Ch_11 - Chapter 11 - Equity Analysis And Valuation Chapter...

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Chapter 11 - Equity Analysis And Valuation 11-1 Chapter 11 Equity Analysis and Valuation REVIEW Equity analysis and valuation is the focus of this chapter. This chapter extends earlier analyses to consider earnings persistence and earning power. Earnings persistence is broadly defined and includes the stability, predictability, variability, and trend in earnings. We also consider earnings management as a determinant of persistence. Earning power refers to the ability of the core operations of a company to operate profitably. Our valuation analysis emphasizes earnings and other accounting measures for computing company value. Earnings forecasting considers earning power, estimation techniques, and monitoring mechanisms for analysis. This chapter describes several useful tools for equity analysis and valuation. We describe recasting and adjustment of financial statements. We also distinguish between recurring and nonrecurring, operating and nonoperating, and extraordinary and nonextraordinary earnings components. Throughout the chapter we emphasize the application of earnings-based analysis with several illustrations.
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Chapter 11 - Equity Analysis And Valuation 11-2 OUTLINE Earnings Persistence Recasting and Adjusting Earnings Determinants of Earnings Persistence Persistent and Transitory Items in Earnings Earnings-Based Equity Valuation Relation between Stock Prices and Accounting Data Fundamental Valuation Multiples Illustration of Earnings-Based Valuation Earning Power and Forecasting for Valuation Earning Power Earnings Forecasting Interim Reports for Monitoring and Revising Earnings Estimates
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Chapter 11 - Equity Analysis And Valuation 11-3 ANALYSIS OBJECTIVES Analyze earnings persistence, its determinants and its relevance for earnings forecasting. Explain recasting and adjusting of earnings and earnings components for analysis. Describe earnings-based equity valuation and its relevance for financial analysis. Analyze earning power and its usefulness for forecasting and valuation. Explain earnings forecasting, its mechanics and its effectiveness in assessing company performance. Analyze interim reports and consider their value in monitoring and revising earnings estimates.
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Chapter 11 - Equity Analysis And Valuation 11-4 QUESTIONS 1. The significance and potential value of research and development costs are among the most important for financial statement analysis and interpretation. They are important not only because of their relative amount but also because of their significance for the projection of future performance. The analyst must pay careful attention to research and development costs and to the absence of such costs. In many companies they represent substantial costs, much of them of a fixed nature. We must make a careful distinction between what can be quantified in this area, and consequently analyzed, and what cannot be quantified and must consequently be evaluated in qualitative terms. While a quantitative measure of the amount of R&D
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This note was uploaded on 08/22/2011 for the course ECON 7200 taught by Professor Afrey during the Three '10 term at University of Adelaide.

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Ch_11 - Chapter 11 - Equity Analysis And Valuation Chapter...

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