chapter17 - Chapter 17 Company Analysis CHAPTER OVERVIEW...

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Unformatted text preview: Chapter 17: Company Analysis CHAPTER OVERVIEW Chapter 17 concludes the three chapter sequence on fundamental security analysis by discussing the analysis of individual companies. It expands on the discussion in Chapter 13 involving valuation methods by examining more closely the components involved when implementing either the Dividend Discount Model or the P/E ratio model. Starting with a discussion of what fundamental analysis is, the chapter devotes considerable space to understanding earnings, one of the two components of the multiplier valuation model. This is done by examining the financial statements for Coca-Cola, and analyzing the determinants of accounting EPS. Ratio analysis is used to show how the firm's variables interact in determining EPS, with particular emphasis on ROE and its determinants. It is important to note here that the analysis of the financial statements, involving the calculation of ROA and ROE, follows the format used on the Level I CFA examination. This allows the use of CFA examination questions to illustrate these points, and shows students that what they are learning here exactly parallels the type of knowledge they are expected to have when seeking a CFA designation, which is widely recognized in the money management business. A thorough discussion is included of which earnings are important (future earnings), and how one might go about forecasting earnings and earnings growth. Both security analysts' estimates and mechanical estimates are examined. The concept of unexpected earnings is explained and illustrated. The remainder of the chapter is devoted to the P/E ratio, the other half of the valuation equation when using a multiplier model. Each of the three determinants of the P/E ratio are examined in detail. Coke's P/E is examined, and the reasons why P/Es vary from company to company are discussed. Additional company analysis, including the beta, is considered. Chapter 17 will help students to better understand the components of a valuation model--what they are, why they are being used, how they are determined, and so forth. In Chapter 13 students learn to calculate intrinsic values for stocks but do not have the opportunity to go behind the calculations. This chapter provides that opportunity. 17-1 When covering Chapter 17, it is strongly recommended that instructors emphasize such daily issues as earnings surprises, which drive stock price changes to a significant extent. There are plenty of examples available in the press each day on earnings surprises. The example (shown as a figure) in Chapter 17 on IBM's earnings announcement is a good example. The text strongly argues that fundamental security analysis should be performed in a particular order, and that means company analysis is the last step. On the other hand, by the time students get to Chapter 17 they should have a good feel for the subject matter and be able to really start understanding conceptually what fundamental security analysis is all about which...
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This note was uploaded on 10/10/2011 for the course FINANCE fin4423 taught by Professor Csk during the Fall '11 term at Troy.

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chapter17 - Chapter 17 Company Analysis CHAPTER OVERVIEW...

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