The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

CHAPTER 2

The Value Edge

Reap the Advantage of Disciplined Techniques

 

William J. Hass

CEO TeamWork Technologies

Shepherd G. Pryor IV

Board Resources

 

 

This chapter traces the evolution of valuation techniques and provides an overview of the challenges faced by analysts and investors. It includes advances by academics and practitioners in response to the problems with accounting based on generally accepted accounting principles (GAAP). Both academics and practitioners have benefited from years of experience and the availability of better data for model testing. This chapter briefly reviews the historical development of current financial theory and practice. It exposes many of the myths and simplistic solutions that have been used to explain the link between corporate intrinsic value and stock price. A review of the literature and current practices suggest that discounted cash flow (DCF) models are near a tipping point and are overtaking the frequently used shortcuts of accounting-based multiples.

Valuation shortcuts, simplistic solutions, and rules of thumb fail to explain how value is added at the strategic business unit (SBU) level. We describe how organizations move through a value journey as they gain greater insights on value building missed by simplistic solutions and popular rules of thumb. A wave of the future is in combining insight on business fundamentals and organizational culture with the power of DCF models, calibrated with extensive databases of market information. ...