Equity Valuation and Analysis: 5th Edition

About this book

WHY THIS BOOK?This book spans the void between the abstract theoretical treatment of equity valuation and the practical problem of valuing an actual company using real-world data. We give serious treatment to the underlying theory of financial analysis and valuation but our main goal is to be able to arrive at a pragmatic answer to the important question what is this company really worth? To answer this question we adopt a different approach from other textbooks. The key differences can be summarized as follows:1. Our focus is on generating good financial statement forecasts. 2. We provide detailed practical guidance on how to obtain and analyze relevant real-world data. 3. We demystify the mechanics of equity valuation.Our overriding theme is that good forecasts of the future financial statements are the key input to a good valuation. Most other aspects of the valuation process are mechanical and can be programmed into a computer. In fact this text refers often to eVal a fancy Excel workbook that provides a template for these many mechanical tasks and is freely available. As with many other textbooks we discuss topics like business strategy analysis accounting analysis financial ratio analysis and so forth. However we always do so with a clear view to how these analyses help us to generate better financial statement forecasts. We also provide plenty of advice on where to go to obtain the most relevant raw data. Armed with such a rich source of data we are able to provide you with plenty of practical examples and limitless opportunities for you to practice doing your own analyses. A final goal of this book is to demystify the valuation process. In the past we have seen students become lost in a sea of valuation formulas and inconsistent spreadsheet models. For example students get confused as to whether they should use a DDM DCF or RIM valuation formula and whether they need to use the CAPM APT or MFM to estimate their WACC (and to how many decimal places). They become obsessed with learning acronyms and formulas but flounder when asked to provide a plausible valuation for an actual company. We demonstrate that these different formulas are easily reconciled and refocus students on developing the best set of financial forecasts to plug into these formulas. This reinforces our main point that the key to good valuations is good forecasts.HOW DOES ALL THIS HELP YOU? The theory of financial analysis and valuation is more compelling when linked to real-world examples. The abstract theory of financial statements ratios and valuation formulas can be covered in a few boring lectures. What makes this topic exciting is seeing how an organized approach to studying a real company leaves you so much better informed about the firms future. Is Apple really worth more than any other public company in the world? The answer is probably yes once you understand its free cash flow generating ability. Tesla wants to produce and sell hundreds of thousands of cars in the future but can it generate enough cash from existing sales to fund the production of all these new cars? A careful study of their cash flows shows that they will almost certainly be borrowing lots of money to build all these cars. Financial statements accounting rules financial ratios and valuation models are all pretty dull beasts on their own but if we can use them to answer questions such as these we can really bring them to life. By blending the theory of equity analysis with practical application we feel that students learn both more effectively.The book is supported by a comprehensive set of free online resources including software cases and quizzes all available at http://www.lundholmandsloan.com