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In: Business and Management

Submitted By cassumpcao
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How Financial Statements are Used in Valuation

Stephen H. Penman

The web page for Chapter Three runs under the following headings:

What the Chapter is Doing

Historical Multiples

Historical Equity and Bond Returns

The Selection of Comparable Firms

Screening Engines

Calculating Multiples

Unlevered (or Enterprise) Multiples

Beware of Price-to-ebitda Ratios

P/E Ratios and Dividends

Price-to-sales Multiples During the Internet Bubble

Multiple Comparison Methods and Chain Letters

Asset-based valuation: Break Up Values

Firms Trading as Market Values less than Net Assets

No Arbitrage: the Law of One Price

How Share Prices are Arbitraged

Negative Stub Values

Expectational Arbitrage and the Risk of Arbitraging

The Cost of Arbitrage: Why There Might Appear to be an Arbitrage Opportunity When There is None.

Dealing with Risk in Active Investing

Readers’ Corner

Appendix to Web Page: Formal Analysis of Abnormal Returns, No-arbitrage, and Market Efficiency

What this Chapter is Doing

Chapter 3 does three things:

First, it looks at three valuation and investment approaches that use financial statement information, but in limited, suspect or impractical ways, and points out the pitfalls in these methods:

o The Method of Comparables o Screening Analysis o Asset-Based Valuation

Second, it outlines the architecture of fundamental valuation approaches that employ all available information, and illustrates that architecture with the dividend discount model.

In this chapter, as in each chapter in the book, approach the material with the question: how do I get an edge? What are...

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