Summary: Business Analysis And Valuation

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• Lecture 1

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• What's the discount dividend model?

  It's a theoretical valuation model, where you divide future dividends by (1+r)^t

• Why is the dividend discount model not a practical model?

  Because of the dividend conundrum: near-term dividends tend to be value-irrelevant

• Enterprise value: pros

  - Comprehensive, step-by-step approach
  - Separates firm valuation from allocating firm value among claim holders
  - Most used in practice

• Equity value: pros

  - Theoretical link with the dividend discount model
  - Focus on popular short-cut valuation method (PE ratios, MTB ratios)
  - Seemingly the most direct approach

• What's the relevance of accounting in capital markets?

  Business 'quality' drives business value. However, information asymmetry and conflict of interest causes information problems. This is an crucial role for disclosure and an need for credibility mechanisms.

• What are the limitations of accounting

  - Forecast errors: you forecast something and uses this in your financial statements, but this can be wrong (e.g. amount of oil
  - Strategic reporting
  - Imperfect rules: threat of strategic reporting induces regulators to disallow reporting discretion and develop rigid rules

• What are the four main limitations of accounting according to CFO's, regarding the influence on earnings quality?

  1. The business model of your company
  2. Accounting standards
  3. Your company's industry
  4. Macro-economic conditions

• Residual information problems call for accounting analysis if:

  - If governance agents, intermediaries, assurance professionals cannot/do not succeed in ensuring disclosure credibility or
  - Accounting regulators have developed rigid, dysfunctional rules.

• What does the accounting analysis analyze?

  It analyzes the firm's reporting environment to assess the risk of misreporting

• What does the accounting analysis attempts?

  It attempts to undo the financial statements from distortions caused by misreporting and rigid rules