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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




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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




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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

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