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Valuation: Measuring and Managing the Value of Companies, Fifth Edition
Chapter 1 Solutions
Why Value Value?
1. One benefit of a long-term perspective on value creation is that it leads to only engaging
in activities that create value and not wasting effort on activities that do not. Also, it is
2. The stock market mirrors the real economy over the long term. Mild inflation tends to be
positive for stocks when the companies have some monopoly power, but high inflation
3. The most common feature of market crashes is the use of short-term debt to invest in
4. No, getting bigger does not translate into creating value. Growth can harm value if the
5. The equity markets are liquid and have depth because there is a high number of buyers
6. Microsoft is a good example of the successful use of network effects. The company
provided the platform used by the vast majority of computer users and then produced
7. The board of directors and the shareholders could introduce incentive schemes where
8. The conservation of value principle says that anything that does not increase cash flows
does not create value. For example, managers should keep this principle in mind when
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