{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Web3ch13 - CHAPTER THIRTEEN The Value of Operations and the...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER THIRTEEN The Value of Operations and the Evaluation of Enterprise Price-to-Book Ratios and Price-Earnings Ratios Stephen H. Penman The web page for Chapter Thirteen runs under the following headings: What this Chapter is Doing Demonstration of the Equivalence of Residual Earnings (RE) and Residual Operating Income (ReOI) Valuation Methods Corresponding Equity (Levered) Measures and Enterprise (Unlevered) Numbers Summary of Leverage Effects Understanding Enterprise Valuation Models Free Cash Flow as a Dividend Pitfalls in Focusing on Earnings Growth Should Managements’ Bonuses be tied to Earnings-per-share Growth? Stock Repurchases and Earnings-per-Share Growth: Papa John’s International Bubble Bubble Levered and Unlevered P/B Ratios: Reebok Dealing with the Valuations Effects of Employee Stock Options Valuation Methods and the Impairment of Goodwill Proceed to the Web Page for Chapter 14 for examples of ReOI and AOIG approaches to valuation.
Background image of page 1

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

View Full Document Right Arrow Icon
What this Chapter is Doing The analysis in Chapter 13 is built on the following notion: If an asset or liability is measured at its (market) value on the balance sheet, there is no work for the analyst to do. The accountant has already carried out the valuation. Putting it in terms of the task required, valuation involves forecasting future residual earnings, as directed by the residual earnings model. If assets and liabilities are already valued correctly in the balance sheet, the forecast of residual earnings must be zero. Accordingly there is no need to forecast: There is no work to do. While operating assets and liabilities are rarely valued correctly in the balance sheet, financial assets and liabilities usually are – or their market values can easily be obtained from the mark-to- market footnote to the statements required by FASB Statement No. 107. The chapter exploits this feature. The value of the equity is determined as follows: Value of Equity = Value of Operations – Value of the Net Financial Obligations If net financial obligations are measured at market value on the balance sheet, we only have to value the operations. Chapters 7 – 9 took us through methods to separate net operating assets (NOA) and net financial obligations (NFO) in income statements and balance sheets. Chapter 13 applies the valuation methods in Chapters 5 and 6 – residual earnings valuation and abnormal earnings growth valuation – to these reformulated financial statements: Residual operating income valuation : Anchor on the book value of NOA and add value by forecasting residual the residual income from operations (ReOI). Abnormal operating income valuation : Anchor on capitalized forward operating income and add value by forecasting abnormal growth in (cum-dividend) operating income (AOIG). Remember that AOIG = Change in ReOI, so forecasting ReOI is sufficient for both methods.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 12

Web3ch13 - CHAPTER THIRTEEN The Value of Operations and the...

This preview shows document pages 1 - 3. Sign up to view the full document.

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