1、Chapter 3,How Financial Statements are Used in Valuation,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 fundamental r 。

2、esearch engines,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 How the。

3、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) What business activities generate value The dividend irrelevance concept Why financing transact 。

4、ions do not generate value, except in particular circumstances Why the focus of value creation is on the investing and operating activities of a firm How the dividend discount model works (or does not work) How the method of comparables works (or does not work) How asset-based valuation works (or do 。

5、es not work) How multiple screening strategies work (or do not work) What is involved in contrarian investing How fundamental analysis differs from screening,Simple (and Cheap) Approaches to Valuation,Fundamental analysis is detailed and costly. Simple approaches avoid forecasting and minimize infor 。

6、mation analysis. But they lose precision. Simple methods: Method of Comparables Screening on Multiples Asset - Based Valuation,Identify comparable firms that have similar operations to the firm whose value is in question. Identify measures for the comparable firms in their financial statements earni 。

7、ngs, book 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,The Method of Comparables: An Example for Biotechnology Firms,The Method of Compa 。

8、rables: Dell, Gateway 2000 and Compaq, 1998,How cheap is this Method,Conceptual problems: Circular reasoning: How do you value the “comparable” companies? If the market is efficient for the comparable companies.Why is it not for the target company ? Implementation problems: Finding the comparables t 。

9、hat 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,Unlevered Multiples (that are Unaffected by the Financing of Operations,Variations of the P/E Ratio,Dividend 。

10、 Adjusted P/E,Typical Values for Common Multiples,Screening Analysis,Technical screens: identify positions based on trading indicators. Some of them: Price screens Small stock screens Neglected stocks screens Seasonal screens Momentum screens Insider trading screens Fundamental screens: identify pos 。

11、itions 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/C) ratios Price/Dividend (P/d) ratios Any combination of these methods is possible,How Multiple Screening Works,Identify a multiple on whic 。

12、h to screen stocks. Ranks stocks on that multiple, from highest to lowest. Buy stocks with the lowest multiples and (short) sell stocks with the highest multiples,Fundamental Screening: Return to Price-to-Book,Average Monthly Returns and Estimated Betas from July 1963 to December 1990 for Ten Price/ 。

13、Book Groups,Returns to two fundamental screens,Year by Year Returns: Value minus Glamour,Problems with Screening,You could be loading up on a risk factor You need a risk model You are in danger of trading with someone who knows more than you You need a model that anticipates future payoffs A full-bl 。

14、own fundamental analysis supplies this,Asset Base Valuation,Values the firms assets and then subtracts the value of debt: The balance sheet does this calculation, but imperfectly: Shareholders Equity = Total Assets -Total Liabilities Problems with this approach: Getting the value of operating assets 。

15、 when there is not a 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 investments are made at time zero and held for T periods when they terminate or are liquidated,For t 。

16、erminal 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 the stock = price received from selling the share at time T,Two Terminal Investments: A Bond and a Pro 。

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