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  • March 2008 (Revised February 2009)
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Transparent Value LLC

By: Sharon P. Katz, Krishna G. Palepu and Aldo Sesia, Jr.
  • Format:Print
  • | Pages:28
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Abstract

Leading index company Dow Jones recently signed a license and joint marketing agreement with Transparent Value LLC, the creator of a new fundamentals-based valuation methodology. The agreement allowed Dow Jones to offer a family of indexes based on the Transparent Value methodology. The methodology viewed stock prices as the clearest and most reliable signals of the market's expectations about a company's future performance and employed a Reverse Discounted Cash Flow (RDCF) valuation model to calculate the revenue required to support a given stock price for a given company. Then, the methodology applied a probability that the company would achieve the needed revenues in the next 12 months, based on its recent track record. Moreover, the methodology endeavored for specificity. For example, when possible, Transparent Value strove to determine what the company needed to do in its business activities to achieve the required revenues. Called "business performance requirements," these could include the number of new store openings, or the number of product unit sales needed, as two examples. The fictitious case protagonist, a business development manager at a leading money management firm, is looking to launch an exchange-traded fund (ETF) using a fundamentals-based index as the underlying index. She needs to decide whether to base her ETF products on the Dow Jones Transparent Value indexes. The case study provides an overview of equity indexes and ETFs and a step-by-step description of Transparent Value's methodology.

Keywords

Asset Management; Stocks; Price; Performance Expectations; Mathematical Methods; Valuation

Citation

Katz, Sharon P., Krishna G. Palepu, and Aldo Sesia, Jr. "Transparent Value LLC." Harvard Business School Case 108-069, March 2008. (Revised February 2009.)
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About The Author

Krishna G. Palepu

Accounting and Management
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  • Velong: Rethinking 'Made in China' By: Krishna G. Palepu, Nancy Hua Dai and Billy Chan
  • Tata Group in 2021: Pursuing Profits through Purpose By: Tarun Khanna, Krishna G. Palepu and Vidhya Muthuram
  • Swvl: Smart Mobility for the Masses By: Krishna Palepu, Esel Çekin and Menna Hassan
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