2Santikian_FBE 421_sp11_

2Santikian_FBE 421_sp11_ - FBE 421: Financial A nalysis...

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FBE 421: Financial Lecture 1 Fundamental Analysis – Intrinsic Value
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Fundamental (Intrinsic) Value What is the fundamental value of a company ? where the CF terms represent expected future cash flows and the r terms represent the discount rate. Discount rates = opportunity cost of capital i.e., the potential return that can be obtained from another investment with comparable risk ... ) 1 ( 1 2 2 2 1 1 0 + + + + + = r CF r CF CF DCF
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Market Value vs. Intrinsic Value Market value = the price at which an asset trades E.g., market prices at close of business, January 11, 2011: WalMart=$54.29, Verizon=$35.36, Microsoft=$28.11, ExxonMobil=$75.69 Does Market Value = Intrinsic Value? If they are the same, financial markets are called “efficient.” i.e., prices reflect fundamentals. But are markets really efficient? What are the implications for valuation and our class
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Market Efficiency If markets are efficient, does this mean that we do not need valuation? Not exactly. If markets are efficient, there is no point in valuing publicly-traded firms, since their market price is equal to their fundamental value. However, we still need valuation in many other cases.
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Still Need Valuation in Efficient Market 1) Projects There are no market prices for internally-generated investments. e.g., How should Starbucks value its new product line of instant coffee, Via? 2) Private firms We cannot rely on prices to value an IPO. e.g., Facebook, LinkedIn Companies cannot rely on prices to value a private acquisition target. e.g., Google’s attempt to acquire Groupon 3) Mergers and Acquisitions (even with public companies)
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But Are Markets Efficient? Is it realistic to expect market prices to always be right? Example : Analysis of the Market in 1998 Dell Computer traded at 76x P/E General Motors 8x (high historical 14-18x more typical) Microcomputer 38x Was Dell’s P/E ratio too high in 1998? Was Dell’s P/E ratio too high in 1998?
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Market Inefficiency? 15x 20x 25x 30x 35x 40x 45x 50x 55x 60x 65x 6/06/97 10/24/97 3/13/98 7/31/98 12/18/98 5/07/99 9/24/99 2/11/00 6/30/00 11/17/00 4/06/01 8/24/01 1/11/02 5/31/02 10/18/02 3/07/03 7/25/03 12/12/03 4/30/04 9/17/04 2/04/05 6/24/05 11/11/05 3/31/06 8/18/06 1/05/07 5/25/07 Average Historical P/E Multiple = 40x SBUX P/E ratio 1997-2007
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Historical 
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This note was uploaded on 02/23/2011 for the course FBE 421 taught by Professor Plotts during the Spring '07 term at USC.

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2Santikian_FBE 421_sp11_ - FBE 421: Financial A nalysis...

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