Equity Valuation, Risk, and Investment: A Practitioner's Roadmap

Table of contents

1. Cover
2. Contents
3. Title
4. Copyright
5. Dedication
6. Foreword
7. Preface
8. About the Author
9. Chapter 1: Introduction
   1. Theoretical Precision or Theoretical Resilience?
   2. Practical Difficulties as Well
   3. Overview of Our Analysis
   4. A Quick and Important Note on Mathematical Notation
10. Chapter 2: Inflation-Protected Bonds as a Valuation Template
    1. Formulas behind the Intuition
    2. TIPS versus Traditional Fixed-Rate Bonds: Measuring the Differences
    3. A Peek Ahead
11. Chapter 3: Valuing Uncertain, Perpetual Income Streams
    1. Mathematical Development of Unleveraged Firm Valuation
    2. What Does the Valuation Formula Tell Us about Sensitivity to Inflation?
    3. Sensitivity to Real Discount Rates and Growth Factors
    4. Comparison with a Traditional Model of Firm Valuation
12. Chapter 4: Valuing a Leveraged Equity Security
    1. Leverage in the Presence of Corporate Income Taxes
    2. From Theory to Practice
    3. Chapter 4 Supplement: Relationship between Leveraged Equity Discount Rate and Debt-to-Capital Ratio for Highly Leveraged Companies
13. Chapter 5: Case Studies in Valuation During the Recent Decade
    1. Case 1: Coca-Cola
    2. Case 2: Intel
    3. Case 3: Procter & Gamble
    4. Market-Implied, Inflation-Adjusted Discount Rates for Coca-Cola, Intel, and Procter & Gamble
    5. Case 4: Enron
    6. Tying Up the Package: Practical Lessons from All Four Cases
14. Chapter 6: Treatment of Mergers and Acquisitions
    1. Generalizing from the P&G/Gillette Example
    2. Applicability of the Results under Alternate Merger Terms
    3. Analytical Postscript 1: Common Stock Buybacks and Issuances Outside the Merger Framework
    4. Analytical Postscript 2: A Word on Executive Stock Option Grants
15. Chapter 7: A Fair Representation? Broad Sample Testing over a 10-Year Market Cycle
    1. Sample Descriptive Data
    2. Basic Valuation Results
    3. Predictive Strength of the Model for the Whole Period
    4. Predictive Strength of the Model for Subperiods
16. Chapter 8: Price Volatility and Underlying Causes
    1. Deriving the Formula for Price Changes
    2. Translating the Price Change Formula into Volatility Estimates
    3. Digression: Impact of Debt Leverage on Equity Volatility
    4. Obtaining the Volatility of the Underlying Variables
17. Chapter 9: Constructing Efficient Portfolios
    1. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part I
    2. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part II
    3. Extracting Expected Equity Returns from Observed Price/Earnings Ratios: Part III
    4. Creating Efficient Portfolios: Unconstrained Case
    5. Creating Efficient Portfolios: Case Where Asset Weights Are Required to Be Nonnegative
    6. Computing the Variance/Covariance Matrix Inputs
18. Chapter 10: Selecting among Efficient Portfolios and Making Dynamic Rebalancing Adjustments
    1. Reconciling Portfolio Desirability and Feasibility
    2. Turning Theory into Easily Calculated Results
    3. Adjusting for Changes in Long-Term Expected Returns on Common Equity
    4. Adapting to More General Changes in Risk-Adjusted Expected Returns
    5. Recapitulation and an Important Caveat
19. Chapter 11: How Did We Arrive Here Historically? Where Might We Go Prospectively?
    1. Crises of Confidence
    2. Some Answers Begin to Emerge
    3. What If Everyone Followed This Type of Model and Investing?
    4. Next Steps
20. Appendix A: Mathematical Review of Growth Rates for Earnings, Dividends, and Book Value per Share
21. Appendix B: Sustainable and Nonsustainable Inflation Rates
22. Appendix C: Deriving the “Equity Duration” Formula
23. Appendix D: Traditional Growth/Equity Valuation Formula
24. Appendix E: Adjustments Required to the Traditional Growth/Equity Valuation Formula to Preserve Inflation Neutrality
25. Appendix F: Brief Recapitulation of the Miller 1977 Capital Structure Irrelevance Theorem
26. Appendix G: Time Series Charts of Unleveraged, Inflation-Adjusted Discount Rate Estimates
27. Appendix H: Comparison of Volatility of Pretax and After-Tax Income
28. Appendix I: Relationship between Observed Price-to-Earnings (“P/E”) Ratios and Nominal Interest Rates
29. Appendix J: Additional Background on Mathematical Optimization Subject to Constraint Conditions
30. Appendix K: Derivation of Asset Class Covariances
31. Appendix L: Expected Return and Variance/Covariance Inputs Underlying Portfolio Examples
32. Bibliography
33. Index