Valuation The Art and Science of Corporate Investment Decisions

For upper-division undergraduate and MBA students as well as business professionals.

A Holistic Approach to Project and Enterprise Valuation

The Art and Science of Corporate Investment Decisions provides an up-to-date, integrated treatment of the valuation of investment opportunities. Taking both industry practice and recent advances in valuation methods into consideration, this text introduces students to a broad spectrum of valuation approaches and equips them to make wise investment decisions.

The Third Edition exposes readers to the latest valuation tools being used in the industry. Practical examples are offered throughout the text to help students understand core principles in the context of realistic situations. Using the accompanying spreadsheets and simulation tools, students will be able to glean information from a variety of sources, construct models that utilize this information, and then summarize their analysis in a meaningful way.

SHERIDAN TITMAN

Sheridan Titman holds the McAllister Centennial Chair in Financial Services at the University of Texas. He has a B.S. from the University of Colorado and an M.S. and Ph.D. from Carnegie Mellon University. Prior to joining the faculty at the University of Texas, Professor Titman was a Professor at UCLA, the Hong Kong University of Science and Technology, and Boston College and spent the 1988–89 academic year in Washington, D.C., as the special assistant to the Assistant Secretary of the Treasury for Economic Policy. In addition, he has consulted for a variety of financial institutions and corporations. He has served on the editorial boards of the leading academic finance and real estate journals, was an editor of the Review of Financial Studies, and was the founding editor of the International Review of Finance. He has served as President of the American Finance Association and the Western Finance Association, and as a director of the American Finance Association, the Asia Pacific Finance Association, the Western Finance Association, and the Financial Management Association and as the President of the Western Finance Association. Professor Titman has published more than 50 articles in both academic and professional journals and a book entitled Financial Markets and Corporate Strategy. He has received a number of awards for his research excellence and is a Fellow of the Financial Management Association and a Research Associate of the National Bureau of Economic Re-search.

JOHN MARTIN

John Martin holds the Carr P. Collins Chair in Finance in the Hankamer School of Business at Baylor University, where he teaches in the Baylor EMBA programs. Over his career, he has published more than 50 articles in the leading finance journals and served in a number of editorial positions, including the coeditorship of the FMA Survey and Synthesis Series for the Oxford University Press. In addition, he has coauthored the following books: Financial Management, 12th edition (Prentice Hall Publishing Company); Foundations of Finance, 8th edition (Prentice Hall Publishing Company); Financial Analysis (McGraw-Hill Publishing Company); The Theory of Finance (Dryden Press); and Value Based Management (Harvard Business School Press/Oxford University Press).

John and Sally have two wonderful sons, the world’s finest daughter-in-law (their youngest son isn’t married), and two beautiful grandsons who visit them often on their ranch outside of Crawford, Texas, where they raise hay and enjoy life with their chickens, dogs (Jack, Minnie and Pearl) and miniature donkeys (Lottie, Dottie, Wavy, Gravy and Biscuit).

Preface xix

Acknowledgments xxvii

1.            Overview of Valuation

PART I:  PROJECT ANALYSIS USING DISCOUNTED CASH FLOW (DCF)

2.            Forecasting and Valuing Cash Flows

3.            Project Risk Analysis

PART II: COST OF CAPITAL

4.            Estimating a Firm’s Cost of Capital

5.            Estimating Required Rates of Return for Projects

PART III: FINANCIAL STATEMENTS AND VALUATION

6.            Forecasting Financial Performance

7.            Earnings Dilution, Incentive Compensation, and Project Selection

PART IV: ENTERPRISE VALUATION

8.            Relative Valuation Using Market Comparables

9.            Enterprise Valuation

10.         Valuation in a Private Equity Setting

PART V : FUTURES, OPTIONS, AND THE VALUATION OF REAL INVESTMENTS

11.         Using Futures and Options to Value Real Investments

12.         Managerial Flexibility and Project Valuation: Real Options

13.         Strategic Options: Evaluating Strategic Opportunities

Epilogue

Index 511

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