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Yellow Moon Chemical Company example, 248 growth value

finance pool basic concept, 500

availability of capital, 55, 58 check list, 484

basic description, 54 Indian growth opportunities example, 500

effect of excessive risk, 56 strategy (importance thereof), 500

effect of shortage of money, 55 land value, 470

valuation implications, 344 mapping decisions and uncertainties, 487

financed cases me too flexibility, 490, 496

basic approach, 241 Monte Carlo simulation, 507

circularity in logic, 242 more sophisticated assumptions, 491

debt & risk illustration, 51 objectives and boundaries, 485

619 Index

oil production/ pipeline size example, 502 garbage in = garbage out (GIGO), 354

organisational capability requirement, 519 Gates (Bill & Melinda Gates Foundation)

partner carry, 470, 508 introduction, 526

Plan, Do, Measure, Learn, 520 limited life of Foundation, 546

process, 479â€“522 Plan, Do, Measure, Learn example, 533

reverse engineering, 514 gold bars problem, 236

risk monetisation goodwill, 67

basic concept, 498 Gordon growth model, 43

grand design example, see property development

pump reliability example, 498

shut down valuation example, 492 example (grand design)

single path into the future (not a), 480 Green Book (HM Treasury), 4, 4

steam cracker (feedstock flexibility) example growth

feedstock flexibility valuation, 477 benefits from growth, 453

initial summary, 464 costs, 233

reduced demand example, 488 effect on funds flow, 131

tail (valuation of), 502 growth imperative, 115

toolkit, 479â€“521 impact on ROCE, 129

tools (list of), 491 seductive siren, 384

types of flexibility, 467, 483 Gulf War effect, 407

when flexibility matters, 482

which flexibilities to value, 490 HBOS (equity return assumptions), 411

focus (generic strategy), 122 hurdle rates (effect of), 454

foreign currency effects

basic principles, 73 Ibbotson Associates, 400

dollar/yen example, 34 IBM (beta example), 408

economic modelling, 230 immune system (of organisations), 107

flexibility valuation, 516 incremental analysis, 191

functional currency, 231, 255 incremental cash flow

inflation, 229 basic concept, 20

London Marathon currency example, 73 definition in standard methodology, 253

realised and unrealised, 73 Indian growth example

full-cycle economics extra costs effect, 519

basic concepts, 207â€“17 flexibility valuation example, 500

calculation method, 213 inertia, organisational, 107

interpretation, 215 inflation

new product launch (drug example), 209, 216 basic concepts, 218

overheads, 208, 211 cost of capital effect, 218

overspends, 207 paving slabs example, 220

Plan, Do, Measure, Learn, 208 stock profits, 226

ROCE as an indicator, 212 working capital effect, 83, 224

sanction request example, 208 initiatives, 107

sources of value implications, 282 insulation example (optimisation of thickness), 444

standard methodology, definition in, 254 insurance, 57, 166, 426

sunk costs, 208, 210 interest

tax (general principle), 211 basic principles, 29

tax (numerical example), 213 compound interest, 5

fund managers, 384 fixed or floating, 31

funds flow foreign currency effects, 34

basic definition, 75 inflationâ€™s impact, 33

difference from cash flow, 242 period of borrowing, 32

effect of growth, 131 pre- or post-tax discounting, 454

future value simple interest, 5

basic definition, 7 internal rate of return (IRR)

value profile over time, 137 basic definition, 16

620 Index

internal rate of return (IRR) (cont.) basic concept, 262, 275â€“81

calculation in birthday treat example, 19 donâ€™t be me too, 336

economic indicator (definition of), 256 evolution over time, 264, 299

economic indicator (use as), 17 flexibility valuation, 490

link to ROCE, 128, 134 government control, 283

not additive, 21 return (choice of), 281, 298

International Financial Reporting Standards, 66 return (CoC change example), 441

inventories start-up companies, 532

basic description, 68 value map, 319

calculation method, 83 mean reversion, 346

investing activities (step from profit to cash flow), 70 Merton Robert C, 462

investment efficiency Microsoft, 44, 470

basic concept, 17 minority interests, 68, 93

economic indicator, 256 Modigliani Miller (MM)

investment grade credit rating, 38 implications for valuation, 344

iron ore, cargo flexibility example, 517 proposition 1 (introduction to), 53

monetisation of risk, 168â€“72

Jake (student), 5 Monitor (NHS regulator), 548

joint ventures Monte Carlo analysis

modelling issues, 237 basic concept, 239

Yellow Moon Chemical Company example, 305 company valuation, 355

junk bonds, 38 drawbacks, 240

expected value calculation, 428

killer reason, 544 flexibility valuation technique, 507

Koller, Goedhart and Wessels, 184 Moodyâ€™s, 36

KPMG, 405

nascent industry argument, 485

laggards, 276 net book value, 66

land value, 236, 470 net present value (NPV)

least-cost strategy, 122, 318 basic definition, 14

level playing field calculation via expected value assumptions, 151

basic concept, 193 economic indicator, 256

suggested standard methodology, 253â€“57 incremental and absolute, 191

why required, 253 new entrants (threat of), 120

liabilities, current, 68 Nobel prize

199 0 (Markowitz et al), 395

liabilities, non-current, 68

linear relationships, 150 1997 (Merton & Scholes), 462

liquidity non linearity, 240

assumption of, 476 non-financial items (valuation of), 553

projects compared with shares, 399 non-value players

Lloyds TSB (equity return assumptions), 412 availability of finance, 529, 544

loans, see debt basic concept, 523

London Business School coffee & tea facilities example, 553

Global Investment Returns yearbook, 410 continuous improvement (acceptability of), 550

London Marathon example (currency effect), 73 financing constraints, 537

long-term plan, 103 objectives, 534, 537

purpose, 528

market attractiveness, 124 risk aversion, 548

market price, willing buyers and sellers, 144 scorecard (against value players), 559

market survey (valuation thereof), 510 similarities with value players, 527

Mars (man from), 335 staff turnover reduction example, 553

McKinsey/GE matrix timing (of finance availability), 545

basic concept, 123 NOPAT, 78

sources of value (link to), 263, 271 Norman (rich Uncle), 5, 191

me too Normanâ€™s birthday treat example, 18, 191

621 Index

off balance sheet, 72 risk analysis, 174

oil sources of value analysis, 312

field development assessed against do nothing, 195 sustaining investment, 206

government control effect, 283 planning

platform example (flexibility value), 486 main components, 100â€“108

price assumptions (in a plan), 104 techniques, 115

price assumptions (ten possibilities), 144 plans

production uncertainty (pipeline size example), 502 annual plan, 105

shutdown flexibility, 517 controllable and uncontrollable variables, 104

operating activities (step from profit to cash flow), 70 feedback loops, 109

operating leverage, 433 Fence Treatment Inc plan valuation example, 135

optimisation flow through, 104

basic principles, 198â€“203 long-term plan (LTP), 103

case study (implications of optimisation), 447 plan period, 356

case study (selecting optimisation studies), 201 planning cycle, 108

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