866  Index
Discount rate, 30. See also Cost of 
capital
Disentanglement costs, 623
Diversification:
and conglomerate discounts, 118–
119
effect on cost of capital, 57–58
in portfolio of businesses, 537–540
Divestitures, 613–631
assessing potential value from, 
622–625
barriers to, 624–625
conflict of interest and, 618
in corporate portfolio strategy, 
535–537
costs associated with, 623–624
deciding on, 626–631
earnings dilution from, 620
executive resistance to, 619–621
exit prices, 625
legal/regulatory issues, 624–625
pricing/asset liquidity, 625
research into, 615–616
transaction structure choice, 626–
631
carve-outs, 626, 629–630
IPOs, 626, 627, 629
private vs. public transactions, 
626–627
spin-offs, 626, 627–628
tracking stock, 626, 630–631
value created vs. value forgone, 622
value creation from, 615–625
Dividends, 233, 633, 652–653, 659
Dot-com bubble, 3, 42–43, 44, 93, 
321–322
Earnings per share (EPS), 110
consensus earnings estimates, 117
earnings volatility, 115–117
effect of share repurchases on, 
44–46
from employee stock options, 
113–114
Digital initiatives, 91–97
defined, 91
performance improvements, 92
cost reduction, 93–94
customer experience 
improvements, 94–95
decision-making improvement, 
96–97
new business models, 92–93
new revenue sources, 95–96
value measurement, 91–92
Dimson, Elroy, 311, 312, 832
Direct equity approach. See Equity 
cash flow (valuation model)
Disclosure. See Transparency
Discounted cash flow (DCF), 20, 
516–517
alternatives to, 202–204
in banking, 738–740
conservation of value, 42
cyclical companies, 725–727
drivers of cash flow and value, 51
and economic-profit valuation, 21, 
41
with extreme inflation, 499–500
scenario DCF approach, 692–698
valuation models
adjusted present value (APV), 
177–178, 195–196
capital cash flow (CCF), 178
decision tree analysis (DTA), 761, 
772–777, 784–788
economic profit, 177–178, 191–195
enterprise DCF, 178–191 (see also 
Enterprise discounted cash 
flow)
equity cash flow, 200–202
real option valuation (ROV), 761
real-option valuation (ROV), 
770–771
scenario approach, 362–366, 761
scenario DCF approach, 709–710
single-path DCF, 761
stochastic simulation DCF, 761

Index  867
incorporating risk in valuation
country risk premium, 692–694, 
697–698
scenario DCF approach, 692–698
other complications, 701–703
triangulating valuation, 703–707
Employee productivity, ESG, 89–90
Employee stakeholders, 12
Employee stock options, 113–114, 190, 
352–354
Employment growth, correlation with 
TRS, 14
Energy companies, 10
Enron, 110, 335
Enterprise discounted cash flow, 178–
191, 799–802
four steps of, 180
nonequity claims, identifying/
valuing, 180, 189–191
nonoperating assets, identifying/
valuing, 180, 189
operations valuation, 180
valuing equity, 180, 191
valuing operations, 181–189
Enterprise value:
converting to value per share, 
335–355
defined, 335n1
in multiples, 372–377, 384–385
relationship to equity value, 178–179
Environmental, social, and 
governance (ESG), 83–89
cash flow link, 86
common valuation framework, 84
overlapping criteria, 84–85
value creation, 85–86
cost reductions, 87–88
employee productivity uplift, 
89–90
investment and asset 
optimization, 90
regulatory and legal intervention 
reduction, 88
revenue growth, 86–87
guidance, 117–118
and investor communications, 
681–684
and mergers and acquisitions 
(M&A), 112, 607–609
and share repurchases, 111
from write-downs, 112–113
eBay, 109, 120, 127–128, 166, 684, 685
EBIT (earnings before interest and 
taxes), 402n6
EBITA (earnings before interest, taxes, 
and amortization), 221–224, 
253–257, 428, 496, 600–601
EBITDA (earnings before interest, 
taxes, depreciation, and 
amortization), 221–222, 
253–257
EBITDAR (earnings before 
interest, taxes, depreciation, 
amortization, and rental 
expense), 253–257. See also 
Multiples
Economic profit, 21
capital-light businesses, 478–481
for continuing value (CV) 
estimation, 289–290
discounted free cash flow
equivalence, 793–797
ROIC and size, 40–42
valuation models based on, 177–
178, 191–195
Economic spread analysis, 745–748
Economies of scale, 136–137, 596–597, 
610
Edmans, Alex, 89
Elanco, 529
Emerging markets, 691–707
estimating cost of capital, 698–700
after-tax cost of debt, 701
country risk premium, 701
weighted average cost of capital 
(WACC), 701
estimating the cost of equity, 700
exchange rate movements, 702