...differences across organizational units compared to Return on Investment (ROI). Another disadvantage with EVA is that numbers can be easily altered or manipulated to boost EVA, therefore painting a better picture than what actually exist. EVA also places a large emphasis on producing immediate results, thereby creating a disincentive for management to invest in quality projects. 2) Please examine the historical performance of Coca-Cola and PepsiCo in terms of EVA. What trends do you observe? What are the factors behind those trends? What do you think are the key drivers of EVA? Through observing EVA for Coca-Cola and PepsiCo, we noticed a few things. First, Coca-Cola’s EVA seems to be more stable, but PepsiCo, which although was negative from 1994-1997, is increasing rapidly and surpassed the EVA of Coca-Cola in the year 2000. This dramatic change in EVA for the two companies can most likely be explained by PepsiCo’s 1997 sale of Taco-Bell, KFC, and Pizza Hut, and the poor performance of former Coca-Cola CEO Douglas Ivester, whose mistakes cost Coca-Cola a huge loss in sales volume....
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...Valuing Coca-Cola Using The Free Cash Flow To Equity Valuation Model John C. Gardner, University of New Orleans, USA Carl B. McGowan, Jr., Norfolk State University, USA Susan E. Moeller, Eastern Michigan University, USA ABSTRACT In this paper, we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion. Keywords: Coca-Cola; Free Cash Flow to Equity; Equity Valuation; Super-normal Growth Model CORPORATE FINANCIAL MANAGEMENT AND STOCK VALUATION C orporate financial management encompasses the efficient acquisition and allocation of funds. The objective of corporate financial management is to maximize the value of the firm. Solomon (1963, page 22, Chapter II) argues that wealth maximization should be the goal of corporate financial management because this criterion maximizes the wealth of the owners of corporations and maximizes the wealth of a society by maximizing economic output. The value of the firm is measured by the market capitalization of the firm. The...
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...I. Introduction Financial examiners and practitioners have long been concerned in comprehension how the behavior of financial forecaster influence investment market efficiency. These investment analysts generate company earnings prediction, note down the details on particular organizations, provide business and sector examination, and make stock suggestions. Analysts assemble and practice a variety of information about numerous stocks, from their intrinsic values comparative to their up to date market prices, from their valuation multiples and to conclude with the rate the investment prospective of every stock. In this research paper, I as an investment analyst will inspect Pepsi company’s analyst predilections across stocks, and estimate the sources of the investment worth presented by analyst stock recommendations and its changes for the particular company. II. What is Stock Valuation Stock valuation is a method of estimating the average intrinsic value of a stock by applying fixed formulas that cause in numerous financial indicators. Every firm has an intrinsic value also known as strike price of a company, and that strike price is based on the quantity of free cash flow they can give throughout their effectual era. A forecaster (analyst) valuing the corporation possibly will look at company’s administration, the composition of its capital structure, expectation of future earnings, and market importance of resources (assets). According to Nguyen (n.d.), “When trying to...
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...Portfolio Modeling and Evaluation: Beating the Market ABSTRACT During the period of 2005 to 2010, the market portfolio (P1) and one suggested portfolio (P3) post a positive absolute return of 0.80% and 0.82% respectively which underperformed the active fund portfolio (P2) 0.91%. This report follows various modeling methods in order to back test the performance of the active fund portfolio and compare its performance with that of two other portfolios. The findings indicate that, even though P2 achieves the highest return on the overall performance, the limitations such as the macro environment, the assumptions set, and the Shrinkage method used that accidentally downsizes some valuable stocks in out-‐samples as they are closely correlated are being ignored. By contrast, P3 will probably offer a “middle-‐choice” which will bring a promising and more stable return. 1 Portfolio...
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...Advanced Accounting Third Edition Susan S. Hamlen University at Buffalo, The State University of New York Ronald J. Huefner University at Buffalo, The State University of New York James A. Largay III Lehigh University Cambridge BUSINESS PUBLISHERS Cambridge Business Publishers ADVANCED ACCOUNTING, Third Edition, by Susan S. Hamlen, Ronald J. Huefner, and James A. Largay III. COPYRIGHT © 2016 by Cambridge Business Publishers, LLC. Published by Cambridge Business Publishers, LLC. Exclusive rights by Cambridge Business Publishers, LLC for manufacture and export. ALL RIGHTS RESERVED. No part of this publication may be reproduced, distributed, or stored in a database or retrieval system in any form or by any means, without prior written consent of Cambridge Business Publishers, LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. STUDENT EDITION ISBN: 978-1-61853-151-3 Bookstores & Faculty: to order this book, call 800-619-6473 or email customerservice@cambridgepub.com. Students: to order this book, please visit the book’s Website and order directly online. Printed in Canada. 10 9 8 7 6 5 4 3 2 1 PREFACE W elcome to Advanced Accounting. We wrote this book with two major objectives in mind. First, we seek to reflect the changing topical emphases and content in the advanced accounting course; coverage is completely updated for new developments concerning...
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...MANAGING OF PORTFOLIO RISK QUẢN LÝ DANH MỤC ĐẦU TƯ MỤC TIÊU CHƯƠNG * Ý nghĩa của risk aversion và các bằng chứng nào cho thấy nhà đầu tư thường risk averse? * Các giả định cơ bản bên cạnh học thuyết Markowitz portfolio theory * Ý nhĩa của risk và các công cụ khác nhau dung để đo lường risk được sử dụng trong hoạt động đầu tư * Cách tính toán suất sinh lợi kỳ vọng (expected rate of return) của một tài sản đơn lẻ có rủi ro hay danh mục đầu tư gồm nhiều tài sản * Cách tính toán độ lệch chuẩn của suất sinh lợi đối với một tài sản riêng lẻ có rủi ro * Ý nghĩa của hiệp phương sai: COVARIANCE (Tích phương sai) giữa các suất sinh lợi và cách tính hiệp phương sai * Mối quan hệ giữa hiệp phương sai và hệ số tương quan * Công thức độ lệch chuẩn cho một danh mục đầu tư tài sản có rủi ro và khác biệt với độ lệch chuẩn của một tài sản riêng biệt có rủi ro * Công thức đo lường độ lệch chuẩn của một danh mục đầu tư cách thức và tại sao chúng ta phải đa dạng hóa một danh mục đầu tư * Những biến động đối với một danh mục đầu tư khi chúng ta thay đổi hệ số tương quan giữa các tài sản trong danh mục đầu tư * Thế nào là đường biên hiệu quả về lợi nhuận và rủi ro (the risk-return efficient frontier) * Lý do hợp lý đối với các nhà đầu tư khác nhau trong việc chọn lựa một danh mục đầu tư khác nhau từ dan mục nằm trên efficient frontier * Các nhân tố của danh mục đầu tư trên đường efficient frontier được các nhà đầu tư cá nhân lựa chọn 1. CÁC...
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...TUTORIAL 1 BUSINESS PLANNING & FINANCIAL PLANNING 1. Candidate should explain that a stockholder owns part of a company and is entitled to income in the form of dividends. Stockholders also elect directors who run the company. Stakeholders are groups of people who have an interest in how the firm is run. These include stockholders, employees, management, creditors and customers among others. Each group is interested in the firm’s operation and profitability for its own reasons. All stockholders are stakeholders, but not all stakeholders are stockholders. 2. The two common sources of corporate financing are stocks (shares) and bonds. Shareholders are the owner of the firm in which they are entitled to dividend if firms generate profit. Bondholders are creditors to a firm. They receive fixed coupon payment (annually or semi-annually) until maturity of the bond plus principle at maturity. 3. Symmetric Information is a situation in which investors and managers have identical information about firms’ prospects. Asymmetric information is a situation in which managers have different (better) information about firms’ prospects than do investors. 4. The relationship between stockholders and the management is called the agency relationship. This occurs when the shareholders as principals hire their agents to act on their behalf. The possibility of conflicts of interest between them is termed as the agency problem. There are two types of agency costs, the direct costs originating from compensation...
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...VALUATION TECHNIQUES Vault Guide to Finance Interviews Valuation Techniques How Much is it Worth? Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise, consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters, you should understand that the value of a company is equal to the value of its assets, and that Value of Assets = Debt + Equity or Assets = D + E If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually gain ownership of the company – if I buy 50 percent of a company’s equity, I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner. The value of debt is easy to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information, however, is hard to come by, so it is safe to use the book value.) Figuring out the market value of equity is trickier, and that’s where valuation techniques come into play. The four most commonly used techniques are: 1. 2. 3. 4. Discounted cash flow (DCF) analysis Multiples method Market valuation Comparable transactions method Generally, before...
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...VALUATION TECHNIQUES Vault Guide to Finance Interviews Valuation Techniques How Much is it Worth? Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise, consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters, you should understand that the value of a company is equal to the value of its assets, and that Value of Assets = Debt + Equity or Assets = D + E If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually gain ownership of the company – if I buy 50 percent of a company’s equity, I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner. The value of debt is easy to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information, however, is hard to come by, so it is safe to use the book value.) Figuring out the market value of equity is trickier, and that’s where valuation techniques come into play. The four most commonly used techniques are: 1. 2. 3. 4. Discounted cash flow (DCF) analysis Multiples method Market valuation Comparable transactions method Generally, before...
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...Risk and Return “Believe me! The secret of reaping the greatest fruitfulness and the greatest enjoyment from life is to live dangerously!” —Friedrich Wilhelm Nietzsche Are You the “Go-for-It” Type? The financial crisis has people buzzing about “systematic risk.” This term means different things in different contexts. Traditionally, systematic risk has referred to the non-diversifiable risk that comes from the impact the overall market has on individual investments. This risk is also known as “market risk” according to the Capital Asset Pricing Model (CAPM) described in this chapter. With the financial crisis, however, people have been using the term systematic risk in a somewhat different way. Many companies, especially financial firms, are connected to each other in significant ways. With a financial instrument known as a swap, for example, one company may have a contract with another company that calls for large payments to be made by one to the other according to specified terms. If the company that is obligated to pay does not, then the company that was supposed to receive the funds might fail. If that company that was supposed to receive the funds fails, then other companies that it owed money to according to other swaps might also fail. This chain reaction of default, failure, default, failure could affect a large number of firms. The larger the firm, the more such relationships it is likely to have and the greater the chain reaction failures that...
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...Aswath Damodaran INVESTMENT VALUATION: SECOND EDITION Chapter 1: Introduction to Valuation Chapter 2: Approaches to Valuation Chapter 3: Understanding Financial Statements Chapter 4: The Basics of Risk Chapter 5: Option Pricing Theory and Models Chapter 6: Market Efficiency: Theory and Models Chapter 7: Riskless Rates and Risk Premiums Chapter 8: Estimating Risk Parameters and Costs of Financing Chapter 9: Measuring Earnings Chapter 10: From Earnings to Cash Flows Chapter 11: Estimating Growth Chapter 12: Closure in Valuation: Estimating Terminal Value Chapter 13: Dividend Discount Models Chapter 14: Free Cashflow to Equity Models Chapter 15: Firm Valuation: Cost of Capital and APV Approaches Chapter 16: Estimating Equity Value Per Share Chapter 17: Fundamental Principles of Relative Valuation Chapter 18: Earnings Multiples Chapter 19: Book Value Multiples Chapter 20: Revenue and Sector-Specific Multiples 3 16 37 81 121 152 211 246 311 341 373 425 450 487 533 593 637 659 718 760 Chapter 21: Valuing Financial Service Firms Chapter 22: Valuing Firms with Negative Earnings Chapter 23: Valuing Young and Start-up Firms Chapter 24: Valuing Private Firms Chapter 25: Acquisitions and Takeovers Chapter 26: Valuing Real Estate Chapter 27: Valuing Other Assets Chapter 28: The Option to Delay and Valuation Implications Chapter 29: The Option to Expand and Abandon: Valuation Implications Chapter 30: Valuing Equity in Distressed Firms Chapter 31: Value Enhancement: A Discounted Cashflow...
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...Executive Summary Apple Inc., formerly Apple Computer, Inc., is a multinational corporation that creates consumer electronics, smart phones, tablets, personal computers, computer software, and commercial servers, and is a digital distributor of media content. Apple's core product lines are the iPhone smartphone, iPad tablet computer, iPod portable media players, and Macintosh computer line. Founders, Steve Jobs and Steve Wozniak effectively created Apple Computer on April 1, 1976, with the release of the Apple I, and incorporated the company on January 3, 1977, in Cupertino, California. Apple experienced modest, but above average growth from its founding until the mid-2000s when the popularity of its iPods and iTunes Store were joined by Apple’s release of the first iPhones. This combination, along with then-CEO Steve Jobs’ iconic leadership, catapulted Apple to successes rarely seen as it became the largest publicly traded company in the world by 2012. Our financial analysis of Apple revealed many things, not the least of which is the simple fact that Apple is a well-run, efficient, innovative company. Over the last three years, Apple realized a consistent positive trend in well over half of the twenty-two key financial ratios analyzed, highlighted by improvements in all profitability and inventory management ratios. It kept pace with the growth experienced in the technology and consumer electronics industries, despite significant gains in market share by giants...
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...Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa White Paper: Examining Berkshire Hathaway’s 1995 Purchase of GEICO Insurance Tim Glowa Tim@Glowa.ca September 12, 2001 © 2001 Tim Glowa September 12, 2001 -1- Berkshire Hathaway and GEICO Insurance Table of contents © 2001 Tim Glowa Executive Summary.................................................................................................... 3 Introduction................................................................................................................. 4 Review of the case: Berkshire Hathaway purchasing GEICO.................................... 4 Strategic Outcome....................................................................................................... 7 Finance........................................................................................................................ 7 Time Value of Money................................................................................................. 8 Assessment of the GEICO purchase ........................................................................... 8 Time value of money ................................................................................................ 11 An examination of the GEICO acquisition in hindsight........................................... 13 Limitations of Discounted Cash Flow ...................................................................... 15 Limitations of this Analysis ...
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...Preface Let me begin this preface with a confession of a few of my own biases. First, I believe that theory and the models that flow from it should provide the tools to understand, analyze, and solve problems. The test of a model or theory then should not be based on its elegance but on its usefulness in problem solving. Second, there is little in corporate financial theory that is new and revolutionary. The core principles of corporate finance are common sense and have changed little over time. That should not be surprising. Corporate finance is only a few decades old, and people have been running businesses for thousands of years; it would be exceedingly presumptuous of us to believe that they were in the dark until corporate finance theorists came along and told them what to do. To be fair, it is true that corporate financial theory has made advances in taking commonsense principles and providing structure, but these advances have been primarily on the details. The story line in corporate finance has remained remarkably consistent over time. Talking about story lines allows me to set the first theme of this book. This book tells a story, which essentially summarizes the corporate finance view of the world. It classifies all decisions made by any business into three groups—decisions on where to invest the resources or funds that the business has raised, either internally or externally (the investment decision), decisions on where and how to raise funds to finance...
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...Case Study 2: Warren E. Buffett, 1995 This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hathaway’s shares closed up 2.4 percent for the day, for a gain in market value of $718 million.1 That day, the Standard & Poor’s 500 index closed up 0.5 percent. The acquisition of GEICO renewed public interest in its architect, Warren Buffett. In many ways he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $7 billion), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28 percent from 1965 to 1994),2 Berkshire Hathaway paid him only $100,000 per year to serve as its CEO. Buffett and other insiders controlled 47.9 percent of the company, yet Buffett...
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