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basic concept, 203 control (of capital expenditure), 106

unbundling optimisation options, 445 control (re principles of consolidation), 72

business development costs (ABCDE valuation), 373 copper

business unit strength, 124 cost curve example, 296

buyer power, 120 government control effect, 283

buying success, 324 co-product credits, 274

correlations

call option, 471 basic concept, 162

capacity reservation fee, 436 equity returns, 162

Capital Asset Pricing Model (CAPM) Monte Carlo analysis, 240

basic description, 49 Corus PLC

beta factor (ÃŸ), 166 abbreviated financial summary, 96

WACC formula, 397 case study (accounting data into AFS), 88

capital expenditure (capex) company valuation example, 366

basic description, 70 short cut valuations, 369

control system, 106 synergies with Tata, 371

cargo size (flexibility valuation), 517 value of, 97

cash flow statement, 69 cost control and risk management, 114

check lists (risk), 172â€“77 cost curves

chimera, 561 basic concept, 272â€“78

Claire (project), see also Yellow Moon Chemical copper example, 296

Company244 evolution over time, 279

closure costs, 236 global or national?, 334

coffee and tea facilities example, 553 shape (importance thereof), 276

company as series of projects sources of value (link to), 272

basic concept, 126â€“33 cost leadership, 122

overheads & sunk costs (inclusion of), 132 cost of capital (CoC)

scaffolding example, 126 assessment (detailed numbers), 412â€“15

company valuation basic concepts, 48â€“59

basic principles, 342â€“69 best estimate, 415

calculated share price, 352 beta factor (CoC component), 407

Corus example, 366 buying and selling (importance thereto), 442

dividends or cash flow, 345 calibration against share price, 444

liabilities, 366 change in CoC example, 440

mean reversion, 346 company-wide or divisional, 421, 449

plan period, 356 competitorsâ€™ CoC, 439

plan period asset value, 353 components (estimates of), 399â€“412

share price calculation, 368 cost of borrowing (CoC component), 401

short cut approaches, 369 cottage industry (avoid), 459

617 Index

country risk, 456 decommissioning costs, 236

country-specific CoC, 420 Dell computers (sale recognition), 64

equity risk premium (CoC component), 409 depreciation, 66

see also amortisation

fudge factors, 449

implied by market prices, 444 dice-rolling example (fair market price), 144

inflation effect, 218 differentiation, 122

initial estimate, 57 discount factors

basic definition, see also economic value model

market value debt (CoC component), 405

market value equity (CoC component), 406 discount tables, 11

Modigliani Miller effect, 54, 344 mid-year and end-year, 12, 136

discount rate, see cost of capital

non-value players, 547, 550

optimisation (implications for), 444 discounted payback

project CoC, 415 basic definition, 15

quantification (as an interest rate), 5 economic indicator (definition of), 256

real CoC, 218 economic indicator (use as), 17

discounting, see economic value model

risk & reward (implications for), 460

tax rate (CoC component), 404 distributor example (financing activities), 435

valuation (implication of changes in CoC), 443 diversifiable risk, 176

cost of debt (CoD), see interest and cost of capital divestments, 469

cost of equity, see CAPM and cost of capital dividends

calculation method, 397 basic description, 41

when to use, 438 do dividends matter?, 45

cottage industry (avoid), 459 funds flow (relationship to), 43, 344

country entry (flexibility value), 468 modelling issues, 243

country risk (CoC implications), 456 setting (use of the marginal dollar), 535

cradle-to-grave approach, 338 signalling mechanism, 45

credit rating agencies, 36 valuation of, 342

credit rating definitions, 36 Yellow Moon Chemical Company example, 246

cumulative present value Do, Learn, Do approach, 110, 531

abbreviated financial summary entry, 76

fish diagram, 387 economic evaluation

cumulative probability curves, 149 purpose, 188

currency effects, see foreign currency effects standard methodology, 252

economic indicators, 16

DCF (discounted cash flow analysis), see economic value definition in standard methodology, 256

model introduction to, 16

deal or no deal game show, 349 link to accounting results, 125

debt sensitivity analysis, 157

advantages over equity, 38 economic modelling

basic concepts, 39 financed cases, 241

currency (choice thereof), 35 foreign currency effects, 230

fixed or floating, 31 hard wiring, 195

flexibility, 38 inflation, 218

inflationâ€™s impact, 33 joint ventures, 238

leverage illustration, 53 level playing field, 193

long-term or short-term, 32 model audit, 197

modelling issues, 243 model design, 189

recourse and non-recourse, 36 purpose, 193

tax relief, 38 real cash flow modelling, 219

valuation of, 30 Russian coffee shop example, 194

decision-taking rule, 8 spreadsheet layout, 195

decision trees standard methodology, 194, 252, 253â€“57

basic concept, 151 stock profits, 226

flexibility valuation technique, 509 three spreadsheets or one?, 194

property auction example, 151 working the case, 197

618 Index

economic value model modelling issues, 242

basic description, 9 Yellow Moon Chemical Company case study, 244

calculating value, 10 financial distress

flexibility implications thereof, 471 definition, 164

Nobel prize, 395 step in treatment of risk/reward, 425

overview, 396â€“99 financial options, 471

Financial Statement Analysis and Security Valuation,

Enron, 106

equity 185, 330

basic concepts, 48 financing activities

going public, 41 Corus example, 91

ownership rights, 40 distrubution cost example, 435

rights issue example, 46 exclusion (method), 74

rights issues, 46 exclusion from abbreviated financial summary, 74

share issues, 46 simple example, 434

shareholders equity, 68 step from profit to cash flow, 71

valuation formula, 43 treatment of, 433â€“39

value of, 41 fish diagram

equity risk premium cost of capital change example, 440

CoC component, 409 introduction to, 390

initial estimate, 57 optimisation & company value example, 451

expected value five forces model, 117

calculations with expected values, 150 fixed assets

correct expected value (U shaped valley), 172 basic description, 67

decision-making rule, 428 calculation method, 82

definition, 146 fixed costs, 77

dice-rolling example, 144 flexibility valuation

difficulty in assessment, 149, 154 additional costs

fair market price example, 144 basic concept (include them), 518

reasonable estimate of, 254 Indian growth example, 519

risk monetisation example, 169 analogy (valuation method), 518

experience curve, 279 annual average assumptions, 491

external risks, 173 basic concepts, 464â€“71

Black Scholes, 474, 476, 502, 516

failures (incorporation in plans), 154 cargo size flexibility, 517

fair market price, 144 cone of uncertainty, 480

fat-tailed risk, 176 decision trees

feedback loops, 109 basic concept, 509

Fence Treatment Inc swimming pool cover example, 509

plan valuation example, 135 feedstock purchase example, 495

understanding performance example, 137 financial options

value profile example, 137 similarities with, 471

finance charges first guess (start flexibility assessment with), 487

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