Stock Valuation

An Essential Guide to Wall Street's Most Popular Valuation Models

By: Scott Hoover

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Hardcover | 5 January 2006 | Edition Number 1

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386 Pages

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22.86 x 15.24 x 2.24

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A practical look at the valuation models used by Wall Street

Veteran consultant and educator Scott Hoover analyzes the limitations and idiosyncrasies of major valuation models. He examines the time value of money, cash flow analysis, discount rates, and other tools, and describes how money managers and bankers apply them to valuation.

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List of Figures	p. xiii
Preface	p. xv
Acknowledgments	p. xvii
Setting the Stage	p. 1
Purpose and Scope	p. 1
Who Values Stocks?	p. 1
Corporate Managers	p. 2
Financial Analysts: Investment Banking	p. 2
Financial Analysts: Equity Research	p. 2
Asset Managers	p. 3
Individuals	p. 3
Economic Policymakers	p. 4
The Objective of Equity Investment	p. 4
Related Concepts	p. 5
Earnings vs. Cash Flow	p. 5
Good Companies vs. Good Stocks	p. 6
Size Matters	p. 7
Growth vs. Value	p. 8
Few Stocks vs. Many Stocks	p. 11
Broad-Based Portfolios vs. Concentrated Portfolios	p. 12
The Investment Process	p. 14
Market Selection	p. 15
Class/Industry Selection	p. 15
Asset Selection	p. 16
Organization of the Book	p. 21
Case Study: O'Charley's	p. 22
Price Formation, Market Efficiency, and Great Investors	p. 25
Purpose and Scope	p. 25
How Are Prices Determined?	p. 26
Types of Orders	p. 26
Dealer Markets	p. 29
Auction Markets	p. 30
What Have We Learned about Price Formation?	p. 33
Market Efficiency	p. 34
The Evidence	p. 35
A Few of the Great Investors	p. 38
The S&P 500!	p. 38
Warren Buffett	p. 39
Peter Lynch	p. 40
Bill Miller	p. 41
Putting It All Together	p. 44
In Practice ...	p. 44
Case Study: O'Charley's	p. 45
The Time Value of Money	p. 47
Purpose and Scope	p. 47
In Theory ...	p. 47
The Discount Rate	p. 48
Multiple Cash Flows	p. 49
Implied Discount Rates	p. 54
In Practice ...	p. 56
Expressing Interest Rates	p. 56
Application: Retirement Planning	p. 60
Summary	p. 65
Understanding Financial Statements	p. 67
Purpose and Scope	p. 67
Financial Statements	p. 68
The Balance Sheet	p. 69
The Income Statement	p. 79
The Statement of Cash Flows	p. 87
Linkages Between the Statements	p. 93
Building the Free Cash Flow Equation	p. 95
Sales and Cost of Goods Sold: Implications for Free Cash Flow	p. 97
Dealing with Capital Expenditures and Depreciation	p. 100
Cash	p. 101
The Free Cash Flow Equation	p. 102
Other Cash Flow Items	p. 103
In Practice ...	p. 103
Nonsynchronous Financial Statements	p. 104
Differences in Terminology and Reporting Structure	p. 107
Case Study: O'Charley's	p. 108
A Note on SFAS No. 123R	p. 115
Summary	p. 116
Interpreting Financial Statements	p. 117
Purpose and Scope	p. 117
In Theory ...	p. 118
Common Size Financial Statements	p. 119
Indexed Financial Statements	p. 122
The Turnover Balance Sheet	p. 122
The DuPont Method	p. 125
Special Ratios	p. 140
Unused Assets	p. 145
In Practice ...	p. 148
Identifying Misleading Items	p. 148
Case Analysis: O'Charley's	p. 150
Case Study: Applebee's	p. 155
Summary	p. 160
Capital Structure and the Cost of Capital	p. 163
Purpose and Scope	p. 163
In Theory ...	p. 166
The Pecking Order Theory	p. 166
Internal Financing	p. 168
External Financing	p. 171
Signaling Effects	p. 173
The Cost of Capital	p. 176
In Practice ...	p. 187
Problems with Estimating the Cost of Debt	p. 187
Problems with Estimating the Cost of Preferred Stock	p. 191
Problems with Estimating the Cost of Equity	p. 192
Problems with Estimating Weights for the WACC Calculation	p. 197
Case Study: O'Charley's	p. 200
Summary	p. 202
Forecasting	p. 205
Purpose and Scope	p. 205
In Theory ...	p. 206
Growth from Retained Earnings	p. 209
The Forecasting Process	p. 212
In Practice ...	p. 236
Case Study: O'Charley's	p. 236
Summary	p. 241
Valuing Employee Stock Options	p. 245
Purpose and Scope	p. 245
In Theory ...	p. 247
The Black-Scholes Option Pricing Model	p. 250
Valuing Yet-to-Be-Issued Employee Stock Options	p. 272
In Practice ...	p. 277
A Note on Dilution-Based Approaches	p. 278
Different Contracts and Lack of Complete Information	p. 279
Early Exercise	p. 281
Case Study: O'Charley's	p. 284
Summary	p. 289
Relative Valuation and Screening	p. 291
Purpose and Scope	p. 291
In Theory ...	p. 293
A Note on Model Error	p. 293
Screening	p. 294
Comparables ("Comps") Analysis	p. 296
Discounted Dividends and the Malkiel Model	p. 309
A Relative Version of the Malkiel Model: Growth-Adjusted Comps	p. 317
In Practice ...	p. 322
Equity Research and Investment Banking	p. 323
What Stocks Can We Include?	p. 323
Outliers	p. 324
Analyst Growth Rates	p. 325
Case Study	p. 325
Summary	p. 327
The Discounted Cash Flow Model	p. 329
Purpose and Scope	p. 329
In Theory ...	p. 330
The DCF Model	p. 334
In Practice ...	p. 351
Case Study	p. 352
Other Recommended Readings	p. 356
Bibliography	p. 359
Index	p. 363
Table of Contents provided by Ingram. All Rights Reserved.

Stock Valuation

An Essential Guide to Wall Street's Most Popular Valuation Models

At a Glance

Hardcover

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Defective items

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