Preface  xiii • Improve a company’s strategic planning and performance management systems to align the organization’s various parts behind improved ex- ecution of strategic priorities and create value. • Communicate effectively with investors, including whom to talk with and how. • Design an effective capital structure to support the corporation’s ­strategy and minimize the risk of financial distress. Structure of the Book In this seventh edition, we continue to expand the practical application of finance to real business problems, reflecting the economic events of the past decade, new developments in academic finance, and the authors’ own experi- ences. The edition is organized into five parts, each with a distinct focus. Part One, “Foundations of Value,” provides an overview of value cre- ation. We make the case that managers should focus on long-term value creation for current and future shareholders, not just some of today’s share- holders looking for an immediate pop in the share price. We explain the two core principles of value creation: (1) the idea that return on invested capital and growth drive cash flow, which in turn drives value, and (2)  the con- servation of value principle, which says that anything that doesn’t increase cash flow doesn’t create value (unless it reduces risk). We devote a chapter each to return on invested capital and to growth, including strategic prin- ciples and empirical insights. Part Two, “Core Valuation Techniques,” is a self-contained handbook for using discounted cash flow (DCF) to value a company. The reader will learn how to analyze historical performance, forecast free cash flows, estimate the appropriate opportunity cost of capital, identify sources of value, and inter- pret results. We also show how to use multiples of comparable companies to supplement DCF valuations. Part Three, “Advanced Valuation Techniques,” explains how to analyze and incorporate in your valuation such complex issues as taxes, pensions, re- serves, capital-light business models, inflation, and foreign currency. It also discusses alternative return-on-capital measures and applications. Part Four, “Managing for Value,” applies the value-creation principles to practical decisions that managers face. It explains how to design a portfo- lio of businesses; how to run effective strategic-planning and performance management processes; how to create value through mergers, acquisitions, and divestitures; how to construct an appropriate capital structure and pay- out policy; and how companies can improve their communications with the financial markets. xiv  Preface Part Five, “Special Situations,” is devoted to valuation in more complex contexts. It explores the challenges of valuing high-growth companies, com- panies in emerging markets, cyclical companies, and banks. In addition, it shows how uncertainty and flexibility affect value and how to apply option- pricing theory and decision trees in valuations. Finally, our nine appendixes provide a full accounting of our methodol- ogy in this book. They provide theoretical proofs, mathematical formulas, and underlying calculations for chapters where additional detail might be helpful in the practical application of our approach. Appendix H, in particular, pulls into one place the spreadsheets for the comprehensive valuation case study of Costco featured in this edition. Valuation Spreadsheet An Excel spreadsheet valuation model is available via Web download. This valuation model is similar to the model we use in practice. Practitioners will find the model easy to use in a variety of situations: mergers and acquisi- tions, valuing business units for restructuring or value-based management, or testing the implications of major strategic decisions on the value of your company. We accept no responsibility for any decisions based on your in- puts to the model. If you would like to purchase the model (ISBN 978-1-118- 61090-8 or ISBN 978-1-118-61246-9), please call (800) 225-5945, or visit www .wileyvaluation.com.