You are in: North America
Change location

You are here

Book > Textbooks > Financial Investment/Analysis
Valuation Using Financial Statements
Share
Share

Valuation Using Financial Statements

Third Edition
December 2024 | Cambridge Business Publishers
Download flyer
Formerly published by Cambridge Business Publishers, now published by Sage

Valuation Using Financial Statements, Third Edition is designed to teach students how to value companies using accounting and cash-flow information drawn directly from financial statements. The book provides a clear, structured roadmap for valuation, guiding readers through financial statement reformulation, profitability analysis, forecasting, cost of capital estimation, and the application of valuation models. Written as a practical guidebook, the authors walk students step by step through the valuation process using a single, continuous company example—Kooper Tire & Rubber. Beginning with the company’s Form 10-K and concluding with an estimate of equity value, every stage of the valuation process is demonstrated in detail and reinforced through a comprehensive valuation spreadsheet.

The text emphasizes readability and practical implementation, helping students understand not only how valuation models work, but when and why they should be used. By focusing on enterprise valuation and clearly linking forecasting assumptions to valuation outcomes, the book prepares students to perform independent, real-world company valuations.

Instructor Resources/Ancillaries: To access the resources for this title—including the test bank, editable chapter PowerPoint® slides, solution files, and supplementary materials—please follow these easy steps:

  1. Visit mybusinesscourse.com.
  2. Sign in with your instructor account. New to myBusinessCourse™? Create an instructor account here.
  3. From your instructor dashboard, go to the Request Materials page and request access to this title's resources. Verified instructors receive immediate access; new accounts are typically verified within 48 business hours.
 
About the Authors
 
Preface
 
Chapter 1: The Link between Valuation and Financial Statement Analysis
Why Valuation?

 
Organization

 
Understanding the Business and the Business Environment

 
Summary

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
 
Chapter 2: Role of Accounting
Understanding the Relation between Accounting Earnings and Free Cash Flows

 
Operating Versus Financial Activities

 
Formalizing the Relation between Free Cash Flows and Accounting Numbers

 
The Statement of Cash Flows

 
Summary

 
Appendix 2A: Financial Statement Articulation and Free Cash Flows

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 3: Reformulation to Identify Operating Activities
Separation of Operating and Financial Activities

 
Identifying Net Operating Assets, NOA

 
The Equity Section of the Balance Sheet

 
Identifying Net Operating Profit after Tax, NOPAT

 
Financial Statement Linkages

 
Appendix 3A: A Detailed Example of Effects of Classification as Operating versus Financial Activities

 
Appendix Summary

 
Appendix References

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
 
Chapter 4: Use of Additional Information to Enhance Reformulation
Additional Information Related to Kooper Tire & Rubber’s Balance Sheet

 
Additional Information Related to Kooper Tire & Rubber’s Income Statement

 
More Information on Pension and Postretirement Benefits Other Than Pensions

 
Appropriate Tax Rate Assumption for Reformulating Kooper Tire & Rubber

 
Estimating the Cost of Debt Capital For Kooper Tire & Rubber

 
Summary

 
Appendix 4A: Detail on Incorporation of Additional Information

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 5: Adjusting Accounting Information
The Effect of Accounting Method Choices on Valuation Models

 
Adjustment A: Inventory Method

 
Adjustment B: Operating Leases

 
Adjustment C: Special-Purpose Entities

 
Adjustment D: Share-Based Compensation

 
Reformulation Updated for Additional Information and Adjustments

 
Appendix 5A: Operating Lease Adjustments under the Prior Standards

 
Appendix 5B: Example of Accounting for Share-Based Compensation

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 6: Analysis of Enterprise Operations
Evaluating Sales Growth

 
Evaluating Profitability of Operations

 
Disaggregating Return on Net Operating Assets

 
Trade-Off between Operating Profit Margin and Asset Turnover

 
Evaluating Financial Activities

 
Detailed Analysis of Operating Profit Margin

 
Detailed Analysis of Operating Asset Turnover

 
Understanding Profitability by Examining Other Companies

 
The Mapping from Return on Net Operating Assets to Return on Equity

 
Advantages and Disadvantages of Equity Versus Debt Financing

 
Appendix 6A: Decomposition of Return on Equity (ROE)

 
Appendix 6B: Critical Thinking in Ratio Analysis

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 7: Full-Information Forecasting for Valuation
Overview of the Forecasting Process

 
The Roles of Sales Growth, PM, and ATO

 
Limited-information Forecasting

 
Compiling Limited-information Forecasts

 
Introduction to Industry Analysis

 
Moving from Limited-information to Full-Information Forecasting

 
Preparing for Valuation

 
Suspect Accounting

 
Summary

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 8: Market Multiple Valuation
Use of Accounting Data in Market Multiples

 
Calculating Market Multiples

 
Implementing the Multiples Method for Valuing Kooper Tire & Rubber

 
Price-to-Earnings Ratios Observed in Practice

 
Valuation Using Other Multiples

 
Consideration of EBITDA Multiples

 
Combining Estimates from Differing Multiples

 
The Product of a Multiples Valuation

 
Perspective on Valuation Multiples and Fundamental Analysis

 
Summary

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
 
Chapter 9: Cost of Capital for Operations and Equity
Estimating the Cost of Capital

 
Diversifiable and Non-Diversifiable Risk

 
Estimating Cost of Equity Capital Using the Capital Asset Pricing Model

 
Cost of Debt Capital

 
Computing the Cost of Capital for Operations

 
Summary

 
Appendix 9A: Estimating the Cost of Equity Capital

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
 
Chapter 10: Valuation Using Forecasts of Cash Flows
Valuation of a Savings Account and Illustration of the Concept of Time-Value of Money

 
Cash Flow-Based Valuation of a Finite-Life Project

 
The Free Cash Flow Valuation Model

 
Forecasts of Free Cash Flows from Operations for Kooper Tire & Rubber

 
The Use of Continuing Values in the Free Cash Flow Model

 
Free Cash Flow Valuation of KOOPER TIRE & RUBBER’S Operations

 
Summary

 
Appendix 10A: Derivation of Continuing Values in the Free Cash Flow Model

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 11: Valuation Using the Residual Operating Income Valuation Model
Moving from Cash Flows to Accrual-Basis Accounting Data in Valuing a Finite-Life Project

 
Derivation of the Residual Operating Income Valuation Model

 
Project Valuation Using the Residual Operating Income Model

 
Effects of Accounting Choices on the Residual Operating Income Model

 
Determining Value Based on the Forecasts of Operations for Kooper Tire & Rubber

 
The Use of Continuing Values in the Residual Operating Income Valuation Model

 
Residual Operating Income Valuation of Kooper Tire & Rubber’s Operations

 
Summary

 
Appendix 11A: Derivation of the Residual Operating Income Model

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 12: Valuation Using the Abnormal Operating Income Growth Model
Moving from Cash Flows to Accounting Data in Valuing a Finite-Life Project

 
Derivation of the Abnormal Operating Income Growth Valuation Model

 
Project Valuation Using the Abnormal Operating Income Growth Model

 
Effects of Accounting Choices on the Abnormal Operating Income Growth Model

 
Determining Value Based on the Forecasts of Operations for Kooper Tire & Rubber

 
The Use of Continuing Values in the Abnormal Operating Income Growth Valuation Model

 
Abnormal Operating Income Growth Valuation of Kooper Tire & Rubber’s Operations Using Forecasts

 
Summary

 
Appendix 12A: Derivation of the Abnormal Operating Income Growth Model

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 13: Valuation of Equity
Calculating the Value of Equity from the Value of Operations

 
Valuation Formulas for Equity

 
Choosing between an Operations or Equity Valuation Model

 
Midyear Adjustment

 
Demonstration of Steps for Comparison of Value Estimate to Market Price

 
Demonstration of Steps for Comparison of Value Estimate to Market Price

 
Using Analysts’ Forecasts as a Shortcut to Valuation

 
Summary

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
Problems

 
 
Chapter 14: Steady State and Forecast Horizon
Defining Steady State

 
Implementation of Steady State

 
Evaluating Valuation Models

 
Choice of Steady State Growth

 
Tying Market Multiples to Valuation Models

 
Summary

 
Questions

 
Multiple Choice

 
Mini-Exercises

 
Exercises

 
 
Quick Reference Guide for Chapters 1-14
 
Index
Key features
NEW TO THIS EDITION

Continued emphasis on a fully integrated, step-by-step valuation framework using financial statements.

Expanded demonstrations of forecasting, cost of capital estimation, and model implementation.

Refined explanations linking accounting-based analysis to cash-flow-based valuation models.

Enhanced spreadsheet support to guide students through independent valuation projects.

KEY FEATURES

Structured Valuation Framework: Provides a clear template for completing a company valuation from financial statement analysis through final value estimation.

Financial Statement Reformulation: Students learn to expand and reorganize financial statements to isolate operating activities and improve analytical insight.

Profitability and DuPont Analysis: Demonstrates how operating performance drives value and informs forecasting assumptions.

Forecasting Payoffs: Guides students through forecasting earnings and cash flows based on financial statement drivers.

Cost of Capital Estimation: Clearly explains how discount rates are estimated and applied in valuation models.

Multiple Valuation Models: Covers cash-flow-based models, earnings-based models, market multiples, and accounting-based valuation approaches.

Model Equivalence and Comparison: Explains how different valuation models relate to one another and when each is most appropriate.

Enterprise-Value Focus: Emphasizes valuation of operating activities to avoid forecasting leverage and to sharpen analytical focus.

Demonstrated Implementation: Every step of the valuation process is illustrated using a single company example, from Form 10-K to equity value.

Integrated Valuation Spreadsheet: A comprehensive spreadsheet mirrors the text and serves as a guide for student valuation projects.

Readable, Student-Focused Writing: Complex valuation concepts are presented clearly and concisely, with practical application always in view.

Supports Independent and Group Projects: Designed to guide students as they perform valuations of companies they select.