Streetsmart Guide to Valuing a Stock

Streetsmart Guide to 
Valuing a Stock......Page 4
Copyright......Page 5
Contents......Page 8
Preface......Page 12
Acknowledgments......Page 16
Financial Flameout......Page 18
Good Companies ¡ª Hot Stocks ¡ª Ridiculous Prices......Page 19
The Investment Decision......Page 21
The 10 Principles of Finance......Page 22
Overview of the Book......Page 24
Notes......Page 28
CHAPTER 2 THE 10 PRINCIPLES OF FINANCE AND HOW TO
USE THEM......Page 30
Principle 1: Higher Returns Require Taking More Risk......Page 31
Principle 2: Efficient Capital Markets Are Tough to Beat......Page 38
Principle 3: Rational Investors Are Risk Averse......Page 46
Prices in the Short Run......Page 48
Principle 5: When Analyzing Returns, Simple Averages Are Never Simple......Page 51
Principle 6: Transaction Costs, Taxes, and Inflation Are Your Enemies......Page 53
Principle 7: Time and the Value of Money Are Closely Related......Page 57
Principle 8: Asset Allocation Is a Very Important Decision......Page 60
Principle 9: Asset Diversification Will Reduce Risk......Page 65
Principle 10: An Asset Pricing Model Should Be Used to Value Investments......Page 71
Summary......Page 73
Notes......Page 75
Introduction to Valuation......Page 78
DCF Stock Valuation......Page 80
We Caused the High- Tech Bubble......Page 86
Return to Stockholders......Page 89
Stock Price ¡ª Too High? ¡ª Too Low? ¡ª Just Right?......Page 94
Stock Valuation ¡ª Art, Science, or Magic?......Page 99
Stock Valuation Approaches: Fundamental,Technical, and MPT......Page 100
Stock Value, Stock Price, and Emotions......Page 105
Stock Value, Stock Price,and Analyst Recommendations......Page 107
When to Buy, When to Sell: Our Recommendation......Page 109
Where Do We Go Next?......Page 111
Notes......Page 112
Some Definitions Relating to Cash Flow......Page 114
The Free Cash Flow to the Firm Approach......Page 119
Why DCF and Not EPS?......Page 125
The Discounted FCFF Valuation Approach......Page 127
Microsoft ¡ª A Simple DCF Example......Page 132
Valuation—Growth versus Value, Large Cap
 versus Small Cap......Page 140
Notes......Page 141
The Five Chinese Brothers......Page 144
Growth Rates and the Excess Return Period......Page 145
Net Operating Profit Margin and NOP......Page 155
Income Tax Rate and Adjusted Taxes......Page 158
Net Investment......Page 160
Incremental Working Capital......Page 164
Free Cash Flow to the Firm......Page 168
Valuation Exercise: Estimating Free Cash Flow for Cisco......Page 169
Notes......Page 172
Don¡¯t Count Until You Discount......Page 174
WACC and Market Capitalization......Page 178
Estimating ConEd¡¯s WACC......Page 183
The Cost of Common Equity and Shares Outstanding......Page 184
The After- Tax Cost of Debt and Debt Outstanding......Page 191
The Cost of Preferred Stock and Amount Outstanding......Page 194
WACC Calculation ¡ª ConEd......Page 195
Balance Sheet Items in the Valuation Process:Our Recommendation......Page 196
Valuation Exercise: Cisco......Page 199
After the Cost of Capital ¡ª The Next Step......Page 200
Notes......Page 201
Save a Tree ¡ª Use the Internet......Page 202
The Internet and Investment Information......Page 203
Cash Flow Valuation Inputs ¡ª Easy to Find......Page 211
Cash Flow Valuation Inputs Requiring Estimation......Page 216
Cost of Capital Valuation Inputs......Page 217
Valuation Exercise: Cisco......Page 220
Notes......Page 221
Overview......Page 222
Valuing Citigroup ¡ª December 17, 2002......Page 225
Valuing Merrill Lynch ¡ª December 18, 2002......Page 237
Valuing Berkshire Hathaway ¡ª December 18, 2002......Page 245
Valuing Washington REIT ¡ª December 20, 2002......Page 254
Summary......Page 264
Notes......Page 265
Glossary......Page 266
Acronyms......Page 276
Bibliography......Page 278
Index......Page 282
About the Authors......Page 288