Custom FIN 5614 (Virginia Tech)

by Holthausen

ISBN: 978-1-61853-460-6 | Copyright 2022

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Corporate Valuation, 2e (pg. 1.2)
Chapter 1: Introduction to Valuation (pg. 1.2)
Introduction (pg. 1.4)
1.1 What Do We Mean By “The Value of a Company”? (pg. 1.4)
1.2 The Economic Balance Sheet: Resources Equal Claims on Resources (pg. 1.6)
Example Economic Balance Sheet (pg. 1.6)
The Economic Balance Sheet Does Not Equal the Accounting Balance Sheet (pg. 1.9)
Review Exercise 1.1 (pg. 1.10)
1.3 Valuation Principles (pg. 1.10)
Introduction to Measuring Free Cash Flows (pg. 1.10)
Review Exercise 1.2 (pg. 1.12)
The Discounted Cash Flow Valuation Model (pg. 1.12)
Illustration of the Discounted Cash Flow Valuation Using Snap Inc. (pg. 1.13)
Review Exercise 1.3 (pg. 1.15)
1.4 Measuring the Value of the Firm (pg. 1.15)
Two Forms of the Discounted Cash Flow (DCF) Valuation Model (pg. 1.15)
The Discounted Excess Flow Valuation Models (pg. 1.16)
Market Multiple Valuation Models (pg. 1.17)
Leveraged Buyout Valuation Models (pg. 1.18)
1.5 Measuring the Value of the Firm’s Equity (pg. 1.18)
1.6 Real Options in Valuation (pg. 1.19)
1.7 How Managers and Investors use Valuation Models (pg. 1.20)
Control Transactions (pg. 1.21)
Asset and Financial Restructuring Activities (pg. 1.23)
Raising Capital (pg. 1.27)
Strategic Analysis and Value-Based Management (pg. 1.28)
Contracts Between a Company and Its Investors and Employees (pg. 1.28)
Regulatory and Legal Uses of Valuation (pg. 1.29)
Identifying Over- and Undervalued Securities (pg. 1.29)
1.8 An Overview of the Valuation Process (pg. 1.30)
Summary and Key Concepts (pg. 1.31)
Additional Reading and References (pg. 1.31)
Exercises and Problems (pg. 1.31)
Solutions for Review exercises (pg. 1.34)
Chapter 2: Financial Statement Analysis (pg. 1.38)
Introduction (pg. 1.40)
2.1 Sources of Information (pg. 1.41)
Information About a Company (pg. 1.41)
Information About an Industry (pg. 1.42)
Privately Held (Owned) Companies (pg. 1.43)
2.2 How We Use Financial Ratios in Valuation (pg. 1.43)
Competitive Analysis (pg. 1.43)
Measuring the Debt and Preferred Stock Costs of Capital (pg. 1.43)
Creating, Driving, and Assessing the Reasonableness of Financial Forecasts (pg. 1.44)
Assessing the Degree of Comparability in Market Multiple Valuation (pg. 1.44)
Constraints and Benchmarks in Contracts (pg. 1.44)
2.3 Identifying a Company’s Industry and Its Comparable Companies (pg. 1.45)
2.4 The Gap, Inc.-An Illustration of the Calculation and Analysis of Financial Ratios (pg. 1.46)
2.5 Measuring a Company’s Performance Using Accounting Rates of Return (pg. 1.48)
Return on Assets (pg. 1.48)
Return on Investment (pg. 1.49)
Return on (Common) Equity (pg. 1.50)
Adjusting Financial Ratios for Excess Assets (pg. 1.51)
Alternative Ways to Measure Financial Ratio Inputs (pg. 1.52)
Limitations of Accounting Rates of Return as Measures of Performance (pg. 1.52)
2.6 Disaggregating the Return on Assets (pg. 1.53)
Disaggregating the Return on Assets (pg. 1.53)
Relation Between the Return on Asset Components (pg. 1.54)
How Does GAP Perform Relative to Other Companies in Its Industry? (pg. 1.54)
Review Exercise 2.1 (pg. 1.55)
2.7 Measuring a Company’s Cost Structure Using Expense Ratios (pg. 1.55)
The Gap, Inc.’s Expense Ratios (pg. 1.56)
Review Exercise 2.2 (pg. 1.58)
2.8 Analyzing a Company’s Asset Utilization Using Turnover Ratios (pg. 1.58)
Review Exercise 2.3 (pg. 1.59)
2.9 Summary Of Disaggregating The Gap, Inc.’S Rates Of Return (pg. 1.59)
2.10 Analyzing A Company’s Working Capital Management (pg. 1.60)
Ability to Pay Current Liabilities (pg. 1.60)
Inventories, Accounts Receivable, Accounts Payable, and Trade Cash Cycle Ratios (pg. 1.61)
Review Exercise 2.4 (pg. 1.63)
2.11 Analyzing A Company’s Fixed Asset Structure And Capital Expenditures (pg. 1.63)
Depreciable Life (Age) (pg. 1.63)
Capital Expenditures (pg. 1.64)
2.12 Other Types Of Financial Statement Relations-Growth, Trends, Per Share, Per Employee, And Per (pg. 1.64)
Employee, Unit of Capacity, and Unit of Output Measures (pg. 1.65)
Growth Rates and Trend Analyses (pg. 1.65)
Per Share Measures (pg. 1.66)
2.13 Analyzing A Company’s Financial Leverage And Financial Risk (pg. 1.66)
Measurement Issues-What Is Debt? (pg. 1.67)
Coverage Ratios (pg. 1.69)
Debt to Earnings Ratio (pg. 1.70)
2.14 Disaggregating The Return On (Common) Equity (pg. 1.70)
Review Exercise 2.5 (pg. 1.71)
2.15 Assessing Competitive Advantage (pg. 1.71)
Cost Leadership as a Competitive Advantage (pg. 1.72)
Differentiation as a Competitive Advantage (pg. 1.72)
Strategic Positioning (pg. 1.72)
Achieving and Sustaining Competitive Advantage (pg. 1.73)
Identifying the Source of Competitive Advantage (pg. 1.74)
Assessing the Sustainability of Competitive Advantage (pg. 1.74)
Fort Howard Corporation (pg. 1.75)
Nike, Inc. (pg. 1.77)
2.16 Implementation And Measurement Issues (pg. 1.78)
Some Basic Measurement Rules (pg. 1.78)
Seasonality (pg. 1.79)
Quarterly Data (pg. 1.79)
Different Fiscal Year-ends (pg. 1.79)
Adjusting the Data for Influential Observations (Outliers) (pg. 1.79)
Negative Denominators (pg. 1.80)
Inflation Adjustments (pg. 1.80)
The Role of Accounting (pg. 1.80)
“Quality” of the Financial Disclosures (pg. 1.81)
Accounting Rates of Return Do Not Equal Economic Rates of Return (pg. 1.81)
Summary and Key Concepts (pg. 1.82)
Additional Reading and References (pg. 1.82)
Exercises and Problems (pg. 1.82)
Solutions for Review exercises (pg. 1.88)
Chapter 3: Measuring Free Cash Flows (pg. 1.90)
Introduction (pg. 1.92)
3.1 Introduction To Measuring Free Cash Flows (pg. 1.92)
Measuring (Unlevered) Free Cash Flows (FCF) (pg. 1.93)
Measuring Equity Free Cash Flows (EFCF) (pg. 1.94)
How Issuing and Repaying Debt Affects Equity Free Cash Flows (pg. 1.95)
3.2 The Bob Adams Company Example (pg. 1.96)
The Bob Adams’s Unlevered Free Cash Flows (pg. 1.97)
Bob Adams’s Equity Free Cash Flows (pg. 1.99)
Reconciling Free Cash Flows to Change in Cash Balance (pg. 1.100)
Bob Adams Free Cash Flow Forecasts (Year 1 through Year 3) (pg. 1.100)
Review Exercise 3.1 (pg. 1.101)
3.3 Cash Flow Statement Basics (pg. 1.101)
The Algebra Underpinning the Cash Flow Statement (pg. 1.102)
Using the Cash Flow Statement to Measure Free Cash Flows (pg. 1.103)
The Bob Adams Company Revisited (pg. 1.104)
Review Exercise 3.2 (pg. 1.106)
3.4 The Relationships Between The Free Cash Flow Schedule And The Cash Flow Statement (pg. 1.106)
The Relationships (pg. 1.106)
Preparing Starbucks Free Cash Flow Schedule Using the Components on Its Statement of Cash Flows (pg. 1.108)
Measuring Starbucks’ Unlevered Free Cash Flow (pg. 1.110)
Measuring Starbucks’ Equity Free Cash Flow (pg. 1.112)
Reconciling Starbucks’ Equity Free Cash Flow to Its Change in Cash Balance (pg. 1.113)
Calculating Starbucks’ Free Cash Flow Using the Cash Flow Statement (pg. 1.113)
Using Cash Flows in Financial Analysis and Valuation (pg. 1.114)
3.5 Differences Between Book And Tax Accounting And The Effect On Income Tax Rates (pg. 1.115)
Permanent Differences Between Book and Tax Accounting (pg. 1.115)
Review Exercise 3.3 (pg. 1.117)
Temporary Differences Between Book and Tax Accounting (pg. 1.117)
Example of a Deferred Tax Liability Resulting from Depreciation (pg. 1.118)
Overview of the Modified Accelerated Cost Recovery System (MACRS) (pg. 1.120)
Review Exercise 3.4 (pg. 1.121)
Example of a Deferred Tax Asset Arising from a Warranty Liability (pg. 1.121)
Disclosures of Uncertain Tax Positions (pg. 1.122)
3.6 Understanding And Analyzing Income Tax Disclosures (pg. 1.122)
The Deferred Income Tax Schedule (pg. 1.123)
Measuring the Income Tax Rate Used on the Tax Forms (pg. 1.125)
3.7 Effects Of Interest Deduction Limitations And Net Operating Loss Carryforwards (pg. 1.126)
Interest Deduction Limitations (pg. 1.127)
Review Exercise 3.5 (pg. 1.133)
Net Operating Loss Carryforwards (pg. 1.133)
Review Exercise 3.6 (pg. 1.140)
Summary and Key Concepts (pg. 1.141)
Additional Reading and References (pg. 1.141)
Exercises and Problems (pg. 1.141)
Solutions for Review exercises (pg. 1.146)
Chapter 4: Creating a Financial Model (pg. 1.154)
Introduction (pg. 1.156)
4.1 An overview of the process of creating a financial model (pg. 1.157)
Steps in the Process of Creating a Financial Model (pg. 1.157)
Level of Aggregation (pg. 1.158)
Real or Nominal Cash Flow Forecasts (pg. 1.158)
Choice of Horizon for Explicit Year-by-Year Cash Flows (pg. 1.159)
Timing of Cash Flows Within a Year (pg. 1.159)
4.2 Forecasting Starbucks Corporation (Starbucks) (pg. 1.160)
4.3 Selecting and Forecasting the Forecast Drivers for the Company’s Operations (Steps 2 and 3) (pg. 1.162)
Forecast Drivers for the Starbucks Corporation Financial Model (pg. 1.164)
4.4 Creating a Financial Model for the Company’s Operations (Step 4) (pg. 1.166)
Starbucks’ Income Statement Forecasts-Part 1 (pg. 1.166)
Using Expense Ratios to Forecast Expenses (pg. 1.167)
Review Exercise 4.1 (pg. 1.168)
Starbucks’ Property, Plant, and Equipment Forecasts (pg. 1.169)
Starbucks’ Income Statement Forecasts-Part 2 (pg. 1.170)
Starbucks’ Balance Sheet Forecasts-Part 1 (pg. 1.170)
Review Exercise 4.2 (pg. 1.171)
The Balance of Shareholders’ Equity Is Not a Plug (pg. 1.171)
Starbucks’ Free Cash Flow Forecasts (pg. 1.172)
Starbucks’ Balance Sheet Forecasts-Part 2 (pg. 1.173)
Starbucks’ Cash Flow Statement Forecasts (pg. 1.174)
Review Exercise 4.3 (pg. 1.175)
4.5 Stress Testing the Model and Assessing the Reasonableness of the Forecasts (Steps 5 and 6) (pg. 1.175)
Checking and Stress Testing the Model-Step 5 (pg. 1.175)
Step Back and Ask, “Do the Forecasts Make Sense?”-Step 6, Part 1 (pg. 1.175)
Comparing Historical Financial Ratios to the Financial Ratios Based on the Forecasts-Step 6, Part 2 (pg. 1.176)
Starbucks’ Historical Financial Ratios and Financial Ratio Forecasts (pg. 1.176)
4.6 Incorporating the Company’s Capital Structure Strategy (pg. 1.177)
Incorporating an Alternative Capital Strategy in the Financial Model (pg. 1.178)
Review Exercise 4.4 (pg. 1.179)
4.7 Sensitivity and scenario analyses and simulations (pg. 1.179)
4.8 Forecasting Required Cash and Valuing Excess Cash (pg. 1.180)
Forecasting the Cash Required to Operate the Business (Required Cash) (pg. 1.181)
Valuing Excess Cash (pg. 1.181)
4.9 Forecasting Income Tax Rates and Payments (pg. 1.183)
Forecasting the Average Tax Rate and Adjustments to Forecast Income Taxes Paid (pg. 1.183)
Forecasting the Marginal Tax Rate for Interest, TINT (pg. 1.184)
4.10 More Detailed Forecasts of Revenues and Capital Expenditures (pg. 1.185)
The Price and Quantity Components of the Revenue Growth Rate (pg. 1.185)
Adjusting Growth Rates for Inflation (pg. 1.186)
Potential Forecast Drivers for Revenues and Capital Expenditures (pg. 1.186)
Potential Forecast Drivers for Capital Expenditures (and Property, Plant, and Equipment) (pg. 1.187)
Illustration of a More Detailed Revenue Forecast (pg. 1.188)
Illustration of More Detailed Capital Expenditure and Depreciation Forecasts (pg. 1.189)
Summary and Key Concepts (pg. 1.192)
Additional Reading and References (pg. 1.192)
Exercises and Problems (pg. 1.192)
Solutions for Review exercises (pg. 1.195)
Chapter 5: The Adjusted Present Value and Weighted Average Cost of Capital Discounted Cash Flow Valu (pg. 1.200)
Introduction (pg. 1.202)
5.1 creating Value from Financing (pg. 1.202)
Insights from Miller and Modigliani and Others (pg. 1.203)
The Single Investor Company (pg. 1.204)
Countervailing Forces (pg. 1.207)
5.2 The Adjusted Present Value and Weighted Average Cost of Capital Valuation Models (pg. 1.209)
Adjusted Present Value (APV) Method (pg. 1.209)
Weighted Average Cost of Capital (WACC) Method (pg. 1.210)
The Weighted Average Cost of Capital (pg. 1.211)
The Link between the Unlevered Cost of Capital and the Equity Cost of Capital (pg. 1.212)
How the Cost of Capital Links Are Used in Practice (pg. 1.213)
The Adjusted Present Value and Weighted Average Cost of Capital Valuation Methods Are Typically Not (pg. 1.214)
5.3 The Andy Alper Company (pg. 1.215)
Which Valuation Method Do We Use to Value Andy Alper Company? (pg. 1.215)
Alper’s Valuation Based on Capital Structure Ratios Used to Initially Finance the Company-The Weight (pg. 1.216)
Review Exercise 5.1 (pg. 1.218)
Alper’s Valuation Based on Growing Its Debt and Preferred Stock Financing at the Free Cash Flow Grow (pg. 1.220)
Costs of Capital Implicit in the Adjusted Present Value Valuation (pg. 1.221)
Review Exercise 5.2 (pg. 1.221)
5.4 The Discounted Equity Free Cash Flow Valuation Method (pg. 1.222)
Valuing Common Equity by First Measuring the Value of the Firm (pg. 1.222)
Valuing the Equity Directly Using the Equity Discounted Cash Flow Method (pg. 1.222)
Equity Discounted Cash Flow Model for the Alper Company (pg. 1.223)
Complexities and Limitations of the Equity Discounted Cash Flow Method (pg. 1.224)
Assumption About Distributing Equity Free Cash Flows to Equityholders (pg. 1.225)
Review Exercise 5.3 (pg. 1.225)
5.5 The Discounted Dividend Valuation Model (pg. 1.225)
5.6 Useful Valuation Concepts to Keep in Mind (pg. 1.226)
The Value of the Firm Is Net of Its Non-Interest-Bearing Operating Liabilities (pg. 1.226)
Using Nominal or Real (Inflation-Adjusted) Cash Flows and Discount Rates (pg. 1.227)
The Concept of Expected Free Cash Flows (pg. 1.229)
The Risk-Adjusted Discount Rate (Cost of Capital) (pg. 1.231)
Don’t Use “Fudge Factors” (pg. 1.232)
5.7 Comprehensive Example-Dennis Keller, INC. (pg. 1.234)
Value of Keller Based on the 20% Debt Capital Structure Valuation-The Seller’s Perspective (pg. 1.235)
Value of Keller Based on the $20 Million Debt Capital Structure-The Buyer’s Perspective (pg. 1.238)
Summary and Key Concepts (pg. 1.243)
Additional Reading and References (pg. 1.244)
Exercises and Problems (pg. 1.244)
Solutions for Review Exercises (pg. 1.248)
Chapter 6: Measuring Continuing Value Using the Constant-Growth Perpetuity Model (pg. 1.250)
Introduction (pg. 1.252)
6.1 The Constant-Growth Perpetuity Model (pg. 1.253)
Using the Free Cash Flow in Year Zero (FCF0) (pg. 1.254)
Basic Assumptions Underlying the Constant-Growth Perpetuity Model (pg. 1.254)
The Steady State Company (pg. 1.255)
When Will a Company Meet the Constant-Growth Perpetuity Model Assumptions? (pg. 1.255)
Value Derived from Continuing Value Is Often More Than 50% (pg. 1.256)
Does an Infinite Horizon Really Assume the Company Exists Forever? (pg. 1.258)
6.2 Estimating The Long-Term Growth Rate For The Constant-Growth Perpetuity Model (pg. 1.259)
Factors to Consider When Estimating the Long-Term Growth Rate (pg. 1.259)
The Present Value Weighted Average Growth Rate (pg. 1.260)
Review Exercise 6.1 (pg. 1.262)
A Two-Stage Continuing ValueGrowth Rate Illustration (pg. 1.262)
Review Exercise 6.2 (pg. 1.263)
Using Comparable Companies to Measure Present Value Weighted Average Growth Rates (pg. 1.263)
Review Exercise 6.3 (pg. 1.265)
6.3 Estimating The Base-Year Year Free Cash Flow (pg. 1.265)
Preparing the Base-Year Free Cash Flow Forecast for the Financial Model (pg. 1.265)
“Lumpy” Capital Expenditures Result in “Lumpy” Free Cash Flows (pg. 1.268)
Review Exercise 6.4 (pg. 1.271)
Relationship Between Capital Expenditures and Depreciation (pg. 1.272)
6.4 Real Growth And Value Creation In The Constant-Growth Perpetuity Model (pg. 1.273)
A Constant Growth Rate Equal to Inflation (No Real Growth) (pg. 1.274)
Real Growth from New Investment Can Decrease the Value of the Firm (pg. 1.275)
Yahoo! with New Investments as of the Continuing Value Date (pg. 1.278)
6.5 Assessing The Reasonableness Of The Continuing Value Estimate (pg. 1.279)
Analyzing Yahoo!’s Forecasts (pg. 1.279)
Review Exercise 6.5 (pg. 1.280)
Using Market Multiples to Assess the Reasonableness of the Continuing Value (pg. 1.281)
Yahoo!’s Implied Market Multiples (pg. 1.281)
Summary and Key Concepts (pg. 1.282)
Additional Reading and References (pg. 1.284)
Exercises and Problems (pg. 1.284)
Solutions for Review Exercises (pg. 1.287)
Chapter 8: Estimating the Equity Cost of Capital (pg. 1.326)
Introduction (pg. 1.328)
8.1 The Capital Asset Pricing Model (pg. 1.328)
The Effects of Diversification (pg. 1.329)
Beta as a Measure of Security Risk (pg. 1.330)
Review Exercise 8.1 (pg. 1.331)
A Quick Look at Some Betas (pg. 1.332)
A Portfolio Beta Is a Weighted Average of the Betas of the Securities in the Portfolio (pg. 1.333)
Review Exercise 8.2 (pg. 1.333)
Further Observations and Empirical Evidence (pg. 1.334)
Evidence on the Capital Asset Pricing Model (pg. 1.334)
8.2 An Overview on Estimating the Equity Cost of Capital Using the Capital Asset Pricing Model (pg. 1.336)
8.3 Estimating Beta (pg. 1.337)
The Equity Cost of Capital Used in Valuation is Forward Looking but Estimated Using Historical Data (pg. 1.337)
The Market Model (pg. 1.338)
Return Dichotomization in the Market Model (pg. 1.338)
Market Model Estimates for Four Example Companies (pg. 1.339)
Equity Betas Capture Systematic Financial Risk and Business Risk (pg. 1.340)
The Market Model Applied to Portfolios (pg. 1.342)
Review Exercise 8.3 (pg. 1.342)
Beta Estimation: Choosing the Proxy for the Market Portfolio (Market Index) (pg. 1.343)
Beta Estimation: Choosing the Time Period for the Estimation and Time Interval (Periodicity) for Mea (pg. 1.344)
Mean Reversion in Estimated Betas and Adjusted Betas (pg. 1.346)
Using Commercially Available Betas (pg. 1.347)
Potential Spurious Effects of Company Specific Information on Beta (pg. 1.348)
8.4 Adjusting Estimated Betas for Changes in Risk (Non-Stationary Betas) (pg. 1.349)
Adjustments to Beta for Changes in Operations (pg. 1.349)
Direct Adjustments to Unlevered Betas for Excess Assets and Divestitures (pg. 1.350)
Shifting Betas in the Future (pg. 1.350)
Review Exercise 8.4 (pg. 1.351)
Review Exercise 8.5 (pg. 1.351)
8.5 Estimating the Market Risk Premium (pg. 1.351)
The 1926 to 2016 U.S. Return Experience (pg. 1.352)
Choice of the Proxy for the Market Portfolio (Market Index) (pg. 1.353)
Choice of Proxy for the Risk-Free Return to Measure the Market Risk Premium (pg. 1.353)
The Historical Approach to Estimating the Market Risk Premium (pg. 1.355)
Time Variation in Estimating the Market Risk Premium (pg. 1.358)
Estimates of the Market Risk Premium from Market Participants (pg. 1.358)
Estimates of the Market Risk Premium from Implied Cost of Capital Estimates (pg. 1.359)
Uncertainty in Estimates of the Market Risk Premium (pg. 1.359)
Where Does All of the Evidence Leave Us? (pg. 1.359)
8.6 Estimating the Risk-Free Rate of Return to Use in the Capm (pg. 1.360)
8.7 Putting the Pieces Together (pg. 1.361)
Informed Judgment and Guiding Principles (Links) (pg. 1.361)
CAPM Example Using Our Four Companies (pg. 1.361)
Review Exercise 8.6 (pg. 1.363)
How Finance Professionals Put the Pieces Together (pg. 1.363)
8.8 Adjusting the Capital Asset Pricing Model for Market Capitalization (pg. 1.364)
8.9 The Build-Up Method (pg. 1.366)
Typical Formulation of the Build-Up Method (pg. 1.366)
8.10 Multi-Factor Models (pg. 1.367)
The Fama and French Three-Factor Model and Its Estimation (pg. 1.368)
Review Exercise 8.7 (pg. 1.371)
8.11 Implied Cost of Capital Estimates (pg. 1.371)
The Constant Dividend Growth Model (pg. 1.371)
Implied Cost of Capital Estimates from Forecasts of Excess Earnings or Cash Flows (pg. 1.372)
Summary and Key Concepts (pg. 1.373)
Additional Reading and References (pg. 1.373)
Exercises and Problems (pg. 1.373)
Solutions for Review Exercises (pg. 1.376)
Chapter 9: Measuring the Cost of Capital for Debt and Preferred Securities (pg. 1.380)
Introduction (pg. 1.382)
9.1 Types of Non-Common-Equity Securities (pg. 1.383)
How Do Companies Finance Their Balance Sheets? (pg. 1.383)
Current and Non-Current Operating Liabilities Not Included in Non-Common-Equity Financing (pg. 1.385)
The Cost of Capital for Warrants, Employee Stock Options, and Other Equity-Linked Securities (pg. 1.386)
9.2 Credit Ratings, Recovery Rates, Default Rates, and Yield to Maturity Versus the Cost of Debt (pg. 1.386)
Credit Rating Agencies and Credit Ratings (pg. 1.386)
Recovery and Default Rates (pg. 1.387)
The Promised Yield to Maturity versus the Cost of Debt (pg. 1.393)
Review Exercise 9.1 (pg. 1.396)
9.3 Measuring The Debt and Preferred Stock Costs of Capital (pg. 1.396)
An Overview of the Process for Measuring the Debt and Preferred Stock Costs of Capital (pg. 1.397)
Measuring the Yield to Maturity (pg. 1.397)
Measuring the Cost of Debt Using the Internal Rate of Return Approach (pg. 1.399)
Review Exercise 9.2 (pg. 1.402)
Measuring the Preferred Stock Cost of Capital Using the Adjusted Promised Yield Approach (pg. 1.402)
Measuring the Cost of Debt Using the Expected Default Loss Approach (pg. 1.402)
Using the Capital Asset Pricing Model to Measure the Cost of Debt (pg. 1.405)
Review Exercise 9.3 (pg. 1.407)
Using Credit Default Swaps to Measure Default Risk and Recovery Rates (pg. 1.407)
Measuring the Cost of Debt-Summary (pg. 1.409)
9.4 Credit Rating Models (pg. 1.409)
Estimating Credit Ratings Using Financial Ratios (pg. 1.410)
Review Exercise 9.4 (pg. 1.411)
The HZ Credit Rating Model (pg. 1.412)
Review Exercise 9.5 (pg. 1.416)
Preferred Stock Rating Models (pg. 1.416)
Yield Prediction Models (pg. 1.417)
9.5 Bankruptcy Prediction and Financial Distress Models (pg. 1.417)
The HZ Financial-Ratio-Based Bankruptcy Prediction Model (pg. 1.417)
Review Exercise 9.6 (pg. 1.420)
Option Pricing-Based Financial Distress Models (pg. 1.420)
Which Approach Works Better (Ratio-Based or Option Pricing-Based Financial Distress Models)? (pg. 1.423)
Summary and Key Concepts (pg. 1.423)
Additional Reading and References (pg. 1.424)
Appendix: An Overview of the Black-Scholes and Merton Option Pricing Models (pg. 1.424)
The Black-Scholes and Merton Option Pricing Models (pg. 1.425)
Review Exercise A9.1 (pg. 1.427)
Exercises and Problems (pg. 1.427)
Solutions for Review Exercises (pg. 1.428)
Robert W. Holthausen

Robert W. Holthausen

Robert W. Holthausen is the Ernst and Young and the Nomura Securities Company Professor of Accounting and Finance and is the Chairman of the Department of Accounting.

Prior in going to Wharton, he was a Professor of Accounting and Finance at the Graduate School of Business of the University of Chicago. He earned his doctorate at the University of Rochester where he also earned his M.B.A. Prior to his academic career, he was a C.P.A. working at Price Waterhouse and he was also in the finance group at Mobil.

Professor Holthausen is widely published in both finance and accounting journals. His research has studied the effects of management compensation and governance structures on firm performance, the effects of information on volume and prices, corporate restructuring and valuation, the effects of large block sales on common stock prices, and numerous other topics. His research has appeared in such journals as the Journal of Accounting and Economics, The Accounting Review, the Journal of Accounting Research, the Journal of Finance and the Journal of Financial Economics. He has served in various editorial capacities for all five journals listed above; either as consulting editor, associate editor, editorial board member or reviewer. He is currently an editor of the Journal of Accounting and Economics.

His teaching has been concentrated in the areas of investment management and valuation. Currently, his primary teaching responsibility is for the valuation class he developed. He has teaching experience at the undergraduate, M.B.A., and Ph.D. levels and has won teaching awards from both the undergraduate and M.B.A. students at Wharton, including the David J. Hauck award. He is currently the academic director of Wharton’s Mergers and Acquisitions program.

Professor Holthausen has consulted with a variety of companies. His specific consulting engagements are varied and include such diverse activities as serving as a compensation consultant to a Fortune 500 Company, consulting with an investment company in the development of fundamental trading rules used to manage equity portfolios and performing valuation analysis in a variety of situations.

Corporate Valuation, 2e - Theory, Evidence & Practice (Holthausen, Zmijewski)
Last Updated: May 25 2021

Errors identified after publication, corrected. 

Data Spreadsheets - Exhibits
Last Updated: Oct 1 2019

These are the excel spreadsheets for the 2e exhibits and review exercises.

Data Spreadsheets - Problems
Last Updated: Oct 13 2021

These are the excel spreadsheets for the 2e problems. These spreadsheets will save time in data entry and allow students to dedicate additional time to learning the material. 

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