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Estimating retirements
Recall from Appendix B the gross plant identity (using current dollars): BEG PLANT + CAPX - RETIREMENT = END PLANT
Under the assumption of a constant, real historic growth rate (g), then RETIREMENT = CAPX/[1 + g] L
where L is gross plant life. Appendix B contains the following expression for CAPX in terms of END PLANT (note that g needs to be non-zero):
END PLANT
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When dealing not just with gross plant but also total gross operating assets, released non-depreciating assets are treated as retirements.
Glossary
Assumptions
To emphasize the importance of continually seeking and needing feedback information in order to test and judge the reliability of conceptual beliefs and to correct erroneous beliefs, we use 'assumptions' as a synonym for 'knowledge' when discussing what knowledge is and how it improves. In other contexts, 'assumption' has its usual meaning — purported facts or causal descriptions accepted as reliable with little or no supporting empirical evidence for such.
Assets, operating assets
The firm's assets are divided into operating assets used in the firm's businesses and non-operating assets. CFROIs and net cash receipts are based on operating assets. Many accounting and inflation adjustments are made to standard financial-statement data in calculating an amount of CFROI-operating assets.
CAPM and CAPM/beta
CAPM is shorthand for 'capital asset pricing model.' The CAPM specifies the expected return on a specific stock as the expected return on a risk-free asset plus a risk premium which is the product of 'beta' multiplied by the estimated excess return for the general stock market over the risk-free rate. 'Beta' is a measure of the sensitivity of a specific stock's price to movements in the general stock market. Betas greater than 1.0 indicate greater sensitivity than the market, and betas less than 1.0 indicate the opposite.
CFROI
CFROI is an abbreviation for 'cash flow return on investment' and is used to refer to both (1) the complete CFROI valuation model and (2) the CFROI performance metric, which is a key component of the model. The CFROI performance metric is an approximation of the average real internal rate of return earned by a firm on all its operating assets.
Glossary
345
Company-specific risk differentials
In the CFROI model, a real risk differential — positive, negative, or zero — is added to the real market discount rate to determine a company-specific real discount rate. Risk differentials are related to the company's size and financial leverage. The company-specific real discount rate is used to calculate a present value of the firm's forecasted net cash receipts stream.
Competitive life cycle and fade
A well-accepted proposition in economics is that competition, over the long term, tends to force returns toward the average. The CFROI model incorporates this effect of competition in the form of baseline forecasts for above-average CFROIs to fade downward over time and below-average CFROIs to fade upward over time; and similarly for above-average growth and below-average growth. Fade rates for CFROIs and growth are key determinants of NCRs.
Constant dollars
Dollar (or other monetary unit) amounts for different years are expressed in dollars (or other monetary unit) having the same purchasing power.
Cost of capital, or discount rate
'Cost of capital' is the rate of return investors demand from companies for the use of their capital. As such, cost of capital also is the discount rate used for calculating the present value of a stream of future receipts. Types of cost-of-capital rates include weighted-average cost of capital, equity cost of capital, and debt cost of capital. In the CFROI model, the cost of capital, or discount rate, is a real rate and is the weighted average of a real debt rate and a real equity rate.
Current dollars
Dollar (or other monetary unit) amounts for different years have the purchasing power of the dollar (or other monetary unit) for the year for which the amount is recorded.
Discount rate
See Cost of capital.
DualGrade®, DualGrade® performance scorecard
DualGrade® is a two-grade summary grading system for companies which is based on the CFROI model. One grade is for expected
CFROI Valuation: a total system approach to valuing the firm
near-term CFROI economic performance level and the other is for the percentage of a company's total value attributable to future investments. The DualGrade® Performance Scorecard presents selected other measures along with dual grades. DualGrade® is a trademarked product of HOLT Value Associates.
Fade
See Competitive life cycle.
Growth/sustainable growth
The CFROI valuation model uses a competitive life-cycle perspective in which NCRs forecasted to come from future investments are driven by forecasted ROIs on incremental projects and forecasted amounts invested in them. For valuation purposes, 'growth' is the year-by-year amounts invested in these future projects. The rate of such growth over the long run closely approximates rate of growth in the firm's operating assets. With a given CFROI level, sustainable growth can be calculated by assuming no change in dividend payout or capital structure, and this can be used to estimate the year-by-year amounts invested in future projects.
Historical dollars
Dollar (or other monetary unit) amounts for a given year are the summation of different-year current-dollar amounts; thus they are amounts of mixed-purchasing-power dollars (or other monetary unit).
Inflation-adjusted, or real, magnitudes
Inflation is a rise in the general level of prices, and indicates a decrease in the value of the monetary unit. We make adjustments to all quantities measured as monetary amounts in order to eliminate recorded changes owing solely to inflation. Measurements adjusted for changes in the values of monetary units are called inflation-adjusted, or real, magnitudes. We use the terms interchangeably. Similar adjustments would be made if deflation were to occur.
Internal rate of return (IRR)
An IRR is the discount rate that equates the cost for an investment with the subsequent net cash receipts over a number of years that result from the investment.
Managerial skill
Skill is observable as performance. A firm's managerial skill is revealed by the extent over a longer term that: (1) customers believe
Glossary
347
they have received high value from the firm's products or services, (2) the average competitor in the industry is unable to reproduce what the firm delivers to customers, and/or to achieve its level of resource efficiency, and (3) larger investments are made while the firm continues to earn returns on those investments well above its cost of capital.
Market-derived discount rate, or market rate
In the CFROI model, the 'market rate' is a real rate derived by a procedure consistent with the model and incorporating the market's valuation of an aggregate of firms. Since valuation at any given time is based on expectations of receiving a stream of future receipts, the market-derived discount rate is forward looking.
Model
'Model' is synonymous with 'conceptual framework' in our usage. By these terms we mean a posited causal description of the key components to valuation and the relationships among them. We do not use model in the sense of a set of mathematical equations for calculating the 'right' price of individual common stocks.
Net cash receipts (NCRs)
On an intuitive level, a firm's net cash receipt for a time period is the cash inflow less the cash outflow. Outflows are needed to make the investments and conduct the operations which will eventually provide additional inflows. Hence, the value of the firm is the present value of this net cash receipt stream. Also, the CFROI model separates the forecasted NCR stream into two components: NCRs from existing assets and NCRs from future investments.
NCRs are payments to both debt and equity capital suppliers. They are in constant dollars and have included the payment of corporate taxes and the benefit of interest payments being tax deductible. Hence, they should be discounted with a real weighted-average discount rate which does not require an adjustment to the real debt rate to capture the tax-deductibility-of-interest benefit.
Present value factor
To calculate the present value of a future sum, the sum is divided by (1 + discount rate) raised to a power equal to the number of periods between the period of the future sum and the period for which the present value is calculated. To illustrate, if the discount rate is 10 per cent and the sum to be present-valued is 3 years into the future, the divisor would be (1.10) 3 , which is 1.331. To convert a divisor into
CFROI Valuation: a total system approach to valuing the firm
a multiplier factor, take its reciprocal: in the illustration, 1/1.331, which is 0.751. Any sum to be present-valued at 10 per cent for a 3-year period would be multiplied by this factor.
Real magnitudes
See Inflation-adjusted magnitudes.
Relative wealth index
Trends in the Relative Wealth Index indicate how a firm's total shareholder return (dividends plus price change) compares to the total return from the general market (the S&P 500 in the United States). A flat trend in the Index implies total shareholder return matching the market. Upward or downward trends indicate outperforming or underperforming the market.
Residual income (Rl)/residual income model
RI is what a firm earns in excess of that required to compensate owners for the cost of using their capital. In the standard academic 'residual income model', a firm's RI for any period is calculated as the product of the 'spread' between the firm's return-on-equity and its equity-cost-of-capital multiplied by the firm's accounting-equity-value at the beginning of the period. The firm's warranted equity at a point in time, is the sum of accounting equity value plus the present value of the stream of forecasted annual RI amounts for a selected number of years. At the end of the selected period, the RI for the final year is typically assumed to continue in perpetuity, which permits an easy present-value calculation of the assumed perpetuity RI. EVA® (economic value added) is a version of RI which uses total capital instead of equity capital, a variety of accounting adjustments, and a nominal weighted average cost of capital via CAPM/beta.
ROI
Whereas the CFROI metric is an approximation of the average real internal rate of return earned by a firm on all its operating assets, ROI is the real internal rate of return earned on incremental investments, or projects.
Setting the line
With an actual price of a company's stock and a forecasted company CFROI level for one year in the future, the CFROI model can be used to
Glossary
349
infer the market's expectation for the company's CFROI performance at year 5 in the future. In a graphical display of CFROIs, a line can be drawn connecting the +l-year and -f-5-year CFROIs. This is called 'setting the line'. If the firm delivers CFROIs higher or lower than the line, its stock price will likely outperform or underperform the market.
Sustainable growth
See Growth.
Total system, total system approach
Total system approach, as used in the book's sub-title, refers to the need to understand how variables key to firms' values are related, including how non-accounting variables produce the results reflected in accounting statements. This approach provides, in the form of the CFROI model, a template for nurturing critical thinking about measuring firms' economic performance, making forecasts of future economic performance, and calculating warranted values.
Warranted equity value per share
A firm's warranted equity value per share is based on subtracting the estimated market value of debt, preferred stock, and minority interest from the total-firm's warranted value and dividing that sum by common shares outstanding, adjusted for dilution.
Warranted value
In general, a 'warranted value' is a value of a company calculated from use of a valuation model. A warranted value should not be uncritically interpreted as the right value. In the case of the CFROI model, a firm's warranted value is the sum of (1) the net present value of forecasted NCR streams attributable to the firm's existing operating assets and to expected future investments in operating assets, both discounted by the company's real discount rate and (2) the realizable after-tax value of the firm's non-operating assets.
Abbott Laboratories, 184, 206
Life cycle, 30-1 Accounting-based data, 7, 195-7,
210, 219-21, 226-8, 230-5 Accrual accounting, 67, 108 Adaptability, as a managerial skill,
226-7
Advanced Micro Devices, 164
Life cycle, 50-1 AIMR (Association for Investment
Management and Research),
106
Air Products & Chemicals, 149-50
Life cycle, 38-9 American Standard, 230
and Demand Flow® Technology, 221-3 Analog Devices, 228-30
Life cycle, 48-9 Apple Computer, Life cycle, 54-5 Asset growth rate, see Growth;
Sustainable asset growth Asset life, 79, 112-14, 139 Assets:
beginning-of-year (BOY) value estimates, 108, 169-71, 178-9
operating/non-operating, 111, 139, 344
value of existing, 68, 69, 75-6, 175-7, see also Intangible assets; Gross plant: Current dollar calculations, Hershey Foods Corporation Assumptions, and knowledge, 3-4,
191, 193-4
definition, 344 AT&T, 5-6
Atlas Copco, Life cycle, 46-7
Beginning-of-year (BOY) assets, see Assets
Benchmarks, 13, 175
Bethlehem Steel, Life cycle, 60-1
Bonds: and DCF pricing, 66 historical real achieved returns, 85 and risk-differential concept, 99 S&P A-rated yields, real and nominal, 95
Brand names, see Intangible assets
Briggs & Stratton, Life cycle, 58-9
Brown, J.S., on feedback and strategies, 224-5
Campbell Soup, 153 Capital asset pricing model
(CAPM)/beta method, 3, 189-202
in DCF valuation, 10, 84
definition, 344
equity cost of capital, 197-8
equity premium problems, 198-202
origin of, 192-4
portfolio vs. firm approach, 182-3 Capital gains tax rate, US, 97 Capital structure, 65, 67, 93,
139-42, 170-1, 181, see also
Financial leverage Capitalize and amortize approach,
200
Cash flow return on investment (CFROI) performance metric: as economic performance, 3, 9, 14-18
comparable with discount rate, 83, 88
compared with other metrics, 5-6, 17, 138-9, 159-60, 183, 196-7, 204, 206
351
definition, 13, 17, 79, 344 example calculation, actual firm, 110-39
example calculation, model firm,
69-81 long term average, 22-3 measurement units, 109-10, see
also Cash flow return on
investment (CFROI) valuation
model; Life cycle; Return on
investment, ROI Cash flow return on investment (CFROI) valuation model; compared with other models,
189-213 comprehensive calculations
required, 106-10 example calculation, actual firm,
168-9, 172-81 example calculation, model firm,
64-78
improvement process, 211, 235
map of major components, 65, 110, 162, 185
pricing equation, 66, 68, 88
real magnitudes, 9
summarized, 9-12, see also Cash flow return on investment (CFROI) performance metric; Discount rates; Fade; Growth; Life cycle; Net cash receipts Caterpillar Inc., 226-7 Chart Industries, 157 Clark and Fujimoto, on the
economics of customer
satisfaction, 235 Coase, R., on abstractions in
economics theory, 192 Coca-Cola, performance, 148, 149,
174-5, 184, 206 Collins and Porras, on visionary
companies, 218 Company-specific discount rate, see
Discount rates Competitive life cycle, see Life cycle Constant dollars, definition, 109,
345
Conventional debt, 140 Cooper Tire & Rubber, Life cycle, 56-7
Coors, Life cycle, 62-3
Cost of capital, definition, 345, see
also Discount rate Current dollar (C$), definition, 110,
345
Current dollar (C$) calculations, Hershey Foods Corporation: depreciating assets, 111-12, 114,
117-19, 123-4 gross cash flow, 111-12, 133-8 gross leased property, 118-19 gross operating assets, 111-12,
114, 124 gross plant inflation adjustment,
117
inventory, 130 land, 130-1
non-depreciating assets, 111-12, 124, 129-33
Dana Corp, Life cycle, 52-3
Danaher Corporation, 121
Debt rate, real, see Discount rate
Deductive logic, 193-4
Deere & Co., 148-9
Deflator Index, 94
Dell Computer, 153
HOLT Alliance Services, 237
Demand Flow® Technology, at
American Standard, 221-3 Demanded returns, see Discount
rates Discount rates:
CAPM/beta equity cost of capital, 189-90, 196-202
company specific, 10, 83-8, 147
comparable with CFROI metric, 82, 88
Donaldson Company example, 171 effects of taxes and inflation,
86-8, 97-9, 250-2 investors' demanded, 84-8, 97-9 market-derived, 10, 82-104, 347 real debt, 86, 93-7 real equity, 93, 95-99, 250-2 risk differentials, 10, 99-104 tied to valuation model, 82-4
Discounted cash flow (DCF), 9, 66 valuation models, 9-10, 64, 66, 68-9, 75-8, 196-7
Diversifiabie risk, 183
Index
Dollars, see Constant dollars;
Current dollars (C$); Historical
dollars Donaldson Company:
CFROI-model track record, 168-9
example CFROI valuation calculation, 172-82 Drucker, on assumptions and
failure, 223-4 DualGrade®, see HOLT's
DualGrade® Corporate
Performance Scorecard
Earnings, figures for valuation, 109,
112, 133 Earnings per share (EPS):
forecasts, 101, 164, 173
stock price reactions to, 137-8
valuation by, 5, 6 Earnings/book ratios, 17, 138-9,
159
Eastman Kodak, 148-9, 153 Economic performance, 13-15, 217-18
plausible forecast range, 154-5, 182-3
and share prices, 8 Economic Value Added (EVA®)
model, Stern Stewart & Co., 11,
159-60, 190-1, 196, 202-10 Edison Brothers Stores, equity risk
premium, 199-200 Edwards and Bell, 196 Efficient resource allocation, 216-18 Emerson Electric, 164
Life cycle, 32-3 Enron, 212
Equity discount rate, see Discount rates
EVA®, see Economic Value Added model
Existing assets, value of, 68-70, 74-6, 78, 88, 90, 145, 163, 347, 349
Donaldson Company example calculation, 173, 175-9, 181
Fade, 161-7, 173-9 baseline patterns, 91-3, 154-5,
157-8, 164, 174, 209, 244 and brand names, 230-1
and competitive life cycle, 18-21, 70, 345
empirical evidence for, 165-7
and setting the line, 144, 154-5, 157-8, 349
window, 144, 172-3, 207, 209 Fama and French, on explanatory
power of beta, 171 FAS 87, Employers Accounting for
Pensions, 124, 141 FAS 94, Consolidation of All
Majority-owned Subsidiaries, 125 FAS 106, Post Retirement Benefit
Liability, 131-2, 138 FAS 109, Deferred Tax Assets,
131-2 Fastenal, 153 Feedback:
and analyzing firm as total system, 6-7, 215, 225
and innovative environment, 223-5
and knowledge improvement, 2-5,
191, 214-15 and predictive accuracy, 193-5,
202
Feltham, G., 196
Finance theory, mainstream
methods, 189-95 Financial Accounting Standards
Board (FASB), 124 Financial leverage, 100-4, 171, 241 Financial subsidiaries, 125-9 Fortune magazine corporate
performance rankings, 159 Frankfurter and McGoun, on
finance methodology, 164-5 Free cash flow (FCF), 190, 212-13 Friedman, M., on the realism of
assumptions, 193, 246-7 Future investments, value of,
68-70, 74-8, 88-91, 145-6, 163,
169, 187, 196, 213, 347, 349
Donaldson Company example calculation, 173, 176-81
in residual income model, 196-7
Genentech, 149, 150 Goodwill, 105-6, 115, 119-22 in HOLT's database, 121-2, 206, see also Intangible assets Government policy, 216-18
353
Gross plant inflation adjustment, 115-18
Growth, 10, 13, 21, 161-9, 206 definition, 346
historical, for inflation mark-up of
plant, 117 historical, for estimating debt
value of leased property, 140,
see also Sustainable asset
growth
Harley-Davidson, 148, 149 Hasbro, 149, 150
Haugen, R, on finance theory, 195 Heartland Express, 153 Hechinger, equity risk premium, 199, 201
Helix Technology Corporation, 158 Hershey Foods Corporation:
balance sheet, 107
CFROI calculation example,
110-14, 117-19, 123, 129-38, 140-2
Life cycle, 40-1 Hewlett-Packard, 219
Life cycle, 28-9 Hillenbrand Industries, 127-9 Historical dollars, definition, 110,
346
HOLT's Backtest Files, 101, 108, 181-2
HOLT's CFROI valuation model, see
Cash flow return on investment
(CFROI) valuation model HOLT's DualGrade® Corporate
Performance Scorecard, 11,
143-60
comparison with other scorecards,
159-60 definition, 346
expected near-term CFROI, 145 industry data, 151-2, 256-8 % Future, 145
for United States, (December
1997), 255-342 USA 2000 Scorecard explanation,
147-8
using dual grades, 148-53 HOLT's Line Item Valuation Model
(LIVM™) software, 173, 236 HOLT/ ValueSearch™:
database, 23, 146, 172-3, 243
firm-specific risk differentials, 102-3
forecast CFROI and goodwill, 122, 206-7
and stock price displays, 207 and user fade patterns, 174, 207
Inflation: adjustments, 9, 14, 93-7,
109-10, 253-4, 346 effects of, 86, 97-9, 197-8, 241, 243, see also Current dollar calculations, Hershey Foods Corporation Intangible assets, 8, 119, 121-2, 230-4, 236, 244 adjusted, 123-4, see also Goodwill Intellectual capital, 232 Internal rate of return, IRR, see
Return on investment, ROI International Business Machines,
Life cycle, 24-5 Investments, value of future, see
Future investments, value of Investors demanded returns, see Discount rates
JLG Industries, 155-7 Jensen, M., 212
Johnson and Broms, on how work is done, 227-8
Kmart, 149, 150
Knowledge, 1-6, 191, 223, 238-9, 246, see also Assumptions, and knowledge; Finance theory, mainstream methods, Learning organizations
Land, 111, 113, 130
Lean manufacturing, lean processes,
121, 153, 155-7, 221-3 Learning organizations, 23-5,
228-30, 234-5 Leased property, current dollar (C$)
gross, 92-3 Lee, C, 196
Life cycle, competitive life cycle, 18-63, 70, 209 definition, 9, 345
Index
Donaldson Company example,
168, 173-9 examples, 21-63, 154, 156, 157,
159
perspective on earnings surprises,
187-8 stylized, 18-21 see also Fade Lincoln Electric Company, bonus and piece-rate scheme, 220-1
Mainstream finance valuation
method, see Finance theory Managerial skill, 9, 13, 18-19, 145,
164, 212-13, 214-18
adaptability, 226-8
definition, 347
innovative environment, 223-5 learning organization, 228-30 total system efficiency, 219-23 vision, 218-19, see also Life cycle and Fade
Mannesmann, Life cycle, 34-5
Market expectations, see Discount rates; Fade; Return on investment; Shareholder return
Market-derived discount rates, see Discount rates
Market-to-book ratio, 99
Markowitz, H., 192
Maximizing shareholder value, 3, 216-18
Miller and Modigliani, 240
Miller and O'Leary, on the factory as a laboratory, 226-7
Mine Safety Appliances Co., 155-6
Model, definition, 347
Monsanto, 148-9, 153
Net cash receipts (NCR), 3, 14-15, 105
capital suppliers' and firms'
perspective, 66-8 and DCF/CFROI arithmetic,
64-81 definition, 342
from existing assets and from future investments, 68-9, 88-9
forecasts/forecasting, 9-10, 91-3, 98-100, 101, 163-4, 171-2, 207
long term forecasts, 161, 188
and market-derived discount rates, 89-92
market expectations, 207-8, 240
model-firm example, 69-81, see also CFROI valuation model, map of major components Net present value, NPV, see Present
value
Net working capital (NWC), 67-8, 70-5
Nintendo, Life cycle, 36-7 Nucor, 212
Ohlson, J., 196
Operating leases, as assets and
debt, 118-19, 140 Operating/non-operating assets, see
Assets, operating/non-operating
Penman, S., 196 Performance; importance of measurement,
17-18, 217, 234-5 and results from business
processes, 221-31 valuing expected, 161-81, see also CFROI performance metric Personal tax rates, see Discount
rates, effects of taxes and inflation Philip Morris, 148, 149 Polaroid, 153
Pooling vs. purchase accounting, see
Goodwill Portfolio vs. firm approach, 182-3 Preferred stock, 142 Preinreich, G., on offsetting
accounting biases, 195-6 Present value (PV) or Net present
value (NPV), 64, 89-90, 197,
212-13
of existing assets, 76, 177 of future assets, 77-9, 178, 180 present value factor, 76-8, 177-8, 180, 347 Price-to-earnings ratio, 5-6, 99, 187 Pricing equation, see Cash flow return on investment (CFROI) valuation model, map of major components and pricing equation Project life, 70, 80, see also Asset life Projects, firm as portfolio of, 69 Purchase vs. pooling accounting, see Goodwill
355
Real asset growth rate, see Growth Real equity rates, see Discount
rates, real equity Real magnitudes, see Inflation,
adjustments Real wealth indices, achieved
historical returns, 84-6 Relative Wealth Index, 22-3, 348
example companies, odd numbered pages, 25-63, 154, 156-8, 168 Replacement-cost accounting, 109 Residual income (RI), RI valuation
model, 11, 189, 195-202
use of CAPM equity cost of capital, 197-202
definition, 348
history in accounting, 195-7, see also Capital asset pricing model; Economic Value Added model; Valuation models, evaluation criteria
Resource allocation, efficient, 1, 216-18
Return-on-capital-employed (ROCE),
118, 133-9, 202, 206, 231 Return on investment (ROI), 13-19, 68-71, 80, 111, 204, 211, 231 achieved real, 14, 208 definitions, 14, 17, 209, 349 for Donaldson in future years, 173-5, 178-9, see also Cash flow return on investment (CFROI) performance metric; Shareholder return Revaluations, 117-18 Risk, diversifiable/undiversifiable, 182-3
Risk differentials, see Discount
rates, risk differentials Risk premium, see Capital asset
pricing model, equity premium
problems ROI, see Return on investment
Scania, and the spirit in the walls, 227-8
Setting the line, definition, 349. see also Fade, and setting the line
Share repurchase programs, evaluation of, 184-7
Shareholder return, 21, 84-6, 155, 159, 183, 240, 340, see also Relative Wealth Index
Sharpe, W., 192, 193
Stakeholders, 214, 216-18
Stanley Works, 154-5
Stata, R., on learning organizations, 228-30
Stigler, G., on effect of competition
on returns, 18 Stock market, and feedback, 225,
see also Feedback Stock price volatility, as risk, 182-3,
197-202
Stock prices, value, 1-2, 8, 19, see also Warranted share price, value
Sustainable asset growth, 2, 161, 168-73, 175, 178, 346, see also Growth
Taxes, see Discount rates, effects of
taxes and inflation Testing assumptions, see
Assumptions, and knowledge;
Finance theory, mainstream
methods Thermo Electron, spinoffs of
early-stage businesses, 232 3M's 15 per cent 'skunk works'
policy, 231-2 Total system, total system approach,
1-2, 6-8, 19, 84, 162, 184, 190,
211, 215, 225-37
definition, 349, see also Knowledge Total-firm warranted value, see
Warranted share price or value Toyota, style of lean manufacturing
and processes 121, 153, 156-7,
221-3
United Kingdom, and plant
revaluations, 117-18 Upside potential of stock, and
downside risk, 182-3, 209
Valuation models:
and accounting ratios, 5, 99,
138-9, 187 ease of implementation, 138-9,
210-11 evaluated by six criteria, 190,
202-11
Index
accuracy, 207-8
identification of key issues, 206-7 insights from firm's track records,
204-6 need for, 1-3
plausibility judgements, 14, 204, 208-9
process for model improvement, 211
see Capital asset pricing model (CAPM)/Beta method; Cash flow return on investment (CFROI) valuation model; Economic value added (EVA®) model, Stern Stewart & Co.; Residual income (RI), RI valuation model Value of existing assets, see Existing
assets, value of Value of future investments, see
Future investments, value of Visionary companies, 218
Wal-Mart Stores;
and assessing upside
potential/downside risk, 209 CAPM/beta equity risk premium,
199-200, 202 EVA® track record, 204-6
and free cash flow, 212
Life cycle, 26-7 Walker, D., on selecting a valuation
model for corporate use, 210 Wallman, S., on accounting
treatment of intangible assets,
233-4
Warranted equity value per share, 275
Warranted share price or value: in CFROI valuation model map,
65, 110, 162, 185 comparison with actual, 181-2 definitions 111, 196-7, 239, 349 example, actual firm, 161-2,
172-82 example, model firm, 65, 66,
68-70 high-low range, 183 pricing equations, 66, 68, 88, 196-7 Whitbread PLC: Life cycle, 42-3 plant revaluations, 117-18 Wrigley, 153 Life cycle, 44-5
Yield to maturity, 66, 86
