Web3ch3 - CHAPTER THREE How Financial Statements are Used...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER THREE How Financial Statements are Used in Valuation Stephen H. Penman The web page for Chapter Three runs under the following headings: What the Chapter is Doing Historical Multiples Historical Equity and Bond Returns The Selection of Comparable Firms Screening Engines Calculating Multiples Unlevered (or Enterprise) Multiples Beware of Price-to-ebitda Ratios P/E Ratios and Dividends Price-to-sales Multiples During the Internet Bubble Multiple Comparison Methods and Chain Letters Asset-based valuation: Break Up Values Firms Trading as Market Values less than Net Assets No Arbitrage: the Law of One Price How Share Prices are Arbitraged Negative Stub Values Expectational Arbitrage and the Risk of Arbitraging The Cost of Arbitrage: Why There Might Appear to be an Arbitrage Opportunity When There is None.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Dealing with Risk in Active Investing Readers’ Corner Appendix to Web Page: Formal Analysis of Abnormal Returns, No-arbitrage, and Market Efficiency What this Chapter is Doing Chapter 3 does three things: First, it looks at three valuation and investment approaches that use financial statement information, but in limited, suspect or impractical ways, and points out the pitfalls in these methods: o The Method of Comparables o Screening Analysis o Asset-Based Valuation Second, it outlines the architecture of fundamental valuation approaches that employ all available information, and illustrates that architecture with the dividend discount model. In this chapter, as in each chapter in the book, approach the material with the question: how do I get an edge? What are the best techniques for getting a competitive edge? Does multiple comparison analysis give me an edge? Screening analysis? Chapter 1 gave you the flavor of active fundamental investing. This chapter does some active investing, albeit with limited information analysis. The web page here talks more about active investing, defining normal and abnormal returns more formally and giving you a better appreciation of what is meant by an “efficient market” and an “inefficient market.” Historical Multiples Table 3.3 gives you a sense of the historical level of some multiples. The BARRA web site has some engines that chart series of more multiples over time: http://www.barra.com Go to their Research + Indexes page. Look particularly at the Fundamentals and Fundamentals Charts features. Plot S&P 500 P/B ratios, P/E ratios, and P/S ratios. Plot return on equity for the S&P 500. Paste them on your wall, or least in your memory. They are important historical standards to judge the present by. See how these ratios differ for value and growth stocks, small and large stocks.
Background image of page 2
See also the graphs below where price-to-sales ratios during the internet bubble are discussed. The History of Equity and Bond Returns
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 28

Web3ch3 - CHAPTER THREE How Financial Statements are Used...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online