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The Dark Side of Valuation - 2nd Edition
This web site is designed to support "The Dark Side of Valuation", the second edition. The publisher is Financial Times Prentice Hall. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. The supporting material includes:
  1. Illustrations: The excel spreadsheets backing up most of the illustrations in the book can be downloaded from this site.
  2. Readings: These are readings from business and academic publications that supplement the specific topic.
  3. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel 95 format, and can be used on either a Mac or Windows system.
  4. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
You can read the preface to the book by clicking here. If you are an instructor using this book, click here .

You can pick the chapter that you would like to go to, to see illustrations, solutions and other supporting material.
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12
Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18

Or you can pick the material that you are interested in.
Spreadsheets   Datasets References

Chapter 1: The Dark Side of Valuation
Topic Details
Readings The Dark Side of Valuation - The 1999 edition

Chapter 2: Intrinsic Valuation
Topic Details
Illustrations Illustration 2.1: Estimating Cash flows for a firm – 3M in 2007
Illustration 2.2: Estimating Cost of equity for a firm – 3M
Illustration 2.3: Estimating the Cost of Debt – 3M
Illustration 2.4: Estimating cost of capital – 3M
Illustration 2.5: Estimating Growth- 3M
Illustration 2.6: High Growth versus Terminal Value Assumptions: 3M
Illustration 2.7: A valuation of 3M
Data Sets
Spreadsheets fcfeginzu.xls: A general FCFE model for valuing equity
fcffginzu.xls: A general FCFF model for valuing firms
Readings
  1. Valuation Basics (courtesy of the Motley Fool)
  2. Why don't they teach you to invest like Warren Buffett?
  3. An open letter to Warren Buffett (from a non-admirer)

Chapter 3: Probabilistic Approaches to Valuation

Topic Details
Illustrations Illustration 3.1: Valuing a company with scenario analysis
Illustration 3.2: Valuing a biotech company with a decision tree
Illustration 3.3: Valuing 3M – Monte Carlo Simulation (Need Crystal Ball installed)
Data Sets  
Spreadsheets  
Readings Simulations, Decision Trees and Scenario Analysis: Probabilistic Approaches to Risk

Chapter 4: Relative Valuation
Topic  Details
Overheads Download as pdf file
Illustrations Illustration 4.1: Comparing PE ratios and growth rates across firms: Beverage Companies
Illustration 4.2: Revisiting the Beverage Sector: Sector Regression
Data Sets

pedata.xls: There is a dataset on the web that summarizes price earnings ratios and fundamentals by industry group in the United States for the most recent year
vebitda.xls: There is a dataset on the web that summarizes value to earnings multiples and fundamentals by industry group in the United States for the most recent yea

Spreadsheets eqmult.xls: This spreadsheet allows you to estimate the price earnings ratio for a stable growth or high growth firm, given its fundamentals.
firmmult.xls: This spreadsheet allows you to estimate firm value multiples for a stable growth or high growth firm, given its fundamentals.
Readings
  1. Malkiel on PE ratios
  2. Interest rates and PE ratios
  3. Low price to book ratios: Not always a bargain

Chapter 5: Option Valuation
Topic  Details
Data Sets optvar.xls: There is a dataset on the web that summarizes standard deviations and variances of stocks in various sectors in the United States
Spreadsheets optst.xls: This spreadsheet allows you to estimate the value of a short term option, when the expected dividends during the option life can be estimated.
optlt.xls: This spreadsheet allows you to estimate the value of an option, when the underlying asset has a constant dividend yield.
bstobin.xls: This spreadsheet allows you to estimate the parameters for a binomial model from the inputs to a Black-Scholes model.
warrant.xls: This spreadsheet allows you to estimate the value of an option, when there is a potential dilution from exercise.
Readings
  1. Making real options real
  2. Literature on real options in venture capital and R&D
  3. Real Options in Valuation
  4. Real Options and Business Strategy
  5. How much is flexibility worth?
  6. Get Real
  7. Reality Check: A skeptical look at real options
  8. The Real Power of Real Options

Chapter 6: A Risky Base: A Risky Riskfree Rate
Topic  Details
Illustrations Illustration 6.1: Currency mismatch effects on valuation
Illustration 6.2: Valuing in Mature Market Currency
Illustration 6.3: Valuing in the local currency
Illustration 6.4: Interest Rate views and Valuation
Data Sets T.Bill and T.Bond rates: 1928-Current
Spreadsheets  
Readings  

Chapter 7: Risky Ventures: Assessing the Price of Risk

Topic  Details
Illustrations

Illustration 7.1: Valuing 3M- Pre and post market crisis.

Data Sets histretSP.xls: Summarizes historical returns on stocks, T.Bonds and T.Bills going back to 1926.
ratings.xls: This dataset includes default spreads for bonds in different ratings classes.
ctryprem.xls: Contains the updated ratings for countries and the risk premiums associated with each.
histimpl.xls: Shows the inputs used to calculate the premium in each year for the U.S. market.
Spreadsheets implprem.xls: This spreadsheet allows you to estimate the implied equity premium in a market.
Readings
  1. Classic Rule of Risk Premium under attack (WSJ)
  2. Greenspan on the Risk Premium
  3. Estimating Risk Premiums
  4. Those were the days... An argument for lower risk premiums
  5. Historical Risk Premiums: A reexamination
  6. Country bond default spreads over time\
  7. The Equity Risk Premium (ERP): Determinants, Estimation and Implications

Chapter 8: Macro Matters: The Real Economy
Topic  Details
Data Sets

spearn.xls: Earnings changes, by year, for the S&P 500 going back to 1960
Inflation and Earnings: Inflation rates and Earnings on S&P 500
GDP and Earnings on S&P 500

Spreadsheets  
Readings  

Chapter 9: Baby Steps: Valuing Young and Start-up Companies
Topic  Details
Illustrations Illustration 9.1: Valuing Secure Mail – Venture Capital Approach
Illustration 9.2: Estimating cash flows for a young business- Secure Mail Software
Illustration 9.3: Estimating cash flows for Healthy Meals - An Organic Restaurant
Illustration 9.4: Estimating discount rates for Secure Mail Software
Illustration 9.5: Estimating discount rates for Healthy Meals
Illustration 9.6: Estimating terminal value and value today for Secure Mail
Illustration 9.7: Estimating terminal value and value today for Healthy Meals
Illustration 9.8: Adjusting valuation of Secure Mail Software for survival
Illustration 9.9: Adjusting valuation of Healthy Meals for key person discount
Illustration 9.10: Valuing Equity Claims in Secure Mail Software
Illustration 9.11: Estimating the effect of illiquidity on equity value – Healthy Meals
Illustration 9.12: Valuing Healthy Meals with Private transaction Multiples
Illustration 9.13: Valuing Secure Mail – Relative Valuation
Illustration 9.14: Valuing the option to expand into database systems– Secure Mail
Data Sets  
Spreadsheets

startup.xls: Valuing a young, start-up company
business.xls: Valuing a finite-life business
liqdisc.xls: Spreadsheet to estimate illiquidity discount on value

Readings  

Chapter 10: Shooting Stars: Valuing Growth Companies
Topic  Details
Illustrations Illustration 10.1: Growth and Scale – Under Armour and Evergreen Solar
Illustration 10.2: Reinvestment, Growth and Value – Effects of inconsistencies
Illustration 10.3: Valuing Operating Assets - Evergreen Solar
Illustration 10.4: Valuing Operating Assets – Under Armour
Illustration 10.5: From Operating Asset to Equity Value per share – Evergreen and Under Armour
Illustration 10.6: A Relative Valuation of Under Armour
Illustration 10.7: A Relative Valuation of Evergreen Solar
Data Sets histgr.xls: There is a dataset on the web that summarizes historical growth rates in earnings and revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes reinvestment rates and return on capital by industry group in the United States for the most recent quarter.
margins.xls: This dataset on the web summarizes operating margins, by industry, for the United States.
Spreadsheets

higrowth.xls: Values a high growth firm, based on revenue growth and target margins.
chgrowth.xls: This spreadsheet allows you to estimate the expected growth rate in operating income for a firm where the return on capital is expected to change over time.

Readings
  1. Estimating Growth
  2. ROIC rules
  3. Measuring ROE and ROC rigtht
  4. The inside of earnings growth in the 1990s
  5. Evaluating analyst growth estimates
  6. Competitive Advantage Period
  7. Growth at young firms: How long does it last?

Chapter 11: Not so staid: Valuing Mature Companies

Topic  Details
Illustrations Illustration 11.1: Stable growth, unstable inputs…
Illustration 11.2: Acquisition inconsistency – Valuing Cisco
Illustration 11.3: Debt and Value – The upside of debt and no downside
Illustration 11.4: Valuing an acquisitive mature company – Revisiting Cisco
Illustration 11.5: The Cost of Capital Approach – Hormel Foods , Enhanced cost of capital & APV
Illustration 11.6: A Valuation of Hormel Foods- Status Quo versus Optimal
Illustration 11.7: The Probability of Control Changing – Hormel Foods
Illustration 11.8: Market Prices and the Expected Value of Control
Illustration 11.9: Valuing voting and non-voting shares
Data Sets asics.xls: There is a dataset on the web that summarizes operating margins, tax rates and non-cash working capital as a percent of revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes returns on capital and reinvestment rates by industry group for the United States.
wacc.xls: There is a dataset on the web that summarizes debt ratios and costs of capital by industry group for the United States.
Spreadsheets

valenh.xls: This spreadsheet allows you to estimate the approximate effect of changing the way a firm is run on its value.

Readings
  1. Value Enhancement: Back to Basics
  2. EVA as elixir
  3. An EVA debate
  4. The Value of Control

Chapter 12: The Inevitable End: Valuing Companies in Decline and Distress

Topic  Details
Illustrations Illustration 12.1: Valuing Sears – An Over Optimistic Valuation in September 2008
Illustration 12.2: Discount Rate contortions: Las Vegas Sands
Illustration 12.3: Valuing a company in irreversible decline: Sears in September 2008
Illustration 12.4: Estimating the probability of bankruptcy using bond price: Las Vegas
Illustration 12.5: Estimating Distress Sale Proceeds in January 2009: Las Vegas Sands
Illustration 12.6: Valuing Las Vegas Sands with Distress valued separately
Illustration 12.7: Valuing Las Vegas Sands: Adjusted Present Value
Illustration 12.8: Valuing Equity as an Option
Illustration 12.9: Firm Value and Equity Value
Illustration 12.10: Equity Value and Volatility
Illustration 12.11: Probabilities of default and Default Spreads
Illustration 12.12: Valuing Equity as an option – Las Vegas Sands in January 2008
Illustration 12.13: Choosing distressed  comparables
Illustration 12.14: Forward Multiples and Distress
Data Sets

dbtfund.xls: There is a dataset on the web that summarizes book and market value debt ratios by industry group in the United States for the most recent year

Spreadsheets normearn.xls: This spreadsheet allows you to normalize the earnings for a firm, using a variety of approaches
distress.xls: Estimates the probability that a firm will cease existence as a going concern - i.e. the probability of distress.
Readings
  1. Warning signs of distress
  2. Valuing Distressed Firms

Chapter 13: Ups and Downs: Valuing Cyclical and Commodity Companies

Topic  Details
Illustrations Illustration 13.1: Valuing Exxon Mobil with 2008 Earnings
Illustration 13.2: EBITDA Multiples – Specialty Chemicals Companies
Illustration 13.3: Valuing Toyota – Normalized Earnings
Illustration 13.4: Valuing Exxon Mobil – Normalized commodity prices
Illustration 13.5: Valuing Toyota with adaptive growth
Illustration 13.6: Valuing Exxon Mobil – Simulation (Crystal Ball)
Illustration 13.7: PE ratios for oil companies
Illustration 13.8: Valuing an oil company – Gulf Oil
Data Sets  
Spreadsheets

normearn.xls: Normalizes earnings for a firm, using historical or industry averages.

Readings  

Chapter 14: Mark to Market: Valuing Financial Service Companies

Topic  Details
Illustrations Illustration 14.1: Dividends and Growth: Wells Fargo
Illustration 14.2: Wells Fargo Banks – February 2009
Illustration 14.3: Excess Return Valuation – Goldman Sachs
Illustration 14.4: Comparing PE ratios: Insurance Companies
Illustration 14.5: Price to Book Value Ratios: Small commercial banks
Data Sets  
Spreadsheets eqexret.xls: Estimates the value of a financial service firm from the expected excess returns in the future.
Readings Creative Accounting at Banks

Chapter 15: Invisible Investments: Valuing Companies with Intangible Assets

Topic  Details
Illustrations Illustration 15.1: Capitalizing R&D expenses: Amgen in February 2009
Illustration 15.2: Capitalizing Brand Name Advertising – Coca Cola in 2009
Illustration 15.3: Capitalizing Recruitment and Training Expenses: Cyber Health Consulting
Illustration 15.4: Valuing Amgen
Illustration 15.5: Valuing large pharmaceutical firms with PE ratios
Illustration 15.6: Fully Diluted Approach to estimating Value per Share
Illustration 15.7: Treasury Stock Approach
Illustration 15.8: Option Value Approach
Illustration 15.9: Valuing with expected option issues
Illustration 15.10: Adjusting PE ratio for options outstanding
Data Sets  
Spreadsheets

R&Dconv.xls: This spreadsheet allows you to convert R&D expenses from operating to capital expenses.brandnamevalue.xls: This spreadsheet allows you to value the brand name in a company, relative to a generic company.

Readings
  1. Dealing with Management Options
  2. Option backlash at companies
  3. Options at dot.com firms
  4. The growth of option compensation and problems
  5. Market based solutions to pricing employee options
  6. R& D's effects on earnings
  7. The Value of Intangibles

Chapter 16: Volatility Rules: Valuing Emerging Market Companies

Topic  Details
Illustrations Illustration 16.1: Estimating Lambdas – Gerdau Steel and Tata Motors
Illustration 16.2: Estimating Costs of Debt and Equity – Gerdau Steel and Tata Motors
Illustration 16.3: Valuing Tata Motors
Illustration 16.4: Valuing Gerdau Steel
Illustration 16.5: Valuing Tata Motors - Indian Auto firms
Illustration 16.6: Valuing Gerdau Steel: Steel companies listed in the United States
Data Sets ctryprem.xls: Contains the updated ratings for countries and the risk premiums associated with each.
Spreadsheets  
Readings Estimating Company Risk Exposure to Country Risk

Chapter 17: The Octopus: Valuing Multi-business, Multi-national Companies

Topic  Details
Illustrations

Illustration 17.1: Valuing United Technologies – Aggregated Basis
Illustration 17.2: Valuing United Technologies – Disaggregated Basis
Illustration 17.3: Sum-of-the-parts Relative Valuation of United Technologies

Data Sets  
Spreadsheets  
Readings  

Chapter 18: Lighting the Way: Vanquising the Dark Side

Topic  Details
Readings