本学期资料 财务报表 Chpter Notes Chp003

1、Chapter 3,How Financial Statements are Used in Valuation,3-2,How Financial Statements are Used in Valuation,The web page offers further treatment of comparable analysis and screening analysis, as well as an extended discussion of valuation techniques and asset pricing. It also links you to fundament

2、al research engines.,3-3,What You Will Learn From This Chapter,What a valuation technology looks like What a valuation model is and how it differs from an asset pricing model How a valuation model provides the architecture for fundamental analysis The practical steps involved in fundamental analysis

3、 How the financial statements are involved in fundamental analysis How one converts a forecast to a valuation The difference between valuing terminal investments and going concern investments (like business firms) The dividend irrelevance concept Why financing transactions do not generate value, exc

4、ept in particular circumstances Why the focus of value creation is on the investing and operating activities of a firm How the method of comparables works (or does not work) How asset-based valuation works (or does not work) How multiple screening strategies work (or do not work) How fundamental ana

5、lysis differs from stock screening,3-4,The Big Picture for This Chapter,Understand the Difference Between: Simple Valuation Schemes Stock Screening, and Fully Fledged Fundamental Analysis Understand how the financial statements are used in each of these types of analysis Understand how formal fundam

6、ental analysis is done Understand what generates value in a business: Operating Activities? Investment Activities? Financing Activities?,3-5,Simple (and Cheap) Schemes for Valuation,Fundamental analysis is detailed and costly Simple approaches minimize information analysis (and thus the cost). But t

7、hey lose precision Simple methods: Method of Comparables Screening on Multiples Asset-Based Valuation,3-6,Identify comparable firms that have similar operations to the firm whose value is in question (the “target”). Identify measures for the comparable firms in their financial statements earnings, b

8、ook value, sales, cash flow and calculate multiples of those measures at which the firms trade. Apply these multiples to the corresponding measures for the target to get that firms value.,The Method of Comparables: “Comps”,3-7,The Method of Comparables: Hewlett Packard, Lenovo, and Dell, 2011,3-8,Ho

9、w cheap is this Method?,Conceptual Problems: Circular reasoning: Price is ascertained from price (of the comps) Violates the tenet: “When calculating value to challenge price, dont put price into the calculation” If the market is efficient for the comparable companies.Why is it not for the target co

10、mpany ? Implementation Problems: Finding the comparables that match precisely Different accounting methods for comps and target Different prices from different multiples What about negative denominators? Applications: IPOs; firms that are not traded (to approximate price, not value),3-9,Unlevered (o

11、r Enterprise) Multiples (that are Unaffected by the Financing of Operations),3-10,Variations of the P/E Ratio,3-11,Dividend-Adjusted P/E,3-12,Typical Values for Common Multiples,3-13,Screening Analysis,Technical Screens: Identify positions based on trading indicators Price screens Small stock screen

12、s Neglected stocks screens Seasonal screens Momentum screens Insider trading screens Fundamental Screens: Identify positions based on fundamental indicators of the firms operations relative to price Price/Earnings (P/E) ratios Market/Book Value (P/B) ratios Price/Cash Flow (P/CFO) ratios Price/Divid

13、end (P/d) ratios Any combination of these methods is possible,3-14,How Multiple Screening Works,1. Identify a multiple on which to screen stocks 2.Rank stocks on that multiple, from highest to lowest 3.Buy stocks with the lowest multiples and (short) sell stocks with the highest multiples,3-15,Funda

14、mental Screening: Returns to P/E Screening (1963-2006),3-16,Fundamental Screening: Returns to P/B Screening (1963-2006),3-17,Two-way Screening: Returns to Screening on both P/E and P/B (1963-2006),3-18,Problems with Screening,You could be loading up on a risk factor: You need a risk model You are in

15、 danger of trading with someone who knows more than you You need a model that anticipates future payoffs You are trading on a small amount of information; Ignore information at your peril.,3-19,Asset Based Valuation,Values the firms assets and then subtracts the value of debt: The balance sheet does

16、 this calculation, but imperfectly. Problems with this approach: Getting the value of operating assets when there is no market for them Identifying value in use for a particular firm Getting the value of intangible assets (brand names, R the second is for a going-concern investment in a stock. The i

17、nvestments are made at time zero and held for T periods when they terminate or are liquidated.,For terminal investment, = amount invested at time zero CF = cash flows received from the investment For investment in equity, = price paid for the share at time zero d = dividend received while holding th

18、e stock = price received from selling the share at time T.,3-24,Two Terminal Investments: A Bond and a Project,3-25,The Valuation Model: Bonds,rD is (one plus) the required return on the debt,Valuation issue: What is the Discount rate rD?,3-26,The Valuation Model: A Project,is the required return (h

19、urdle rate) for the project,Valuation Issues: How are cash flows forecasted? What is the discount rate?,3-27,Value Creation: V0 I0,The Bond (no value created): V0=1,079.85 I0=1,079.85 NPV= 0.00 The Project (value created): V0=1,529.50 I0= 1,200.00 NPV= 329.50,3-28,Valuation Models: Going Concerns,Th

20、e terminal value, TVT is the price payoff, PT when the share is sold. Valuation issues : The forecast target: dividends, cash flow, earnings? The time horizon: T = 5, 10, ? The terminal value? The discount rate?,3-29,Criteria for Practical Valuation,To Be Practical, We Require: 1. Finite Horizon For

21、ecasting Forecasting over infinite horizons is impractical 2. Validation Whatever we forecast must be observable ex post, so the forecast can be verified for its accuracy 3. Parsimony Information gathering & analysis should be straightforward The fewer pieces of information, the better,3-30,The Ques

22、tion for Forecasting: What Creates Value in a Firm,Equity Financing Activities ? Share Issues ? Share Repurchases ? Dividends ? Debt Financing Activities ? Investing and Operating Activities? Value is created by investing assets in operations to develop products to sell to customers. Financing activ

23、ities typically do not create value.,3-31,Valuation Models and Asset Pricing Models,A valuation model is a model for calculating the value of an asset An asset pricing model is a model to calculate the discount rate in a valuation model “Asset Pricing Model” is a misnomer: The model does not deliver the asset price,3-32,The Required Return,Otherwise known as: The Discount Rate The Cost of Capital Required Return = Risk-Free Rate + R