Stock Valuation An Essential Guide to Wall

Successful investing is about beating market benchmarks. To do this, you need to know how to identify, evaluate, and invest in mispriced stocks. Stock Valuation provides you with a hands-on examination of Wall Street's most widely practiced valuation models, focusing on the theoretical underpinnings of those models and how they perform when applied to actual trades in the marketplace.

Scott Hoover is an assistant professor at Washington and Lee University and an accomplished business valuation consultant. A speaker at academic and professional conferences, Hoover writes regularly for academic journals.

LIST OF FIGURES

xiii

PREFACE

xv

ACKNOWLEDGMENTS

xvii

Chapter 1 Setting the Stage

1

(24)

Purpose and Scope

1

(1)

Who Values Stocks?

1

(3)

Corporate Managers

2

(1)

Financial Analysts: Investment Banking

2

(1)

Financial Analysts: Equity Research

2

(1)

Asset Managers

3

(1)

Individuals

3

(1)

Economic Policymakers

4

(1)

The Objective of Equity Investment

4

(1)

Related Concepts

5

(9)

Earnings vs. Cash Flow

5

(1)

Good Companies vs. Good Stocks

6

(1)

Size Matters

7

(1)

Growth vs. Value

8

(3)

Few Stocks vs. Many Stocks

11

(1)

Broad-Based Portfolios vs. Concentrated Portfolios

12

(2)

The Investment Process

14

(7)

Market Selection

15

(1)

Class/Industry Selection

15

(1)

Asset Selection

16

(5)

Organization of the Book

21

(4)

Case Study: O'Charley's

22

(3)

Chapter 2 Price Formation, Market Efficiency, and Great Investors

25

(22)

Purpose and Scope

25

(1)

How Are Prices Determined?

26

(8)

Types of Orders

26

(3)

Dealer Markets

29

(1)

Auction Markets

30

(3)

What Have We Learned about Price Formation?

33

(1)

Market Efficiency

34

(4)

The Evidence

35

(3)

A Few of the Great Investors

38

(6)

The S&P 500!

38

(1)

Warren Buffett

39

(1)

Peter Lynch

40

(1)

Bill Miller

41

(3)

Putting It All Together

44

(1)

In Practice...

44

(3)

Case Study: O'Charley's

45

(2)

Chapter 3 The Time Value of Money

47

(20)

Purpose and Scope

47

(1)

In Theory...

47

(9)

The Discount Rate

48

(1)

Multiple Cash Flows

49

(5)

Implied Discount Rates

54

(2)

In Practice...

56

(9)

Expressing Interest Rates

56

(4)

Application: Retirement Planning

60

(5)

Summary

65

(2)

Chapter 4 Understanding Financial Statements

67

(50)

Purpose and Scope

67

(1)

Financial Statements

68

(27)

The Balance Sheet

69

(10)

The Income Statement

79

(8)

The Statement of Cash Flows

87

(6)

Linkages Between the Statements

93

(2)

Building the Free Cash Flow Equation

95

(8)

Sales and Cost of Goods Sold: Implications for Free Cash Flow

97

(3)

Dealing with Capital Expenditures and Depreciation

100

(1)

Cash

101

(1)

The Free Cash Flow Equation

102

(1)

Other Cash Flow Items

103

(1)

In Practice...

103

(13)

Nonsynchronous Financial Statements

104

(3)

Differences in Terminology and Reporting Structure

107

(1)

Case Study: O'Charley's

108

(7)

A Note on SFAS No. 123R

115

(1)

Summary

116

(1)

Chapter 5 Interpreting Financial Statements

117

(46)

Purpose and Scope

117

(1)

In Theory...

118

(30)

Common Size Financial Statements

119

(3)

Indexed Financial Statements

122

(1)

The Turnover Balance Sheet

122

(3)

The DuPont Method

125

(15)

Special Ratios

140

(5)

Unused Assets

145

(3)

In Practice...

148

(12)

Identifying Misleading Items

148

(2)

Case Analysis: O'Charley's

150

(5)

Case Study: Applebee's

155

(5)

Summary

160

(3)

Chapter 6 Capital Structure and the Cost of Capital

163

(42)

Purpose and Scope

163

(3)

In Theory...

166

(21)

The Pecking Order Theory

166

(2)

Internal Financing

168

(3)

External Financing

171

(2)

Signaling Effects

173

(3)

The Cost of Capital

176

(11)

In Practice...

187

(15)

Problems with Estimating the Cost of Debt

187

(4)

Problems with Estimating the Cost of Preferred Stock

191

(1)

Problems with Estimating the Cost of Equity

192

(5)

Problems with Estimating Weights for the WACC Calculation

197

(3)

Case Study: O'Charley's

200

(2)

Summary

202

(3)

Chapter 7 Forecasting

205

(40)

Purpose and Scope

205

(1)

In Theory...

206

(30)

Growth from Retained Earnings

209

(3)

The Forecasting Process

212

(24)

In Practice...

236

(5)

Case Study: O'Charley's

236

(5)

Summary

241

(4)

Chapter 8 Valuing Employee Stock Options

245

(46)

Purpose and Scope

245

(2)

In Theory...

247

(30)

The Black-Scholes Option Pricing Model

250

(22)

Valuing Yet-to-Be-Issued Employee Stock Options

272

(5)

In Practice...

277

(12)

A Note on Dilution-Based Approaches

278

(1)

Different Contracts and Lack of Complete Information

279

(2)

Early Exercise

281

(3)

Case Study: O'Charley's

284

(5)

Summary

289

(2)

Chapter 9 Relative Valuation and Screening

291

(38)

Purpose and Scope

291

(2)

In Theory...

293

(29)

A Note on Model Error

293

(1)

Screening

294

(2)

Comparables ("Comps") Analysis

296

(13)

Discounted Dividends and the Malkiel Model

309

(8)

A Relative Version of the Malkiel Model: Growth-Adjusted Comps

317

(5)

In Practice...

322

(3)

Equity Research and Investment Banking

323

(1)

What Stocks Can We Include?

323

(1)

Outliers

324

(1)

Analyst Growth Rates

325

(1)

Case Study

325

(2)

Summary

327

(2)

Chapter 10 The Discounted Cash Flow Model

329

(30)

Purpose and Scope

329

(1)

In Theory...

330

(21)

The DCF Model

334

(17)

In Practice...

351

(1)

Case Study

352

(4)

FREE SHIPPING

Amazon no longer offers textbook rentals. We do!

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

Summary

Author Biography

Table of Contents

Supplemental Materials