Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.

I thank my editor at McGraw-Hill, Ela Aktay, for her encouragement

and enthusiasm. I thank my publisher, Jeff Krames, for his patience and

apologize for testing it so much due to my passion for perfection and the

huge life-changes that occurred to me while writing this book.

All the people who have helped make this book a reality have my

profound gratitude. In fact, there have been so many that it is almost

impossible to remember every single person, and I apologize to anyone

who should be in this acknowledgment section and who is not due to

my human failings.

Acknowledgments

xviii

List of Figures

Z-distribution vs t-distribution 34

2-1

t-distribution of B around the Estimate b 35

2-2

Timeline of the ADF and Gordon Model 65

3-1

Timeline of Cash Flows 91

A3-1

Payment Schedule 100

A3-2

1926“1998 Arithmetic Mean Returns as a Function of Standard

4-1

Deviation 125

1926“1998 Arithmetic Mean Returns as a Function of Ln(FMV) 127

4-2

Decade Standard Deviation of Returns versus Decade Average

4-3

FMV per Company on NYSE 1935“1995 128

Decade Standard Deviation of Returns versus Decade Average

4-4

FMV per Company on NYSE 1945“1995 129

Average Returns Each Decade 130

4-5

The Natural Logarithm 137

4-6

Discount Rates as a Function of FMV 137

4-7

1939“1998 Decile Standard Deviations as a Function of Ln(FMV) 138

4-8

Traditional Levels of Value Chart 197

7-1

Two-Tiered Levels of Value Chart 198

7-2

3 2 Levels of Value Chart 230

7-3

P/E Ratio as a Function of Size (From the IBA Database) 363

10-1

Decision Tree for Venture Capital Funding 421

12-1

Decision Tree for Bootstrapping Assuming Debt Restructure and

12-2

No Venture Capital 425

Sales Forecast (Decay Rate 0.5) 430

12-3

Sales Forecast (Decay Rate 0.3) 431

12-3A

Post-Transaction Value of the ESOP Vs. % Sold 442

13-1

xix

Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.

This page intentionally left blank.

List of Tables

Abbreviated Balance Sheets 7

1-1

Income Statement 8

1-2

Analysis of Property, Plant, and Equipment 9

1-3

Statement of Stockholders™ Equity 12

1-4

Abbreviated Statement of Cash Flows 13

1-5

Balance Sheets 15

1-6

Statement of Cash Flows 16

1-7

Adjustments to Historical Costs and Expenses 24

2-1A

Regression Analysis 1988“1997 27

2-1B

Calculation of 95% Con¬dence Intervals for Forecast 1998 Costs 28

2-1B

OLS Regression: Example of Deviation from Mean 31

2-2

Abbreviated Table of T-Statistics 36

2-3

Regression Analysis 1993“1997 40

2-4

Regression Analysis of Sales as a Function of GDP [1] 43

2-5

Regression Analysis of Guideline Companies 47

2-6

Regression Analysis 1988“1997 54

A2-1

ADF: End-of-Year Formula 66

3-1

ADF: Midyear Formula 69

3-2

ADF with Cash Flows Starting in Year 3.25: End-of-Year Formula 72

3-3

ADF with Cash Flows Starting in Year 2.00: End-of-Year

3-4

Formula 74

ADF with Cash Flows Starting in Year 2.00 with Negative

3-5

Growth: End-of-Year Formula 75

ADF with Cash Flows Starting in Year 2.00 with g r:

3-6

End-of-Year Formula 76

Periodic Perpetuity Factor (PPF): End-of-Year Formula 80

3-7

Periodic Perpetuity Factor (PPF): Midyear Formula 80

3-8

Periodic Perpetuity Factor (PPF): End-of-Year”Cash Flows Begin

3-9

Year 6 83

PV of Loan with Market Rate Nominal Rate: ADF, End-of-Year 86

3-10

xxi

Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use.

ADF Equation Numbers 90

3-11

ADF with Fractional Year: Midyear Formula 95

A3-1

ADF with Fractional Year: Midyear Formula 96

A3-2

Amortization of Principal with Irregular Starting Point 103

A3-3

PV of Principal Amortization 107

A3-4

Present Value of a Loan at Discount Rate Different than Nominal

A3-5

Rate 110

NYSE Data by Decile and Statistical Analysis: 1926“1998 121

4-1

Regressions of Returns over Standard Deviation and Log of Fair

4-2

Market Value 132

Regression Comparison [1] 133

4-2A

Table of Stock Market Returns Based on FMV”60-Year Model 136

4-3

Discounted Cash Flow Analysis Using 60-Year Model”First

4-4A

Iteration 141

Discounted Cash Flow Analysis Using 60-Year Model”Second

4-4B

Iteration 142

Discounted Cash Flow Analysis Using 60-Year Model”Final

4-4C

Valuation 143

Gordon Model Valuation Using Newton™s Iterative Process 157

A4-5

Geometric versus Arithmetic Returns 171

5-1

Geometric versus Arithmetic Returns: NYSE Data by Decile &

5-2

Statistical Analysis: 1926“1997 172

Geometric Mean versus AFMV: 60 Years 174

5-3

Comparison of Discount Rates Derived from the Log Size Model

5-4

Using 60-Year Arithmetic and Geometric Means 176

Equity Valuation Approach with Iterations Beginning with Book

6-1A

Equity: Iteration #1 182

Equity Valuation Approach with Iterations Beginning with Book

6-1B

Equity 184

Equity Valuation Approach with Iterations Beginning with

6-1C

Arbitrary Equity 185

WACC Approach with Iterations Beginning with Book Equity 187

6-2A

WACC Approach with Iterations Beginning with Arbitrary

6-2B

Guess of Equity Value 189

Synergies as Measured by Acquisition Minus Going-Private

7-1

Premiums 199

Acquisition and Going-Private Transactions Premiums 200

7-1A

Acquisition Premiums by SIC Code 206

7-2

Analysis of Megginson Results 215

7-3

Analysis of American VRP Results 218

7-3A

Mergerstat Mean Premiums: Control versus Minority Purchases 225

7-4

Abrams Regression of Management Planning Study Data 237

7-5

Calculation of Continuously Compounded Standard Deviation

7-6

Chantal Pharmaceutical, Inc.”CHTL 242

Black“Scholes Put Option”CHTL 244

7-7

Put Model Results 245

7-8

List of Tables

xxii

Calculation of Restricted Stock Discounts for 13 Stocks Using

7-9

Regression from Table 7-5 247

Calculation of Component #1”Delay To Sale [1] 254

7-10

Estimates of Transaction Costs [1] 259

7-11

Proof of Equation (7-9) 267

7-12

Proof of Equation (7-9a) 270

7-13

Sample Calculation of DLOM 272

7-14

7-15a QMDM Baseline Data”30% MPI Discount 275

a

Implied Returns for Holding Period”30% Discount 275

7-16

7-17a Implied Returns for Holding Period”20% Discount 276

Summary of Results of Applying the QMDM in 10 Example

7-18

Appraisals 277

QMDM Comparison of Restricted Stock Discount Rate versus

7-19

Mercer Example 1 279

Abrams Valuation Group Regression of Management Planning,

8-1

Inc. Data 300

2

Calculation of Revenue and Earnings Stability (R ) 304

8-1A

Calculation of Price Stability 305

8-1B