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428_lecture9_FS_S09

428_lecture9_FS_S09 - Valuation Class 9 Earnings FCF 1...

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Valuation Class 9 Earnings & FCF Notes based on Penman(2007), Robert Libby et al (2005), Easton, Sommers, Penman & Palencia (2001) 1
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Announcements Your homework set 1 returned Two handouts Correction Problem set 3, question 1). Penman E2.5. year 2003 should be year 2006. 2
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Results of pre-evaluation Received 45 responses Strongest Feature In Class examples, problem set, slide Suggestions Course materials: Customized text books Problem set: Be linked to course materials Lecture: Be slow, loud and clear, interactive Slides: Post to blackboard before the class Pace of the Course Fast (8), Just right (33), slow (4) 3
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Review: DCFM How to express FCF from the earnings equation with accruals? 4
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Review: Compare DDM and DCFM 5
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Review: Compare DDM and DCFM There are two identical firms, X and Y. Both of them reported the same results of financial statements in the year 2007 except that X pays all cash (profit) to shareholders and Y pays 50% of the cash (profit) to its shareholders. Under what condition, the values of the two firms are equal from an shareholder’s view? 6
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Class Outline Review of Financial Statements Earnings & FCF 1. Free Cash Flow Finished up 2. Introduction to Earnings: A measure of value added in a company 3. Earning vs Free Cash Flow 7
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FINANCIAL STATEMENTS FINANCIAL STATEMENTS Balance Sheet Balance Sheet Income Statement Income Statement Statement of Cash Flows Statement of Cash Flows 8
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9  Balance Sheet The balance sheet reports the resources the firm controls at a point in time and the claims against those resources. That is, it is a detailed description of the firm's assets, liabilities and owners' equity.
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10     The Form of the Balance Sheet Assets  =  Liabilities  +  Shareholders’ Equity or Shareholders’ Equity  =  Assets  –  Liabilities Assets  are economic resources that produce  future earnings. Liabilities are obligations  to transfer assets or  provide services to parties other than the  owners. Equity   is the owners' residual interest in the  assets of an entity that remains after  deducting the liabilities.
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Balance Sheet (Left hand side) A. Current Assets 1. Cash 2. Marketable Securities 3. Accounts Receivable 4. Inventory 5. Prepaid expenses Total Current Assets (Right hand side) Current Liabilities 1. Accounts payable 2. Notes payable (loans) 3. Accrued expenses 4. Current L-T Debt Total Current Liabilities 11
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Balance Sheet B. Long-Term assets 1. Gross Fixed Assets -Accum. Depreciation 2. Net Fixed Assets C. Other Assets 1. Patents, Copyrights 2. Goodwill 3. Investments in other companies (equity). Total Assets B. Long-Term liabilities 1. Long Term Debt (bonds) 2. Deferred Taxes C. Stockholder Equity 1. Preferred Stock 2. Common Stock 3. Paid in Capital 4. Retained Earnings Total Liabilities + Equity 12
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INCOME STATEMENT The income statement gives information relating to the firm’s Revenues and Expenses
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