428_lecture12_RIM_B_S09

428_lecture12_RIM_B_S09 - Valuation Class 12 Residual...

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Valuation Class 12 Residual Income Model Some notes based on Easton, et al (2001)
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The Process of Fundamental Analysis Knowing the Business · The Products · The Knowledge Base · The Competition · The Regulatory Constraints Strategy Analyzing Information · In Financial Statements · Outside of Financial Statements Forecasting Payoffs · Measuring Value Added · Forecasting Value Added Convert Forecasts to a Valuation Trading on the Valuation Outside Investor Compare Value with Price to BUY, SELL or HOLD Inside Investor Compare Value with Cost to ACCEPT or REJECT Strategy 1 2 3 4 5
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Eric Young Discusses Fundamental Analysis of  Business Plan In Valuation Process http://eclips.cornell.edu/clip.do?id=6536&tab=TabClipPagehttp://eclips.cornell.edu/clip.d Eric Young Discusses Fundamental Analysis of  Business Plan In Valuation Process Eric Young was a co-founder of Canaan Partners and has served as a General  Partner since its inception. At Canaan, Young has concentrated on  opportunities in communications systems and enterprise automation, having led  its investments in Argon Networks, Copper Mountain Networks, Diffusion  Software, Frame Technology, INS, Kalpana, ONI Systems, Spectrian and  Visigenic Software.  Prior to Canaan, he was a Senior Vice President of GE Venture Capital. During  his five years there, he was responsible for several successful investments in  companies such as Nellcor and Octel Communications. Young joined GE in  1979, holding successive managerial positions in sales, marketing and  manufacturing within two GE industrial product businesses before joining GE  Venture Capital.  Eric Young is a graduate of Cornell University with a BS in mechanical  engineering and received his MBA in finance from Northwestern University. 
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Different Valuation Models focus on alternative CF measures Source: Penman (2000) DDM DDM DCF DCF RIM RIM Wealth distribution Wealth distribution Wealth Creation Wealth Creation
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Metric Wars What Points Did Author Try To make? How many competitors are there? What do they sell?
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Metric Wars 1. What Points Did Author Try To make? 2. How many competitors are there? What do they sell? 3. Which model is better?
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Measuring Wealth The differences of EBO from Stern Stewart EVA
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Measuring Wealth Stern Stewart EVA EBO
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Measuring Wealth How to Implement EBO? ROE B t , r e k (dividend payout ratio) Advantages of EBO over DDM and DCF? What are his recommendations?
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Residual Earnings Residual Earnings Residual earnings = Earnings – required earnings based on investment Residual earnings 1 = Earnings 1 – (required rate of return * investment 0 ) RE 1 = E 1 – r * Capital 0
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Residual Income Model Valuation Anchored on Book Value – Residual Earnings t t t-1 Comprehensive earnings to common ROCE Book value =
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T E T E T T E T 2 E 2 E 1 0 E 0 ρ B V ρ RE .....
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