868  Index
FASB (Financial Accounting 
Standards Board) accounting 
rules, 42–43, 251, 443, 444
Fayard, Gary, 681
Federal Reserve Bank of Philadelphia, 
310
FedEx, 88, 119, 216, 237
Fee and commission income, 735
Finance subsidiaries, 341–342
Financial Accounting Standards Board 
(FASB) accounting rules, 42–43, 
251, 443, 444
Financial crisis of 2007–2009, 3, 108–
109, 312
Financial engineering, 48–49, 661–664
derivative instruments, 662
hybrid financing, 664
off-balance-sheet financing, 662–664
Financial institutions. See Banks
Financial projections 
inflation and, 500–506
operating lease and, 449
Financial statements. See also Balance 
sheet; Income statements
in forecasting, 261–262
in multiple business units, 396–404
operating leases, 452–453
reconciliation to net income, 227
reorganizing, 182–184, 205–238
calculating NOPAT, 221–227
capitalized research and 
development, 237
case study (Costco), 210–233
cash flow available to investors, 
232–233
computing total funds invested, 
216–219
deferred gains, 237–238
free cash flow, 227–233
invested capital, 206–208, 211–221
key concepts, 205–210
operating leases, 234–236
pensions and postretirement 
benefits, 236–237
Equity:
defined, 219
valuing (DCF model), 191
Equity beta, 320
Equity cash flow (valuation model), 
200–202, 738–740
Equity equivalents, 207, 219–220
Equity financing, 659–660
Equity investments, 217
Equity risk capital, 745, 753–755
Equity value:
contingent liabilities, 348
convertibles, 348–352
debt, 344–346
employee stock options, 352–354
noncontrolling interests, 354–355
operating leases, 347
pension liabilities, 465
postretirement liabilities, 347–348
provisions, 346–347
relationship to enterprise value, 
178–179
ESG. See Environmental, social, and 
governance
Event trees, 778–779, 780–781
Excess capacity, reducing, 594–595
Excess cash, 216–217, 338
Executive stock options, 44
Exercise value approach, 353
Expectations:
decomposing TRS, 74–80
treadmill analogy, 70–73, 81–82
understanding, 80–81
Expected rate of return on new 
invested capital. See Return on 
new invested capital (RONIC)
Extraordinary dividends, 659
Facebook, 109, 138, 145
Fair value, 349
Fama, Eugene, 310
Fama-French three-factor model, 
59n6, 322–323
Farfetch, 711–722

Index  869
step 5 (investor funds 
forecasting), 278–280
step 6 (ROIC and FCF 
calculating), 281
nonfinancial operating drivers, 
281–282
stock vs. flow approach, 274
Foreign currency. See Currency, 
foreign
Frameworks. See Valuation 
frameworks
Free cash flow (FCF), 227–233 See also 
Cash flow
defined, 49, 205
discounted economic profit 
equivalence, 793–797
effects of inflation on, 496–498
in forecasting, 262, 281
key concepts, 209–210
operating leases, 448–449
projecting, 186–188
valuing at unlevered cost of equity, 
196–198
and weighted average cost of 
capital, 188–189, 793–797
French, Kenneth, 310
Fundamental investors, 101
General Dynamics, 535
Generally Accepted Accounting 
Principles (GAAP), 114, 338–
339, 458, 521–523, 607
General Mills, 90, 315, 529
Goodwill amortization, 607
Goodwill and acquired intangibles, 
215–216, 231, 241–242, 276–277
Google, 11, 109, 140–141
Governance. See also Environmental, 
social, and governance (ESG)
and strategic management, 572, 
573–576
Gross, Bill, 99
Gross cash flow, 228–229
Gross merchant value (GMV), 713, 716
reconciliation to net income, 227
reconciling total funds invested, 
218–221
pension obligations, 457–458
Financial subsidiaries, 217
Flexibility, 759–792
managing, 767–769
recognizing, 767–768
structuring, 768
vs. uncertainty, 762–764
valuation, four-step process, 778–
783
valuation examples, 779–792
valuation methods, 760–762
compared, 761, 773–774
decision tree analysis (DTA), 761, 
772–777, 784–788
real-option valuation (ROV), 761, 
770–771, 773–774, 779–783, 
788–792
risk-neutral valuation, 771–772
value and, 762–767
Forecasting, 259–284
components of a good model, 
260–262
consensus EPS forecasts, 727
in continuing value (CV) 
estimation, 291–293
Costco, 844–848
costs, fixed vs. variable and, 282
cyclical companies, 727–730
forecast ratios, 261, 267–268
inflation and, 283–284
length/deal determination, 
259–260
mechanics of, 262–284
step 1 (prepare/analyze historical 
financials), 263–265
step 2 (revenue forecasting), 
265–267
step 3 (income statement 
forecasting), 267–273
step 4 (invested capital and 
nonoperating assets forecast), 
273–276