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day 4 relevant metrics 2009 spring v2 - RelevantMetrics...

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Relevant Metrics Dr. James Gong
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Today’s Agenda n What accounting information to report? n Theoretical model n SFAC 5 and SFAC6 n Group exercise: What do financial analysts  want? n What’s and why strategy? n Strategy based business reporting model n PwC Value-reporting n UIUC strategy based auditing n Managerial influence on providing information
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Review of Last Session n How do we measure phenomena and  attributes in accounting?
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What Information to Report n Theoretical model n Finance theory based n Accounting based
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Gordon s Dividend Discount Model P0 Dt = t = 1 (1+k)t where P0 = Current value of stock Dt = Dividend at time t  k = Required return P0 D1+P1 = (1+k) If holding in one period P0 D1 = (1+k) If holding in two periods D2+P2 (1+k)2 + If holding for infinite periods
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Price-Earnings Relationship P0 D1 (1+k) = D0 k = D1 (1+k)2 + + (Assume no growth, i.e., D0 = D1 =…and  using the geometric progression formula) = k E0 Assume earnings = dividends, and  assume earnings and dividends to remain  constant forever. The assumptions are very strong.
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Accounting Information  Based Model n Firm value is sum of n Book value of net assets n Abnormal earnings
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