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8/9/2019 1 an Introduction Investing and Valuation
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INTRODUCTION TOINVESTING
AND VALUATIONFinancial Statement Analysis
and Security ValuationStephen H. Penman
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THE AIM OF THE COURSETo develop and apply technologies for valuingfirms and for planning to generate value withinthe firm using financial statement analysis.
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WHAT WILL YOU LEARN FROMTHE COURSE
How intrinsic values are calculated What determines a firms value How financial analysis is developed for strategy and planning The role of financial statements in determining firms values How to pull apart the financial statements to get at the
relevant information How ratio analysis aids in valuation How growth is analy ed and valued The relevance of cash flow and accrual accounting
information How to calculate what the P!" ratio should #e How to calculate what the price$to$#oo% ratio should #e How to do #usiness forecasting How to assess the &uality of the accounting
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USERS OF FIRMS FINANCIALINFORMATION (DEMAND SIDE) Equity Inve t!"
'nvestment analysis(anagement performance evaluation
De#t Inve t!"Pro#a#ility of default)etermination of lending rates*ovenant violations
M$n$%e&ent
Strategic planning'nvestment in operations"valuation of su#ordinates
E&' !yeeSecurity and remuneration
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Liti%$nt)isputes over value in the firm
Cu t!&e"Security of supply
G!ve"n&entPolicy ma%ing+egulationTa,ation-overnment contracting
C!&'etit!"
Inve t!" $n &$n$%e&ent $"e t*e '"i&$"yu e" !+ +in$n,i$ t$te&ent
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INVESTMENT STYLES Intuitive inve tin%
+ely on intuition and hunches no analysis -$ ive inve tin%
Accept mar%et price as value no analysis S,"eenin%/se a few pieces of information and no forecastingminimal analysis
Fun $&ent$ inve tin%)iscover the value in an investment throughanticipations of payoffs
An$ y.e in+!"&$ti!nForecast payoffs from information
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COSTS OF EACH A--ROACH )anger in intuitive approach
Self deception0 ignores a#ility to chec% intuition )anger in passive approach
Price is what you pay1 value is what you get )anger in screening
'gnores information a#out the future Fundamental analysis
+e&uires wor% 2 Prudence re&uires analysis a defense against paying the
wrong price 3or selling at the wrong price4The )efensive 'nvestor
Activism re&uires analysis an opportunity to find mispricedinvestmentsThe "nterprising 'nvestor
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THE FIRM/ ITS CLAIMANTS/AND THE CA-ITAL MAR0ET
Cash from Loans
The Capital Market:Trading Value
BalanceSheet
IncomeStatement
Cash FlowStatement
Statement ofShareholders'
Equity
Cash from Share Issues
Dividends and Cash fromShare Repurchases
Interest and Loan RepaymentsCash from Sale of De t
!he Investors"!he Claimants on #alue
The Firm:The Value Generator
SecondaryDe tholders
SecondaryShareholdersCash from Sale of Shares
De tholders
Shareholders
$peratin%&ctivities
Investment&ctivities
Financin%&ctivities
The Financial Statements:Information on Value
Value of the firm 5 Value of Assets 5 Value of )e#t 6
Value of "&uity
Ty'i,$ y v$ u$ti!n !+ e#t i $
"e $tive y e$ y t$ 12
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VALUE34ASED MANAGEMENT Test strategic ideas to see if they generate value
a. )evelop strategic ideas and plans#. Forecast payoffs pro forma analysisc. /se pro forma analysis to discover value creation
Applications *orporate strategy(ergers 7 ac&uisitions8uy outs 7 spinoffs+estructurings
*apital #udgeting (anage implemented strategies #y e,amining decisions
in terms of the value added +eward managers #ased on value added
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INVESTING WITHIN A 4USINESS5INSIDE INVESTORS
8usiness 'deas 3Strategy4
'nvestment Funds Value 'n
Apply 'deas with Funds
Value -enerated Value 9ut
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THE -ROCESS OF FUNDAMENTAL ANALYSIS
Ste' 6 3 0n!7in% t*e4u ine The Products The :nowledge 8ase The *ompetition The +egulatory *onstraints
Ste' 8 3 An$ y.in%In+!"&$ti!n 'n Financial Statements 9utside of FinancialStatements
Ste' 9 3 F!"e,$ tin%-$y!++ (easuring Value Added Forecasting Value Added
Ste' : 3 C!nve"t
F!"e,$ t t! $ V$ u$ti!n
Ste' ; 3 T"$ in% !n t*e V$ u$ti!n 9utside 'nvestor
*ompare Value with Price to 8/;1S"
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0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
Dividends CashFlows
ResidualEarnings
Dividends CashFlows
ResidualEarnings
Forecast Period 8eyond theHori on
< : Ye$"
V a
l u a
t i o
n "
r r o r
3 A 4
/sed toestimateimplicit
price
Forecastsavaila#lefor ne,t? ;ears
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63.30%
176.20%
10.30%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
Dividends CashFlows
ResidualEarnings
Dividends CashFlows
ResidualEarnings
Forecast Period 8eyond theHori on
: Ye$"
V a
l u a
t i o
n "
r r o r
3 A 4