VALUATION METHODS AND SHAREHOLDER VALUE CREATION

INDEX OF FIGURES

Chapter 1. Shareholder Value Creation. Basic concepts
Figure 1.1. General Electric. December 1991-December 2000. Increase of equity market value, shareholder value added, and created shareholder value

Chapter 2. Company valuation methods
Figure 2.1. Evolution of the price/book value ratio on the British, German and United States stock markets.
Figure 2.2. Evolution of the PER of the German, British and United States stock markets.
Figure 2.3. Evolution of the dividend yield of the German, Japanese and United States stock markets.
Figure 2.4. Full balance sheet and economic balance sheet of a company.
Figure 2.5. The 1929 American stock market crisis
Figure 2.6. The American stock market crisis of October 1987
Figure 2.7. The Internet speculative bubble of 1998 and 1999
Figure 2.8. The American stock market crisis of 1998 and of September 11, 2001

Chapter 3. Price-earnings ratio, profitability, cost of capital and growth
Figure 3.1. Evolution of the PER of Telefónica and British Telecom.
Figure 3.2. Evolution of the PER of GE, Microsoft and Cisco.
Figure 3.3. Evolution of interest rates and the average PER of the Spanish stock market.
Figure 3.4. Evolution of the average PER of the Spanish, English and United States stock markets.
Figure 3.5. S&P 500. Evolution and average PER.
Figure 3.6. PER of a company depending on its growth (g). Ke = 10%
Figure 3.7. Relationship between the growth of the dividend per share (g) and the pay-out ratio (p)
Figure 3.8. PER of a company depending on its ROE. Ke = 10%
Figure 3.9. PER of a company depending on Ke. ROE = 10%
Figure 3.10. PER of a company depending on Ke. g=4%
Figure 3.11. US Stock Market. PER due to growth as a percentage of PER, and PER.

Chapter 4. Splitting the price-earnings ratio: franchise factor, growth factor, interest factor and risk factor
Figure 4.1. Evolution of the profits and dividends of companies A and B.
Figure 4.2. Evolution of the profits and dividends of companies A and C.
Figure 4.3. Evolution of the profits and dividends of companies D and F.
Figure 4.4. Equity value generation over time. Present value of the dividends until the year indicated.
Figure 4.5. Equity value generation over time. Present value of the dividends until the year indicated as a percentage of the equity value.
Figure 4.6. FF x G of a company with different growth rates (g). Ke = 10%
Figure 4.7. FF of a company with different values for ROE. Ke = 10%
Figure 4.8. FF x G of a company with different values for ROE. Ke = 10%
Figure 4.9. FF x G of a company with different values for Ke. ROE = 10%
Figure 4.10 FF x G of a company with different values for Ke. g=4%
Figure 4.11. FF of a company with different values for Ke. g=4%
Figure 4.12. FF and PER of the US stock market.

Chapter 5. Market value and book value
Figure 5.1. Evolution of the average market-to-book ratio of the US stock market and evolution of the S&P 500.
Figure 5.2. Evolution of the market-to-book ratio of Coca Cola and Pepsico.
Figure 5.3. Market-to-book ratio of General Electric, Microsoft and Cisco.
Figure 5.4. Evolution of the average market-to-book ratio of the US, UK and Spanish stock markets.
Figure 5.5. Evolution of the average market-to-book ratio of the US stock market and the long-term interest rates.
Figure 5.6. Evolution of the average ROE of the US, UK and Spanish stock markets.
Figure 5.7. Evolution of the ROE of Coca Cola and Pepsico
Figure 5.8. Return on equity (ROE) of General Electric, Microsoft and Cisco.
Figure 5.9. Relationship between E/Ebv and ROE/RF.
Figure 5.10. Relationship between the PER and the market-to-book ratio of the Dow Jones Industrial Average. July 2001 - Dec. 2002.
Figure 5.11. Relationship between the ROE and the market-to-book ratio of the Dow Jones Industrial Average. July 2001 - Dec. 2002.
Figure 5.12. Share price of Sealed Air from 1987 to 1989, and from 1989 to 2000
Figure 5.13. Behavior of Sealed Air compared with the industry.

Chapter 6. Dividends and market value
Figure 6.1. Evolution of the dividend yield of GE, Boeing and Coca Cola
Figure 6.2. Dividend yield and yield on 30-year Government bonds in the United States
Figure 6.3. Cash payments to shareholders: dividends and stock repurchases (North American companies included in COMPUSTAT)
Figure 6.4. Evolution of the dividend yield on the German, English and North American stock markets.
Figure 6.5. Coca-Cola. Expected dividend growth implicit in the year-end share price and actual dividend growth.
Figure 6.6. Coca-Cola and Pepsico. Expected dividend growth implicit in the year-end share price.
Figure 6.7. Evolution of the dividend and earnings per share of Coca Cola ($ per share)
Figure 6.8. Evolution of the dividend and earnings per share of Pepsico ($ per share)
Figure 6.9. Market value (capitalization) of Coca Cola and PepsiCo ($ million)

Chapter 7. Interest rates: their importance in the valuation
Figure 7.1. Evolution of the yields on 10-year government bonds in the United States, Japan, Spain, and Germany. (Yield on 10-year government bonds).
Figure 7.2. Evolution of 10-year interest rates in the United States, Italy, France and United Kingdom. (Yield on 10-year government bonds).
Figure 7.3. Evolution of the yields on US Treasuries: 3 months, 3 years and 30 years
Figure 7.4. Evolution of interest rates (yield curve) in the United States.
Figure 7.5. Evolution of the 30-year interest rates in the United States and the S&P 500.
Figure 7.6. Evolution of interest rates and reciprocal of the S&P 500 PER.
Figure 7.7. Relationship between interest rates and the PER of the US stock market (1991- march 2003).
Figure 7.8. Evolution of the yield on 30-year Government Bonds and the dividend yield in the United States.
Figure 7.9. Duration of the S&P 500. Calculated using monthly data from the last two years.
Figure 7.10. Correlation (monthly data from the previous year) between the S&P 500 return and the increase of risk-free interest rates.
Figure 7.11. Yield curve of the debt of US industrial corporations with different ratings and maturities. 13 November 1997.
Figure 7.12.Year-end interest rates of the Federal Reserve (United States) and the European Central Bank (Germany before 1998)

Chapter 8. Valuation using multiples. How do analysts reach their conclusions?
Figure 8.1 Most widely used valuation methods

Chapter 10. Inflation and value
Figure 10.1. Net present value of the cash flows of Campa Spain and Campa Argentina.

Chapter 11. Cost of equity: beta and risk premium
Figure 11.1. Effect of diversification on the volatility of equal-weighted portfolios. Annual volatility calculated with daily data during the period January 1998-June 2001
Figure 11.2. Beta of IBM (calculated with data from the last year)
Figure 11.3. Beta of IBM (calculated with data from the last 5 years)
Figure 11.4. Beta of Microsoft (calculated with data from the last year)
Figure 11.5. Beta of Microsoft (calculated with data from the last 5 years)
Figure 11.6. Beta of Coca-Cola (calculated with data from the last year)
Figure 11.7. Beta of Coca-Cola (calculated with data from the last 5 years)
Figure 11.8. Volatility of the S&P 500 (calculated with data from the last year)
Figure 11.9. Volatility of IBM (calculated with data from the last year)
Figure 11.10. Volatility of Microsoft (calculated with data from the last year)
Figure 11.11. Volatility of Coca-Cola (calculated with data from the last year)
Figure 11.12. Volatility of the S&P 500 (calculated with data from the last 5 years)
Figure 11.13. Evolution of an investment of $100 in December 1925 in the S&P 500 (Stocks), 3-month T-bills and T-bonds, assuming reinvestment of dividends and interest. Goods that could be purchased for $100 in 1925 cost $971 in December 2000 (Inflation)
Figure 11.14. Annual return of the S&P 500 (Stocks), 3-month US treasury bills (T-bills), and 30-year US treasury bonds (T-bonds).
Figure 11.15. Annual volatility of the S&P 500 (Stocks), 3-month US treasury bills (T-bills), 30-year US treasury bonds (T-bonds), and inflation. Volatility calculated using yearly data for the past 10 years.
Figure 11.16. Monthly shareholder return of the S&P500
Figure 11.17. Annual volatility of the US stock market (S&P500 stocks). Volatility calculated using monthly data corresponding to one year
Figure 11.18. Historical differential return (geometric average) between the market and T- bills and T- bonds, over the last 20-year period
Figure 11.19. Average during the last 10 years of the premium bills, and annual return of the 3-month risk-free rate (T-bills).
Figure 11.20. US stock market. Annual average differential return in 2000 of the S&P 500 versus 3-month T-Bills (T-Bills), versus 30-year T-Bonds (T-Bonds) and versus inflation (Annual average differential return from the year chosen until 2000)
Figure 11.21. Implied market risk premium of the S&P 500 using the two-stage growth model. Damodaran uses analyst-forecast growth for the first five years and then a stable growth rate equal to the T-bond rate. Fernandez uses an expected growth based on forecast inflation, past growth and the T-bond rate.
Figure 11.22. Long-term interest rates in Spain, Germany, Japan and United States
Figure 11.23. Evolution of the stock market indexes of Spain, Germany, Japan and United States. December 1991 = 100 points.
Figure 11.24. Return and risk (volatility) expectations for the Spanish stock market in 1998. Survey performed among IESE MBAs in January 1998.

Chapter 12. Valuations of Internet Companies: The case of Terra -Lycos
Figure 12.1. Terra's share price in euros per share

Chapter 14. EVA, Economic profit and Cash value added do not measure shareholder value creation
Figure 14.1. Evolution of Coca-Cola's EVA and market value
Figure 14.2. Evolution of PepsiCo's EVA and market value
Figure 14.3. Evolution of Walt Disney's EVA and market value
Figure 14.4. Evolution of Boeing's EVA and market value
Figure 14.5. Evolution of General Electric's EVA and market value
Figure 14.6. EVA (according to Stern Stewart and Co) and created shareholder value for 269 companies in 1999

Chapter 15. The RJR Nabisco valuation
Figure 15.1. Liabilities structure according to the Management Group's strategy
Figure 15.2. Liabilities structure according to KKR's strategy.
Figure 15.3. EVA of KKR's and the Management Group's strategies.
Figure 15.4. Value of the company at different values for the assets' beta (?u)

Chapter 16. Valuation and value creation in Internet-related companies
Figure 16.1. Amazon. Evolution of the share price and EPS
Figure 16.2. Evolution of Barnesandnoble.com's share price since its flotation
Figure 16.3. Historic growth of Amazon's sales
Figure 16.4. Distribution of the value of Amazon's equity in the year 2000. 10,000 simulations
Figure 16.5. Distribution of Amazon's sales in the year 2009
Figure 16.6. Share price, earnings per share of America Online
Figure 16.7. ConSors' share price (euros/share) and financial statements
Figure 16.8. Evolution of E*Trade's (EGRP) and Ameritrade's (AMTD) share prices
Figure 16.9. Evolution of Charles Schwab's (SCH) and Merrill Lynch's (MER) share prices
Figure 16.10. Microsoft's share price, earnings per share and PER

Chapter 17. Discounted cash flow valuation methods: perpetuities, constant growth and general case
Figure 17.1. Distribution of the company's total value between shareholders, bondholders and the Government. Without leverage costs.
Figure 17.2. Impact of the use of the simplified formulae on the required return to equity of Font, Inc.
Figure 17.3. Impact of the use of the simplified formulae on the WACC of Font, Inc.

Chapter 18. Optimal Capital Structure: Problems with the Harvard and Damodaran Approaches
Figure 18.1. Value of the company and WACC at different debt ratios
Figure 18.2. Price per share and WACC at different debt ratios
Figure 18.3. Composition of the $250,000 of debt, which has an overall cost of 12.5%
Figure 18.4. Required return to the incremental equity cash flow when the debt level is decreased.
Figure 18.5. Boeing according to Damodaran (1994). Value of the firm (D+E), debt and equity, for different debt ratios.

Chapter 22. Real options. Valuing flexibility: beyond discounted cash flow valuation
Figure 22.1. Two possible courses for the price of 10,000,000 shares during the next year.
Figure 22.2. Replicate of the call if the share follows the bearish course. In one year's time, both the option and the replicate portfolio will be worth zero (there will be neither shares nor debt).
Figure 22.3. Replicate of the share following the bullish course. In one year's time, the call will be worth 54.66 million euros. The replicate portfolio will consist of 254.66 million euros in shares and 200 million euros in debt.
Figure 22.4. Distribution of the share's return in one year's time according to 3 different expectations.
Figure 22.5. Distribution of the share price in one year's time according to 3 different expectations.
Figure 22.6. NPVcall-volatility diagram for the option in Table 22.1 assuming that it is not possible to replicate, for three initial oil price levels.
Figure 22.7. Distribution of the expected cash flows in 5 years' time according to Damodaran

Chapter 23. Valuation of brands and intangibles
Figure 23.1. Two valuations of the shares of a consumer products company
Figure 23.2. Sensitivity of the value of the Kellogg brand to the (WCR+NFA)/Sales ratio
Figure 23.3. Differential cash flows of the branded company (b) compared with the company with a generic product (g)
Figure 23.4. Forecast sales and cash flows in Damodaran's valuation
Figure 23.5. Actual and forecast sales and earnings in Damodaran's valuations
Figure 23.6. Course of Kellogg's (K) and Coca-Cola's (KO) share prices from January 1996
Figure 23.7. Course of Pepsico's (PEP) and Coca-Cola's (KO) share prices from January 1998
Figure 23.8. Valuation of the four brands according to Interbrand

Appendix A. Capital Asset Pricing Model (CAPM)
Figure A.1. Capital asset pricing model. In equilibrium, if all investors have identical expectations, all of them will have the market portfolio M, which is on the efficient frontier (EF). The straight line RF-M is called capital market line (CML).
Figure A.2. Capital asset pricing model. In equilibrium, if all investors have identical expectations, each asset's expected return is a linear function of its beta. The straight line is called the security market line (SML).