Strategy, Value and Risk (4^th Ed., 4th ed. 2019) Industry Dynamics and Advanced Financial Management Global Financial Markets Series

The current transformation of the global economy is being driven by new fundamental innovations, digitalization, industry dynamics and climate change. The impact of this transformation in terms of value migration, industry boundaries, investment and firm continuity is vast. The fourth edition of Strategy, Value and Risk examines these issues, and how they will influence firms and industries in the future. Those aspects of the business environment that will have a significant impact on strategy, business models, investments and value are identified, and the accounting, finance, economic and quantitative principles that provide a foundation for the analysis of these issues are discussed.

Part I: Strategy, Value and Risk provides the strategic, economic, accounting and financial framework. Strategy discusses technology and innovation, industry dynamics, globalization and industry concentration, climate change, industry boundaries and future value. Value discusses the accounting framework and corporate finance and investment, while Risk covers investment risk, corporate risk management and value and risk. Part II: Quantitative Analytics provides an overview of financial statistics, derivatives and derivative applications, and provides a background on the financial economics used in the analysis of physical, intangible, financial and energy assets. Part III: The Analysis of Investments, Transformation and Value examines platforms, data and analytics, the energy sector, pharmaceutical and biotech, a growth firm and media transformation, and applies the accounting, economic, financial and quantitative concepts.

This fourth edition lays out scenarios that will likely shape firms and industries in the future, and has relevance to CFOs, corporate finance and investment professionals. Business model disruption, data and analytics, intangible assets and dynamic analysis are now key issues within the CFO role. Investment professionals are required to see the larger economic environment in which firms compete, assess a firm?s industry and its position within that industry, recognize which investments best serve its broad strategic goals and identify a firm?s capabilities and options.

A background in the accounting, finance, economic, quantitative and valuation concepts that are relevant to the digital economy, new industries, business models and technologies is essential for finance professionals. This book addresses these issues within the context of the fundamental changes underway in the global economy, and provides applications of the techniques to illustrate the concepts.

CONTENTS

Part I Strategy, Value and Risk

1. Strategy

1.1 Strategy and value

   1.2.1 Technology and innovation

   1.2.2 Industry dynamics

   1.2.3 Industry and globalization

1.3 Transformation and the firm        

   1.3.1 Innovation and the firm

   1.3.2 Industry boundaries

   1.3.3 Strategy and the environment

   1.3.4 Future Value

Appendix 1 - Classifying industry sectors today

References

2. Value         

2.1 Overview

2.2 The accounting foundations        

   2.2.1 Stocks and flows

   2.2.2 Ratio analysis

   2.2.3 Residual earnings and free cash flow

   2.2.4 Intangible assets and intellectual property

   2.2.5 Pro forma analysis

2.3 Corporate Investments

   2.3.1 Investment methods

   2.3.2 DCF valuation

   2.3.3 The Net Present Value Rule

   2.3.5 Valuing Real Options

   2.3.6 Types of Real Options

2.4 Corporate finance

  2.4.1 Overview

  2.4.2 Theories of firm value

  2.4.3 Developments in the theories of firm value

2.5 Optimizing the firm structure

Appendix 2 Modularity

References

3. Risk

3.1 Investment risk

3.2 Corporate risk management

3.3 The risk drivers    

3.4 Value and risk

References

Part II Quantitative Analytics

4. Financial statistics

4.1 Time series analysis

4.2 Regression models           

4.3 Volatility  

4.4 The lognormal distribution          

4.5 Volatility and the firm

References

5. Derivatives

5.1 Futures, forwards and options

5.2 The replicating portfolio and risk-neutral valuation

5.3 A model for asset prices

5.4 The Black-Scholes formula

5.5 Numerical techniques

   5.5.1 Monte Carlo Simulation

   5.5.2 The binomial and trinomial method

6. Derivative model applications     

6.1 Spot price models

   6.1.1 Geometric Brownian motion

   6.1.2 Mean reversion

   6.1.3 Jumps and seasonal patterns

6.2 Stochastic volatility

6.3 Forward Curve Models

  6.3.1 A single factor model for the forward curve

  6.3.2 The dynamics of the forward curve

  6.3.3 The relationships between forward curve and spot price models

6.4 Convertible bonds

6.5 Compound options

References

Part III The analysis of transformation and value

Overview

7. Platforms, data and analytics

7.2 Cloud computing

7.3 Artificial intelligence

7.4 Quantum computing

7.5 Data

7.6 Analytical management

7.7 IT investments

7.8 Patent options

References

8. Energy

8.1 The global energy markets

8.2 Transformation of the energy sector

8.3 Natural gas and renewables

8.4 Energy Statistics

   8.4.1 The Schwartz single factor model

   8.4.2 Schwartz single factor futures and forward pricing

   8.4.3 Volatility

   8.4.4 Correlations

   8.4.5 Simulating mean reversion

   8.4.6 Estimating the mean reversion rates

   8.4.7 The jump parameters

   8.4.8 The half-life of a mean reverting process

   8.4.9 Energy spot price model simulation

8.5 Natural gas generation valuation

   8.5.1 Overview

   8.5.2 Energy forward curves

   8.5.3 Energy derivatives

   8.5.4 Energy spread options

   8.5.5 Natural gas peaking power plant valuation

   8.5.6 Energy analysis and valuation

References

9. Pharmaceuticals and Biotechnology

9.1 Overview

9.2 New drug development

9.3 Valuation

   9.3.1 The revenues

   9.3.2 The research and development costs

   9.3.3 The cost of capital

   9.3.4 NPV valuation

   9.3.5 The Expected NPV Valuation

9.4 The real options method

References

10. A Growth Firm

10.1 Overview

10.2 The valuation of growth

10.3 A growth case study

10.4 Growth options

10.5 A growth option case study

References

11. Firm transformation and divesture

11.1 Industry decline

11.2 Strategies in declining industries

11.3 Industry decline and transformation

11.4 Investor valuation of the abandonment option

11.5 An abandonment option case study

References

Jamie Rogers is a finance professional based in New York, USA. He has extensive experience in valuation, market risk management, analytics, and quantitative finance across equities, fixed income, currencies, commodities and energy within investment banking, big four accounting and advisory. He holds a Bachelor of Commerce from the University of NSW, Sydney, Australia.

Explores how the current transformation of the global economy is being driven by new fundamental innovations, the digitalization of the economy, industry dynamics and climate change

Discusses the impact of this transformation in terms of industry boundaries, value migration, investment and firm continuity

Illustrates the accounting, finance, economic, quantitative and valuation concepts that are relevant to the digital economy, new industries, business models and technologies

Showcases applications of the techniques to illustrate the concepts