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Valuation: The Art and Science of Corporate Investment Decisions
Sheridan Titman, University of Texas at Austin
John H. Martin

ISBN-10: 0321336100
ISBN-13: 9780321336101

Publisher: Prentice Hall
Copyright: 2008
Format: Cloth; 592 pp
Published: 07/27/2007
Status: Instock

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Valuation: The Art and Science of Corporate Investment Decisions is the first textbook to offer an integrated approach to both project and enterprise valuation. The text goes beyond standard DCF analysis by including additional valuation methods commonly used in practice, such as comparables, simulations (including Crystal Ball^®), and real options. In addition, discussions are considered against the backdrop of other quantitative and qualitative corporate issues that affect valuation, including:

Organizational structure and incentives: The text examines how the corporate decision-making process as well as the incentive system can positively or negatively affect valuation.
Strategic analysis and real options: Real options are presented as a tool to complement executive intuition and provide a more disciplined evaluation process that focuses on creating value.
Risk management and hedging: Risks associated with interest rate fluctuations, variable foreign exchange rates, and fluctuating commodity prices can create hedging and risk management opportunities that affect value.
Financing: The ability to secure attractive financing terms is an important source of value, and readers should understand how financing opportunities influence the value of an investment opportunity.
Irrational behavior: The text examines how limitations in cognitive abilities and biases in assessing abilities of key players can affect valuation.

A focus on both project and enterprise valuation shows students that the same principles apply to both internal and external growth, better illustrating the realities of today’s corporate world.
Valuation is considered within a broad framework that includes behavioral finance, agency considerations, and strategic options.
Four key pedagogical features help students develop good valuation skills:

Practitioner Insight boxes feature comments from a broad spectrum of professionals in the finance world discussing how they use valuation.
Industry Insight boxes delve into how various firms provide data for the valuation process or use the various analytical tools.
Behavioral Insight boxes demonstrate how behavior and agency issues can affect the valuation process.
Technical Insight boxes expand the mathematics, methodologies, or other analytical tools.

Discounted cash flow analysis coverage goes beyond the basics to include other tools, such as an entire chapter on comparables (Chapter 6) and in-depth discussions of simulation and real options (Chapter 11).
Project-specific risk attributes are covered in Chapter 7, showing students how to evaluate the cost of capital for the firm as a whole as well as for individual investment projects using WACC.
Coverage of private equity markets illustrates how students can evaluate privately held companies, including the venture capital valuation method and the LBO valuation model (Chapter 8).
Coverage of real options takes a contemporary approach, showing how real options can become a powerful tool in building on intuition within a disciplined analytical framework.
Every in-text example and end-of-chapter problem has an accompanying Excel^® spreadsheet and Excel-based solution. A subset of problems extends the power of Excel models using Crystal Ball^® simulation programming.
Problems at the end of each chapter range in difficulty from easier, warm-up types to more substantive, in-depth types. Additionally, Mini-Cases at the end of selected chapters provide opportunities to apply the chapter tools to real-world scenarios with companies such as Burlington Industries, Conoco-Phillips, and Southwest Airlines.
Crystal Ball is an add-in to spreadsheet software that allows you to ascertain the risk and uncertainty of a project through Monte Carlo simulations by automatically calculating thousands of different “what if” cases, saving the inputs and results of each calculation as individual scenarios. An access code to Crystal Ball is included with every new copy of the text at no additional charge.

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)

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

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

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

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

Valuation [CORE TEXTS] (Finance)

Author Bios

Sheridan Titman holds the McCallister Centennial Chair in Financial Services at the University of Texas, Austin. Before his present post, he taught for a number of years at UCLA. Among his prolific research projects are studies in optimal capital structure, irrational investors, tangible and intangible information and market reactions, and Asian stock markets. He is coauthor of the textbook, Financial Markets and Corporate Strategy, with Mark Grinblatt.

John Martin holds the Carr P. Collins Chair in Finance at Baylor University, where he teaches corporate finance and financial modeling. He has published widely in the academic literature and in addition to Valuation, is the coauthor of four other textbooks: Financial Management, Foundations of Finance, Financial Analysis, and The Theory of Finance. He is especially interested in research in the areas of corporate governance, evaluation of firm performance, and the design of incentive compensation programs.

Companion Website for Valuation: The Art and Science of Corporate Investment Decisions
Titman & Martin
©2008 | Prentice Hall | On-line Supplement | Instock
ISBN-10: 0321521730 | ISBN-13: 9780321521736

Exam Copy for Valuation: The Art and Science of Corporate Investment Decisions
Titman & Martin
©2008 | Prentice Hall | Cloth | Instock
ISBN-10: 0321523253 | ISBN-13: 9780321523259

Instructor's Resource Disk with PowerPoint and Solutions Manual for Valuation: The Art and Science of Corporate Investment Decisions
Titman & Martin
©2008 | Prentice Hall | CD-ROM Only | Instock
ISBN-10: 0321524020 | ISBN-13: 9780321524027

PowerPoint for Valuation: The Art and Science of Corporate Investment Decisions
Titman & Martin
©2008 | Prentice Hall | On-line Supplement | Instock
ISBN-10: 0321534611 | ISBN-13: 9780321534613
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