Chap003 - Chapter 3 Chapter 3 How Financial Statements are...

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Unformatted text preview: Chapter 3 Chapter 3 How Financial Statements are Used in Valuation How Financial Statements are Used in How Financial Statements are Used in Valuation Valuation Chapter 1 introduced fundamental analysis and Chapter 2 introduced the financial statements. Link to Previous Chapter This chapter shows how fundamental analysis and valuation are carried out and how the financial statements are utilized in the process. It lays out a five-step approach to fundamental analysis and forecasting of financial statements. Simpler schemes involving financial statements are also presented. This Chapter Chapter 4 will begin the implementation of the analysis outlined in this chapter with valuation based on forecasting cash flow statements Link to Next Chapter Link to Web Page What is the methods of comparables? How are fundamental screens used in investing? How is fundamental analysis carried out? How does fundamental analysis utilize the financial statements? How is a valuation model constructed? The web page offers further treatment of comparable analysis and screening analysis, as well as an extended discussion of valuation techniques and asset pricing. It also links you to fundamental research engines. What you will learn from this What you will learn from this Chapter Chapter • What a valuation technology looks like • What a valuation model is and how it differs from an asset pricing model • How a valuation model provides the architecture for fundamental analysis • The practical steps involved in fundamental analysis • How the financial statements are involved in fundamental analysis • How one converts a forecast to a valuation • The difference between valuing terminal investments and going concern investments (like business firms) • What business activities generate value • The dividend irrelevance concept • How the method of comparables works (or does not work) • How asset-based valuation works (or does not work) • How multiple screening strategies work (or do not work) • What is involved in contrarian investing • How fundamental analysis differs from screening Simple (and Cheap) Approaches to Simple (and Cheap) Approaches to Valuation Valuation Fundamental analysis is detailed and costly. Simple approaches avoid forecasting and minimize information analysis. But they lose precision. Simple methods (we will elaborate in the next slides): • Method of Comparables • Screening on Multiples • Asset-Based Valuation 1. Identify comparable firms that have similar operations to the firm whose value is in question (the “target”). 1. Identify measures for the comparable firms in their financial statements – earnings, book value, sales, cash flow – and calculate multiples of those measures at which the firms trade....
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This note was uploaded on 09/08/2011 for the course ACCOUNTING 101 taught by Professor Bayne during the Spring '10 term at Berkeley.

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Chap003 - Chapter 3 Chapter 3 How Financial Statements are...

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