864  Index
dynamic portfolio management, 
535–537
ownership and value creation, 
529–533
Cost and capital efficiency 
advantages, 135
Costco, 28, 35, 180, 205, 210–231, 234–
237, 240–245, 255–257, 265, 307, 
316–326, 330, 452–453, 835–856
Cost of capital, 55–59, 305–333. See 
also Weighted average cost of 
capital (WACC)
beta, 316–321
capital structure, 328–332
in emerging markets, 698–700
estimating cost of debt, 324–328
below-investment-grade debt, 
326–327
bond ratings and yield to 
maturity, 324–326
interest tax shield, 327–328
estimating cost of equity, 
308–324
adjusting for industry/company 
risk, 314–315
arbitrage pricing theory, 323–324
capital asset pricing model 
(CAPM), 58–59, 315–322, 
315–322
Fama-French three-factor model, 
322–323
market return, 308–314
estimating in foreign currency, 
512–520
lack of control, 57–60
in multiple business units, 404–406
for operating leases, 450
as opportunity cost, 56–57
for pension obligations, 462–464
target weights, 328–331
Cost of debt, estimating, 324–328
Cost of equity:
capital asset pricing model (CAPM), 
315–322
Contingent valuation. See Decision 
tree analysis (DTA); Real-
option valuation (ROV)
Continuing value (CV) estimation, 
285–303
asset-based valuations, 302
Costco, 852
discounted cash flow approaches, 
299–301
aggressive growth formula, 300
convergence formula, 299–300
key value driver formula, 286–
288
recommended formula, 286–288
economic profit valuation formula, 
289–290
key value driver formula, 186–187
misunderstandings about, 291–296
effect of forecast length on value, 
291–293
length of competitive advantage 
period, 294–296
multiples (comparables), 301–302
pitfalls in, 296–298
naive base-year extrapolation, 
296–298
naive overconservatism, 298
purposeful overconservatism, 
298
two-stage formula, 857–858
Convergence formula, 299–300
Conversion value, 349
Convertible bonds/preferred stock, 
348–352
Corporate growth. See Growth; 
Revenue growth
Corporate Horizon Index, 4
Corporate portfolio strategy, 527–546
acquisitions and divestitures, 
535–537
best-owner life cycle, 533–534
constructing a portfolio of
businesses, 541–545
diversification, 537–540

Index  865
forward rate vs. spot rate, 508–
512
incorporating currency risk in 
valuation, 518–520
translation approaches, 521–523
risk, 66–67
Customer experience, in digital 
initiatives, 94–95
Customer lock-in, 133–134
Cyclical companies, 725–732
forecasting for, 727–730
management implications, 731–732
share price behavior, 725–730
earnings forecasts, 727–730
market and DCF valuations, 
725–727
valuation approach, 730–731
Data, in forecasting, 260–261
Debt:
below-investment-grade, 326–327
changes in, 233
convertible, 660, 664
debt-to-value ratio, 331–332
defined, 219
enterprise DCF model, 190
estimating cost of, 324–328
valuing, 329–331, 344–346
Debt equivalents, 207, 219, 233, 
346–348
Debt financing, 79, 660–661
Decision making
in digital initiatives, 96–97
strategic management, 572, 576–580
Decision tree analysis (DTA), 761, 
772–777, 784–788
Deferred gains, 237–238
Deferred taxes, 219–220, 277–278
Depreciation:
accelerated, 421
in forecasting, 269–270
Derivative instruments, 662
Devil’s advocate, 577–578
Diageo, 529
emerging markets, 700
estimating, 308–324 (see also Cost 
of capital, estimating cost of 
equity)
alternatives to capital asset 
pricing model (CAPM), 322–
324
beta and, 316–321(see also Beta)
leverage and, 744–745
levered/unlevered, 196–198, 805–
812
Cost of goods sold (COGS), 268
Cost reduction
in digital initiatives, 93–94
in ESG, 87–88
Costs, fixed vs. variable, 282
Cost structure health metrics, 557
Coughlin, Chris, 618
Country risk premium, 692–694, 697–
698, 701, 703, 706
Coverage, 819–821
Covidien, 617
Credit health, 253–257
Credit ratios, and inflation, 500
Credit risk, 753
Credit spreads, 650
Cross-border valuation, 507–524. See 
also Currency, foreign
currency translation approaches, 
521–523
estimating beta, 513–514
estimating cost of capital, 
512–520
forecasting cash flows, 507–512
foreign currency risk, 518–520
Cross-listed shares, 121–122
Cross-subsidization, 618
Currency:
effects on revenue growth, 231, 
248–249
foreign (see also Cross-border 
valuation)
forecasting cash flows, 
507–512