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difficulty thereof, 199 top down & bottom up, 110

fish diagram project example, 451 valuation, 134

organisation and management Porter (Professor Michael)

Competitive Advantage, 116

alignment with sources of value, 264

basic concepts, 102 competitive advantage technique, 121, 264

Competitive Strategy (book), 115

corporate strategy, 100

flexibility value implications, 519 five forces model, 117, 174, 264

outsourcing, 469 McKinsey/GE matrix, 123

overarching risks, 425 supplier power, 119

overheads value chain model, 116, 174, 337

ABCDE valuation, implications thereof, 373 portfolio diversification

control of, 114 ability to take risk, 164

corporate, 114 basic concept, 160

inclusion in NPV analysis, 132 coin-tossing example, 160

scaffolding example, 132 correlations (effect of), 162

ownership (re principles of consolidation), 72 transaction costs (effect of), 165

portfolio screening tool, 124

P10 P90 range, see sensitivity analysis prepayments, 68, 84

P10 P90 tail valuation example, 505 present value (basic definition), 7

partner carry, 470 price war, 322

Principles of Corporate Finance, 184, 208, 217, 384

paving slabs example

inflation (inclusion of), 220 prism approach, 540

inflation, tax and working capital example, 224 probability distributions, 147

initial case study, 24â€“26 product life cycle, 279

Penman Stephen H, 185 profit

performance (understanding thereof) basic concepts, 65

basic concepts, 376 cash flow (link to), 69

Fence Treatment Inc example, 137 project evaluation (real life), 16

performance reports, 105 project life

perpetuity valuation formula, 42â€“43, 135, 237, 248, 357 basic concepts, 134, 232

pharmaceuticals company rules, 234

five forces example, 118, 121 consistent assumptions, 233

pipeline size example (flexibility valuation), 502 cost assumptions (consistency with), 233

Plan, Do, Measure, Learn property development example (grand design)

basic concept, 109 debt & risk illustration, 50

flexibility valuation implications, 520 initial example, 24

full-cycle economics, 208 property plant & equipment, 67

Gates Foundation example, 533 provisions, 68

improving assumptions, 155 put option, 471

622 Index

real options, see flexibility valuation company as series of projects example, 128

real return, link to nominal return, 33 inflation effect example, 226

receivables, trade, 68 link to IRR, 128

redundancy costs, 236 Russian coffee shop example, 194

residual value

basic concept, 234 safety margin (over zero NPV), 388

recommended methodology, 235 scaffolding example

returns (seductive siren), 384 company as series of projects example, 126

reverse engineering, 514, 556 components of value analysis, 267

Rhett Butler, 312 initial case study, 84

rights issue, 46 sensitivity chart example, 159

risk, see also assumptions and expected values sources of value analysis, 288

archetypes, 448 Scholes Myron S, 462

brainstorm approach, 175 scorecard (value against non-value players), 559

capacity, 57, 146, 164 scrap value, 236

search costs, see full-cycle economics

capacity (YMCC example), 252

check lists, 172â€“77 sector attractiveness, 101, 294

company check lists, 174 sector attractiveness and competitive position, 271

comprehensive risk framework, 175 security (of borrowing), 35

defining risk, 142 security market line, 168

definition by Monitor, 549 seductive sirens, 384

external, 174 sensitivity analysis

fat-tailed or thin-tailed, 176 basic description, 17, 156

financial, 173 choice of, 157

impact x probability, 169 definition in standard methodology, 257

internal & external, 173 NPV or IRR, 157

managing risk, 170 P10 P90 range (type 1), 158

mitigation, 170 presentation of, 157

monetisation, 168â€“72 scaffolding example chart, 159

operational, 173 types of sensitivity (1 2 or 3), 158

optimisation in the face of risk, 170 zero NPV case (type 2), 158

overarching, 425 share of growth analysis, 323

share price, see company valuation

personal capacity to take risk, 349

probability distributions, 147 shareholder value

risk capacity, 164 continuous good surprises, 380

sensitivities, 448 rules of the game, 379

success values, 153 shareholdersâ€™ perspective of risk, 167

trade-off with reward, 48, 166 treadmill effect, 380, 551

types of risk (3 in all), 175 shareholdersâ€™ plan, 379

shares, see equity

U-shaped valley, 171

uncertainty, 348 Sharpe William

risk-free rate Capital Asset Pricing Model, 49

basic concept, 50 Nobel prize, 395

CoC component, 400 skew, 148, 176

real, 401 small companies, 165

risk/reward trade-off sources of value

Capital Asset Pricing Model, definition of risk, 166 acquisitions (how to create value), 325

Capital Asset Pricing Model, introduction to, 49 additivity of value, 266

four steps, 423 alone (donâ€™t go out alone), 335

overall approach, 423â€“33 application

what the CoC tells us, 460 design stage, 309

ROCE (or ROACE) detailed design stage, 293

basic concept, 78 getting started, 315

bridge between accounts and value, 133, 269 implementation map, 292

623 Index

implementation stage, 294, 313 startup companies, 379, 531

initial case study (scaffolding), 288 step changes, 380

operation stage, 294, 314 steps (from profit to cash flow), 70

options identification stage, 293, 303 stock profits, 226

stocks, see inventories

standard categories of SoV, 300

Stocks, Bonds, Bills and Inflation, 400

strategy stage, 293

basic concept, 260 strategic investments, 469

brand, 278, 328 strategy

buying success, 324 basic concepts, 100

calibration of assumptions, 263, 310, 330 business strategy, 100

competition (nature of), 287 change in, 215

competitor benchmarking data, 270 changing strategy, 103

components of value, 267 corporate strategy, 100

cost curves, 272â€“78 leverage (maximum point of), 567

diagram (introduction to), 261 strategy to actuals, 108

full-cycle and point-forward economics, 281 strengths and weaknesses, 101

government controls, 283, 331 stuck in the middle, 122

how to apply, 288 substitutes (threat of), 120

how to win, 318 success value

individuals, 338, 340 basic concept, 153

introduction, 258 company valuation, 355

leveraging sources of value, 264 flexibility valuation, 487

look downwards, 321 planning for success, 153

McKinsey/GE matrix, 263 property development example, 154

non-value players, 534 swimming example, 153

sum of all years technique, see company as series of

overall summary, 562

project life cycle, 338 projects

sunk costs, see also full-cycle economics

quantification, 269, 311

regulation, 331 basic concept, 132

regulators, 286 sources of value, 312

search costs, 327 supplier power, 119

senior management support, 316 sustaining investment

so what â€“ implications of SoV, 317 basic concept, 203

sunk costs, 282 control of, 205

what is the SoV technique, 259 justification, 204

why the technique works, 265 legislative changes, 206

Yellow Moon Chemical Company example, 304 valuation (impact on), 355

sports shirts example swimming example (success value), 153

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