A Preview of What Is Ahead 31

1.12 A Preview of What Is Ahead

A managers primary job is to increase the fundamental value of his or her company. Equation 1-1 shows that a firms fundamental value is the present value of its expected free cash flows when discounted at the weighted average cost of capital. This single valuation equation provides a good preview for the rest of the book. Chapter 2 shows how to determine the value today of a future cash flow, a topic called the time value of money. Chapter 3 explains financial statements and how to calculate free cash flows, along with taxation and its role in valuation. Chapter 4 shows how to use financial statements to identify a firms strengths and risks. In Part 2, Chapters 58 discuss bonds, the riskreturn relationship, and stocks. Chapter 9 discusses financial options, which often play an important role in managerial compensation, agency costs, and valuation. In Part 3, Chapter 10 ties these concepts together in estimating the weighted average cost of capital. Chapters 1113 apply the valuation concepts of Equation 1-1 to individual projects, including extensive risk analysis and real options. Part 4 explicitly addresses corporate valuation. Chapter 14 develops techniques for forecasting future financial statements and free cash flows. Chapter 15 directly uses the concepts in Equation 1-1 to determine a corporations value, including the value of its stock. Chapter 15 also discusses corporate 2005 Performance of Selected Dow Jones Global Stock Indexes
Table 1-2 U.S. Local U.S. Local Country Dollars Currency Country Dollars Currency Latvia 91.99% 120.95% France 9.11% 25.73% South Korea 58.41 54.69 Indonesia 8.93 15.47 Cyprus 53.70 75.18 Germany 8.46 24.99 Brazil 47.98 30.12 Sweden 8.43 29.86 Mexico 39.97 33.57 Hong Kong 6.94 6.68 Canada 25.48 22.34 U.K. 4.97 17.39 Japan 25.32 44.35 United States 4.49 4.49 South Africa 23.48 39.01 Taiwan 3.93 7.71 Austria 20.89 39.31 Belgium 3.33 19.08 Hungary 15.36 36.62 Spain 3.19 18.92 Switzerland 14.91 33.18 Malaysia _1.02 _1.56 Australia 11.33 18.97 Italy _1.96 12.98 Singapore 11.12 13.19 New Zealand _3.32 2.54 Chile 10.88 2.17 Portugal _4.38 10.18 Netherlands 10.82 27.70 Venezuela _19.33 _19.09
Source: Adapted from The Wall Street Journal Online, http://online.wsj.com/documents/ye05-djglobalindexes.htm.