Investment Valuation (tools And Techniques For Determining The Value Of Any Asset)

Updated edition of the definitive guide to investment valuation tools and techniques

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset delves into valuation techniques for a variety of different asset classes, including real options, start-up firms, unconventional assets, distressed companies and private equity, real estate, and many more, and explains how to choose the right model for any given asset valuation scenario. The models are presented with real-world examples so as to capture some of the problems inherent in applying these models, with discussion of differences and common elements between the models to provide readers with a holistic understanding of the subject matter.

Written by a professor of finance who is widely regarded as one of the best educators and thinkers on the topic of investment valuation, this newly revised and updated Fourth Edition explores topics including:

• Understanding financial statements, the basics of risk, and tests and evidence for market efficiency
• Estimating risk parameters and costs of financing, terminal value, and equity value per share
• Using scenario analysis, decision trees, and simulations for probabilistic approaches in valuation

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset is an essential resource for all investors and students of financial markets seeking an all-in-one guide to expand their valuation knowledge and make better investment decisions.

Preface xv

Chapter 1 Introduction to Valuation 1

A Philosophical Basis for Valuation 1

Pricing versus Valuation 2

The Bermuda Triangle of Valuation 2

Market Efficiency 6

The Role of Valuation 7

Conclusion 10

Questions and Short Problems 10

Chapter 2 Approaches to Valuation 13

Intrinsic Valuation 13

Pricing or Relative Valuation 21

Contingent Claim Valuation 25

Conclusion 27

Questions and Short Problems 27

Chapter 3 Understanding Financial Statements 29

The Basic Accounting Statements 29

Asset Measurement and Valuation 31

Measuring Financing mix 38

Measuring Earnings and Profitability 44

Measuring Risk 50

Other Issues in Analyzing Financial Statements 56

Conclusion 57

Questions and Short Problems 58

Chapter 4 The Basics of Risk 61

What Is Risk? 61

Equity Risk and Expected Return 62

Alternative Models for Equity Risk 74

A Comparative Analysis of Equity Risk Models 80

Models of Default Risk 81

Conclusion 85

Questions and Short Problems 85

Chapter 5 Option Pricing Theory and Models 91

Basics of Option Pricing 91

Option Pricing Models 94

Extensions of Option Pricing 109

Conclusion 110

Questions and Short Problems 111

Chapter 6 Market Efficiency—Definition, Tests, and Evidence 113

Market Efficiency and Investment Valuation 113

What Is an Efficient Market? 114

Testing Market Efficiency 118

Cardinal Sins in Testing Market Efficiency 123

Some Lesser Sins That Can Be a Problem 124

Evidence on Market Efficiency 125

Time Series Properties of Price Changes 125

Market Reaction to Information Events 133

Market Anomalies 137

Evidence on Insiders and Investment Professionals 146

Conclusion 152

Questions and Short Problems 153

Chapter 7 Riskless Rates and Risk Premiums 157

The Risk-Free Rate 157

Equity Risk Premium 162

Default Spreads on Bonds 182

Conclusion 185

Questions and Short Problems 186

Chapter 8 Estimating Risk Parameters and Costs of Financing 189