CONTENTS
PREFACE = XV
ACKNOWLEDGMENTS = XIX
CHAPTER 1 THE DARK SIDE OF VALUATION = 1
DEFINITION OF A TECHNOLOGY FIRM = 2
THE SHIFT TO TECHNOLOGY = 3
OLD TECH TO NEW TECH = 6
EXTENSION OF THE VALUATION METRICS = 7
THE IMPLICATIONS FOR VALUATION = 9
NEW PARADIGMS OR OLD PRINCIPLES : A LIFE CYCLE PERSPECTIVE = 11
ILLUSTRATIVE EXAMPLES = 16
SUMMARY = 17
ENDNOTES = 17
CHAPTER 2 SHOW ME THE MONEY : THE FUNDAMENTALS OF DISCOUNTED CASH FLOW VALUATION = 19
DISCOUNTED CASH FLOW VALUE = 20
VALUING AN ASSET WITH GUARANTEED CASH FLOWS = 21
INTRODUCING UNCERTAINTY INTO VALUATION = 22
Valuing an Asset with Default Risk = 23
Valuing an Asset with Equity Risk = 26
Valuing an Asset with Equity Risk and Finite Life = 28
VALUING AN ASSET WITH AN INFINITE LIFE = 29
Equity and Firm Valuation = 29
Dividends and Equity Valuation = 32
A Broader Measure of Cash Flows to Equity = 37
From Valuing Equity to Valuing the Firm = 40
VALUING TECHNOLOGY STOCKS = 43
Estimated Cash Flow to the Firm = 44
Expected Growth = 45
Discount Rate = 46
Asset Life = 47
Bringing It All Together = 48
SUMMARY = 50
ENDNOTES = 50
CHAPTER 3 THE PRICE OF RISK : ESTIMATING DISCOUNT RATES = 53
COST OF EQUITY = 54
Risk and Return Models = 54
Estimation Issues = 58
FROM COST OF EQUITY TO COST OF CAPITAL = 87
Calculating the Cost of Debt = 88
Calculating the Cost of Hybrid Securities = 92
Calculating the Weights of Debt and Equity Components = 94
Estimating the Cost of Capital = 99
SUMMARY = 100
ENDNOTES = 101
CHAPTER 4 CASH IS KING : ESTIMATING CASH FLOWS = 105
DEFINING THE CASH FLOW TO THE FIRM = 106
OPERATING EARNINGS(EBIT) = 106
Updated Earnings = 101
Adjustments to Operating Earnings = 109
THE TAX EFFECT = 125
Effective versus Marginal lax Rate = 125
The Effect of Net Operating tosses = 127
The Tax Benefits of R&D Expensing = 129
REINVESTMENT NEEDS = 130
Net Capital Expenditures = 130
Noncash Working Capital Investments = 133
SUMMARY = 137
ENDNOTES = 138
CHAPTER 5 LOOKING FORWARD : ESTIMATING GROWTH = 141
THE IMPORTANCE OF GROWTH = 142
Growth Assets and Assets in Place = 143
Growth Assets at Technology Firms = 143
HISTORICAL GROWTH = 145
Estimating Historical Growth = 145
The Usefulness of Historical Growth = 149
Historical Growth at Technology Firms = 153
ANALYST ESTIMATES OF GROWTH = 155
Number of Analysts Following Technology Firms = 155
The Quality of Earnings Forecasts = 156
THE FUNDAMENTAL DETERMINANTS OF GROWTH = 159
Scenario : Stable Return on Capital = 159
Scenario : Positive and Changing Return on Capital = 165
Scenario : Negative Return on Capital = 167
THE QUALITATIVE ASPECTS OF GROWTH = 178
THE QUESTION OF DETAIL = 180
SUMMARY = 181
ENDNOTES = 181
CHAPTER 6 ESTIMATING FIRM VALUE = 163
CLOSURE IN VALUATION = 184
Multiple Approach = 184
Liquidation Value = 185
Stable Growth Model = 186
VALUING OPERATING ASSETS = 197
THE SURVIVAL ISSUE = 208
Life Cycle and Firm Survival = 208
Likelihood of Failure and Valuation = 209
CASH AND NONOPERATING ASSETS = 210
Cash and Marketable Securities = 211
Holdings in Other Firms = 213
Other Nonoperating Assets = 216
FIRM VALUE AND EQUITY VALUE = 219
SUMMARY = 221
ENDNOTES = 221
CHAPTER 7 MANAGEMENT OPTIONS, CONTROL, AND LIQUIDITY = 225
MANAGEMENT AND EMPLOYEE OPTIONS = 226
The Magnitude of the Option Overhang = 226
Options in Existence = 229
Future Option Grants = 239
VALUE OF CONTROL = 243
Voting Shares versus Nonvoting Shares = 243
Valuing Control = 244
Control in Private Businesses = 245
VALUE OF LIQUIDITY = 245
Determinants of Illiquidity Discount = 245
Quantifying the Liquidity Discount = 246
Liquidity Discounts at Publicly Traded Firms = 247
SUMMARY = 245
ENDNOTES = 249
CHAPTER 8 RELATIVE VALUATION = 251
USE OF RELATIVE VALUATION = 252
Reasons for Popularity = 252
Potential Pitfalls = 253
STANDARDIZED VALUES AND MULTIPLES = 253
Earnings Multiples = 253
Book Value or Replacement Value Multiples = 254
Revenue Multiples = 254
Sector-Specific Multiples = 255
THE FOUR BASIC STEPS TO USING MULTIPLES = 256
Definitional Tests = 256
Descriptional Tests = 259
Analytical Tests = 262
Application Tests = 265
RECONCILING RELATIVE AND DISCOUNTED CASH FLOW VALUATIONS = 271
SUMMARY = 272
ENDNOTES = 273
CHAPTER 9 EARNINGS MULTIPLES = 275
PRICE-EARNINGS RATIO(PE) = 275
Definitions of PE Ratio = 276
Cross-Sectional Distribution of PE Ratios = 277
Determinants of the PE Ratio = 282
Using the PE Ratio for Comparisons = 289
THE PEG RATIO = 297
Definition of the PEG Ratio = 291
Cross-Sectional Distribution of the PEG Ratio = 299
Determinants of the PEG Ratio = 303
Using the PEG Ratio for Comparisons = 307
OTHER EARNINGS MULTIPLES = 313
Price to Future Earnings = 313
Price to Earnings Before R&D Expenses = 315
Enterprise Value to EBITDA = 316
SUMMARY = 317
ENDNOTES = 318
CHAPTER 10 OTHER MULTIPLES = 319
REVENUE MULTIPLES = 320
Definition of Revenue Multiple = 320
Cross-Sectional Distribution = 321
Analysis of Revenue Multiples = 324
Using Revenue Multiples in Analysis = 333
Multiples of Future Revenues = 343
SECTOR-SPECIFIC MULTIPLES = 344
Definitions of Sector-Specific Multiples = 345
Determinants of Value = 346
Analysis with Sector-Specific Multiples = 350
SUMMARY = 351
ENDNOTES = 352
CHAPTER 11 REAL OPTIONS IN VALUATION = 353
BASICS OF OPTION PRICING = 354
Call Options : Description and Payoff Diagrams = 354
Put Options : Description and Payoff Diagrams = 356
DETERMINANTS OF OPTION VALUE = 357
American versus European Options : Variables Relating to Early Exercise = 359
Option Pricing Models = 359
A Few Caveats on Applying Option Pricing Models = 372
Barrier, Compound, and Rainbow Options = 373
THE OPTION TO DELAY = 376
The Payoff Diagram on the Option to Delay = 376
Valuing the Option to Delay = 378
Practical Considerations = 382
Implications for Project Analysis and Valuation = 383
Valuing a Patent = 384
From Patent Value to Firm Value = 387
THE OPTION TO EXPAND = 391
Practical Considerations = 393
Implications for Valuation = 394
WHEN ARE REAL OPTIONS VALUABLE? SOME KEY TESTS = 397
Quantitative Estimation = 397
Key Tests = 397
SUMMARY = 400
ENDNOTES = 401
CHAPTER 12 VALUE ENHANCEMENT = 403
VALUE CREATION : A DISCOUNTED CASH FLOW(DCF) PERSPECTIVE = 404
Value-Creating and Value-Neutral Actions = 404
Ways of Increasing Value = 406
The Value Enhancement Chain = 432
ALTERNATIVES TO THE TRADITIONAL VALUATION MODEL = 434
Economic Value Added = 435
Cash How Return on Investment = 442
SUMMARY = 449
ENDNOTES = 451
CHAPTER 13 A POSTSCRIPT = 453
FUNDAMENTALS DON'T CHANGE = 454
Cash Flow, Growth, and Risk = 454
Lessons for Investors = 455
Lessons for Managers = 455
GROW, GROW, GROW... = 456
Growth and Value = 456
Lessons for Investors = 451
Lessons for Managers = 458
THE EXPECTATIONS GAME = 459
Expectations, Information, and Value = 459
Lessons for Investors = 460
Lessons for Managers = 461
LIVE WITH NOISE = 462
Noise in the Valuation of Technology firms = 462
Implications for Investors = 463
Implications for Managers = 464
SUMMARY = 465
ENDNOTES = 465
REFERENCES = 467
INDEX = 473
