Valuation: The Art and Science of Corporate Investment Decisions

By Plotts, Julia | Journal of Applied Finance, January 1, 2009 | Go to article overview

Valuation: The Art and Science of Corporate Investment Decisions


Plotts, Julia, Journal of Applied Finance


Valuation: The Art and Science of Corporate Investment Decisions By Sheridan Titman and John Martin, Pearson Education: 2007, 556 pages

*In Valuation: The Art and Science of Investment Decisions, co-authors Sheridan Titman and John Martin have provided a tool kit for students and practitioners of financial analysis and valuation to implement successful techniques for project and enterprise valuation. The authors succeed in providing fundamental knowledge to a broad authence of readers that is grounded in industry practice and recent advances in valuation methods. The text directs readers to relevant examples and provides the methodology necessary for the reader to ask relevant questions in their approach to any decision involving valuation.

The book is accessible to a wide authence - from business professionals working within companies in strategic planning or corporate finance and accounting functions to valuation professionals, and in an academic setting the text is appropriate for business students from the undergraduate to executive MBA levels. Unlike other comprehensive valuation texts, it provides accessibility to readers who lack strong foundations in corporate finance because it provides a review of important concepts and theories where necessary. The text also does a great job in reviewing the mechanics of important calculations and provides an explanation of how to utilize the excel spreadsheet support to perform analysis. There are several applications for this text in a classroom environment. It is well suited for use in courses on valuation and corporate financial strategy and is also extremely relevant in Executive MBA coursework.

A common theme in several parts of the text is how firms might be able to incorporate best practices to avoid the downfall of wasted time and resources resulting from agency or "influence" costs. The text does a good job explaining how these influence costs arise and how to implement the appropriate valuation tools to minimize and control these costs.

The text is well written and explains terminology and concepts clearly and is organized into four parts: I. Project Analysis Using Discounted Cash Flow Analysis; II. Cost of Capital; III. Enterprise Valuation; Futures, Options & Valuation of Real Investments.

I. Part I. Project Analysis using DCF

This section does a nice job picking up where many introductory corporate finance texts leave off with capital budgeting. Many texts fall short of providing an understanding of the practical application of the discounted cash flow model. However, the Titman/Martin text refreshes users on the basics of the technique and provides a straightforward three-step approach that addresses various nuances of practical application that are encountered in the real world.

II.Part II. How to Estimate Cost of Capital For the Firm As a Whole and For Individual Investment Projects or Proposals

This section discusses how to estimate cost of capital for the firm as a whole and for individual investment projects or proposals. Other valuation texts can be overly theoretical on this topic and fail to explain how real time market considerations must be factored into both firm and project discount rates. One example is in the approach to the cost of debt capital. In the absence of a market yield to maturity, the text explains how to assign a cost of capital based on a market driven, risk-adjusted methodology (e.g., Figure 4.3, "Reuters Corporate Spreads"). This section could be strengthened with the addition of a financial statement analysis section so that students could tie this back to the assessment of firm credit quality. This section also addresses the cost of preferred equity, and hybrid securities - whereas many corporate finance texts fail to explain this in any level of detail or to allow the reader to practice the application of these forms of capital in the capital structure. Another strong point in this section is the appendix which provides additional "extensions and refinements of WACC estimation," and discusses important topics such as estimating the cost of debt capital for below-investment grade debt financing and factoring in default rates, recovery rates and yields on corporate debt (e. …

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