861 Index Accelerated depreciation, 421 Accounting: changes and irregularities in, 251–253 financial institutions (see Banks) goodwill amortization, 607 mergers and acquisitions (M&A), 607–609 statements (see Financial statements) Accounting standards. See Generally Accepted Accounting Principles (GAAP) Acquired intangibles, 422 Acquisitions, 46–48. See also Mergers and acquisitions (M&A) bolt-on, 162 and conservation of value, 46–48 in corporate portfolio strategy, 535–537 effect on free cash flow, 239–231 effect on ROIC, 152 revenue growth through, 162–163 Active share, 673 Adjusted present value (APV) model, 177–178, 195–196, 802–803 tax shields, 198–199 unlevered cost of equity, 196–198 Aggressive growth formula, 300 Ainslie, Lee, 672 Alphabet (Google), 11, 109, 140–141 Amazon, 109, 128, 137, 141, 160, 161– 162, 163, 387, 388, 391, 678 Amazon Web Services (AWS), 532 Analysts, sell-side, 675 Analyzing performance. See Historical performance analysis Anders, William A., 535 Annual operating plan (AOP), 581– 582 Apple, 132, 140, 147, 477, 558, 596 Arbitrage pricing model, 323–324 Aspen Institute Business and Society Program, 676, 683 Asset-based valuations, 302 Asset health metrics, 558 Asset optimization, in ESG, 89–90 Assets gains and losses on sales of, 435 traded vs. untraded, 778 AT&T, 618 Automation, 94, 96, 140 Aventis, 536 862  Index Balance sheet, 205, 206–207, 211, 273– 276, 458–459. See also Income statements Banks, 733–758 digital initiatives, 91–92 economics of banking, 734–737 fee- and commission-trading activities, 757–758 income sources for, 735–737 interest-generating activities, 756 trading activities, 756–757 valuation complications, 750–757 convergence of forward interest rates, 750–751 loan loss provisions, 752 multibusiness banks, 756 risk-weighted assets and equity risk capital, 753–755 valuation principles, 738–750 analyzing and forecasting equity cash flows, 740–741 discounting equity cash flows, 741–743 economic spread analysis, 745– 749 equity DCF method, 738–740 value driver trees, 740–742, 748–749 Basel III guidelines, 753–755 Becht, Marco, 590 Below-investment-grade debt, 326– 327 Best ownership, 529 Beta in cross-border valuation, 513–514 in emerging markets, 700, 701 equity beta, 320 estimating, 316–318, 404–405 industry beta, 319–321 levered, 811–812 market portfolio, 315–322 smoothing, 318 unlevered, 316 Black, Fischer, 203n18 BlackBerry, 139 Black-Scholes value, 349 Blume, Marshall, 311, 318, 826 Bolt-on acquisitions, 162–163 Bond ratings, 325–326 Bonds, government, 324–326 Boston Scientific, 112, 428–431, 433–434 Bottom-up forecasting, 265–267 Bristol-Myers Squibb, 618 Bubbles, 103. See also Financial crises Business models, in digital initiatives, 92–93 Business value creation, 3 Business Roundtable, 4, 12, 85 Cadbury, 625 Capital asset pricing model (CAPM), 58–59, 306, 827–834 applying in practice, 315–322 beta, 316–321 emerging markets, 699 for foreign currencies, 512–520 global, 512–515, 828–829 international, 515–517, 829–830 local, 515–516, 831–834 market risk premium, 311–312 risk-free rate, 312–313 Capital cash flow (CCF) model, 199 Capital intensity, 717–718 Capitalized expenses, 473–475 Capitalized research and development, 237 Capital-light businesses, 467–481 capitalizing expenses investments, 467–475 economic profit as key value metric, 478–481 need for capital, 475 and ROIC, 475–478 Capital productivity, 556 Capital structure, 253–257, 633–665 complex, 332–333 Index  863 cash return on assets (CashROA), 491 Ciba, 598–599 Cisco Systems, 596 Closet indexers, 671, 673 Coca-Cola, 131, 139, 140, 215, 298, 339–340, 468, 681 Colgate-Palmolive, 35 Commercial health metrics, 557 Commodity price risk, 66 Comparables. See Multiples Compass, 248–249 Competitive advantage, 131–139 brand, 133 cost and capital efficiency advantages, 135 customer lock-in, 133 economies of scale, 136–137 innovative business methods, 135–136 innovative products, 132 persistence of, 140 price premium advantages, 132 product life cycle, 139 quality, 132–133 rational price discipline, 133–134 scalable product or process, 137–138 unique resources, 136 Competitive advantage period, 294– 296 Competitive Strategy (Porter), 129 Confirmation bias, 578–579 Conglomerate discount, 118–119 Consensus EPS forecasts, 727 Conservation of value principle, 42–49 and acquisitions, 46–48 and executive stock options, 44 financial engineering, 48–49 foundations of, 43–44 managerial implications, 44 and share repurchases, 44–46 Contingent liabilities, 348 Contingent NPV, 771–772 debt/equity tradeoffs, 641–645 estimating current, 328–331 financial engineering, 48–49, 661– 664 derivative instruments, 662 hybrid financing, 664 off-balance-sheet financing, 662–664 four-stage approach to developing, 636–641 guidelines, 634–636 leverage, coverage, and solvency, 819–821 market-based rating approach, 818–819 payout and financing decisions, 651–661 debt financing, 660–661 equity financing, 659–660 shareholder payouts, 651–658 pecking-order theory, 817–818 valuation metrics, 280–281 Capital turnover, and inflation, 499 Carve-outs, 626, 629–630 Cash flow: availability to investors, 232–233 foreign, forecasting, 507–512 relationship to ROIC and growth, 29–33 Cash flow perpetuity formula, 50 Cash flow return on investment (CFROI), 483, 485–490 equaling IRR, 485–487 vs. ROIC, 487–490 Cash flow risk, 63–66 Cash flow statement. See Financial statements Cash-flow-to-equity (CFE) valuation model. See Equity cash flow (valuation model) Cash return on capital invested (CROCI), 491 cash return on gross investment (CROGI), 491