.3 EP adjustments using Vodafone March 2005 annual report 148 12.3.1 Balance Sheet 148 12.3.2 Net operating profit after tax (NOPAT) 153 12.3.3 Economic profit 153 12.3.4 EP or CFROI? 154 13 From Economics to Valuation - Part II 157 13.1 General rules 157 13.2 Market value added 157 13.3 CFROI 157 13.4 A word on debt 158 13.5 Valuation 159 13.5.1 CFROI valuation: general framework 159 13.5.2 Understanding project returns 159 13.5.3 The residual period 161 13.5.4 CFROI residual period approach 164 13.5.5 Economic profit valuation: general framework 165 13.6 Valuation of Vodafone 167 13.7 EP or CFROI? 171 13.8 A final word 173 Appendix 1: Vodafone Financial Statements and Relevant Notes for CFROI Calculation 175 Appendix 2: Additional Notes from Vodafone Annual Report for EP Calculation 185 References 191 Part IV Morgan Stanley ModelWare's Approach to Intrinsic Value: Focusing on Risk-Reward Trade-offs 193Trevor S. Harris, Juliet Estridge and Doron Nissim 14 Introduction 195 15 Linking Fundamental Analysis to the Inputs of the Valuation Model 199 16 Our Valuation Framework 203 17 Linking Business Activity to Intrinsic Value: The ModelWare Profitability Tree 211 18 ModelWare's Intrinsic Value Approach 219 19 Treatment of Key Inputs 231 20 The Cost of Capital 233 20.1 Risk-free rate 233 20.2 Equity risk premium 234 20.3 Beta-estimation 234 21 Summary and Conclusions 237 Appendix 239 References 251 Part V UBS VCAM and EGQ Regression-based Valuation 253David Bianco 22 Introducing "EGQ" - Where Intrinsic Methods and Empirical Techniques Meet 255 23 A Quick Guide to DCF and Economic Profit Analysis 257 23.1 Powerful analytical frameworks, but not a complete solution 257 23.2 Dynamics of economic profit analysis 257 23.3 "Unadulterated EVA" 258 23.4 Value dynamic 1: ROIC 258 23.5 Value dynamic 2: invested capital 259 23.6 Value dynamic 3: WACC 260 23.7 Value dynamic 4: the value creation horizon 261 23.8 Combining all four value dynamics: EGQ 261 23.8.1 EGQ vs. PVGO 261 23.8.2 The search for the ultimate valuation methodology 262 24 Regression-based Valuation 263 25 UBS Economic Growth Quotient 265 25.1 The EGQ calculation 265 25.2 EGQ special attributes 265 25.2.1 A complete metric 265 25.2.2 Not influenced by the current capital base 265 25.2.3 Limited sensitivity to the assumed cost of capital 266 25.2.4 Comparable across companies of different size 266 25.2.5 Explains observed multiples on flows like earnings or cash flow 267 26 UBS EGQ Regression Valuation 269 26.1 Intrinsic meets relative valuation 269 26.2 EGQ regressions: relative valuation theater 270 26.3 EGQ regressions: a layered alpha framework 271 26.4 Y-intercept indicates cost of capital 271 26.5 Slope vs. Y-intercept indicates style 271 26.6 Emergent valuation 272 26.7 Why regress EGQ vs. EV/NOPAT? 272 26.8 Think opposite when under the X-axis 273 27 Understanding Regressions 275 27.1 Key takeaways 275 27.2 The line - what is the relationship? 276 27.2.1 Slope (beta) 276 27.2.2 y-intercept (alpha) 277 27.3 The explanatory power or strength of the relationship 277 27.3.1 Correlation coefficient (R) 277 27.3.2 Coefficient of determination (R-squared) 277 27.4 Reliability or confidence in the quantified relationship 278 27.4.1 Standard error (of beta) 278 27.4.2 t-Statistic 278 27.5 Regression outliers 278 27.5.1 Influence outliers 278 27.5.2 Leverage outliers 278 27.6 Beware of outliers in EGQ regressions 279 28 Appendix Discussions 281 28.1 EGQ's muted sensitivity to assumed WACC 281 28.2 EV/IC vs. ROIC/WACC regressions 282 28.3 PE vs. EPS growth regressions or PEG ratios 284 28.4 Return metrics: ROIC vs. CFROI 285 28.5 Accrual vs. cash flow return measures 286 28.6 ROIC vs. CFROI 286 28.7 Adjusting invested capital important, but not for EGQ 288 References 291 Part VI Leverage Buyout (LBO) Models 293Jan Viebig, Daniel Stillit and Thorsten Poddig 29 Introduction 295 30 Leveraged Buyouts 297 31 IRRs and the Structure of LBO Models 301 32 Assumptions of LBO Models 307 33 Example: Continental AG 317 33.1 Background 317 33.2 LBO modeling approach - appropriate level of detail 318 33.3 Key LBO parameters 318 33.4 Step-by-step walk through the model 320 34 A Word of Caution 329 References 333 Part VII Valuation 101: Approaches and Alternatives 335Aswath Damodaran 35 Introduction 337 36 Overview of Valuation 339 37 Discounted Cash Flow Valuation 341 37.1 Essence of discounted cashflow valuation 341 37.2 Discount rate adjustment models 341 37.2.1 Equity DCF models 343 37.2.2 Firm DCF models 344 37.3 Certainty equivalent models 345 37.4 Excess return models 346 37.5 Adjusted present value models 346 37.6 Value enhancement in the DCF world 347 37.6.1 Determinants of value 347 37.6.2 Ways of increasing value 349 38 Liquidation and Accounting Valuation 355 38.1 Book value-based valuation 355 38.1.1 Book value 356 38.1.2 Book value plus earnings 356 38.1.3 Fair value accounting 357 38.2 Liquidation valuation 358 38.3 Value enhancement in the accounting world 358 39 Relative Valuation 361 39.1 Steps in relative valuation 361 39.2 Basis for approach 361 39.3 Standardized values and multiples 362 39.4 Determinants of multiples 363 39.5 Comparable firms 365 39.6 Controlling for differences across firms 365 39.7 Value enhancement in the relative valuation world 366 40 Real Option Valuation 369 40.1 Basis for approach 369 40.2 The essence of real options 370 40.3 Examples of real options 371 40.4 Value enhancement in the real options world 372 41 Closing Thoughts on Value Enhancement 375 References 377 Part VIII Final Thoughts on Valuation 379Armin Varmaz, Thorsten Poddig and Jan Viebig 42 Introduction 381 43 Valuation in Theory: The Valuation of a Single Asset 383 43.1 Certain cash flows 383 43.2 Uncertain cash flows 384 43.3 Risk premia 386 43.4 Certainty equivalents and utility-based valuation 388 43.5 Risk neutral probabilities 391 44 Outlook: The Multi-asset Valuation and Allocation Case 395 45 Summary 399 References 401 Index 403