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L E A R N I N G G O A L S 306 S TOCK V ALUATION C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand the difference between debt and equity in terms of tax treatment; the ownership claims of capital providers, including venture capitalists and stock- holders; and why book value per share is not a sophisticated basis for common stock valuation. Information systems: You need to understand the procedures used to issue common stock; the sources and types of informa- tion that impact stock value; and how such information can be used in stock valuation models to link proposed actions to share price. Management: You need to understand the difference between debt and equity capital; the rights and claims of stockholders; the process of raising funds from venture capi- talists and through initial public offerings; and how the market will use various stock valuation models to value the firm’s common stock. Marketing: You need to understand that the firm’s ideas for products and services will greatly affect the willingness of ven- ture capitalists and stockholders to contribute capital to the firm and also that a perceived increase in risk as a result of new projects may negatively affect the firm’s stock value. Operations: You need to understand that the amount of capital the firm has to invest in plant assets and inventory will depend on the evaluations of venture capitalists and would-be investors; the better the prospects look for growth, the more money the firm will have for operations. Discuss the free cash flow valuation model and the use of book value, liquidation value, and price/earnings (P/E) multiples to estimate com- mon stock values. Explain the relationships among financial deci- sions, return, risk, and the firm’s value. LG6 LG5 Differentiate between debt and equity capital. Discuss the rights, characteristics, and features of both common and preferred stock. Describe the process of issuing common stock, including in your discussion venture capital, going public, the investment banker’s role, and stock quotations. Understand the concept of market efficiency and basic common stock valuation under each of three cases: zero growth, constant growth, and variable growth. LG4 LG3 LG2 LG1 7
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307 P eople who wanted to buy a pair of high-fashion Oakley sunglasses in fall 2001 were out of luck if they looked for them at Sunglass Hut. In August 2001, Oakley’s biggest distributor announced it would no longer carry the brand. The loss of about 25 percent of its sales revenue immediately sent Oakley’s share price down 33 per- cent to about $12 a share, less than half its 52-week high of $26.56. Interestingly, however, some analysts considered Oakley stock a good buy despite this sig- nificant loss of future earnings. They liked Oakley’s diversification strategy. Trading on the NYSE under the eyeglass-evoking symbol OO, Oakley is known for its innovative approach to eyewear design. Its products have international appeal to athletes—from skiers and surfers to golfers and
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