Definition 2 of 109
Shareholder wealth maximization
= maximizing firm value
= maximizing stock price
Types of investment decisions
Ultimate goal of financial managers
P/E Ratio
Price to earnings ratio
Advantages of holding onto cash
,Term 3 of 109
if 3 or more sign changes
2 irrs (guess and check, cf keys will find the other)
uses actual stock prices
cash holdings increased to 13% of total assets
$1.8 trillion
cling to cash and add to debt
motivations:
firms couldn't raise money - citigroup
wanted to seize opportunities to buy cheap - ti
operating and strategic flexibility - google
not possible to solve
Definition 4 of 109
each sector focuses on specific variables
-retail looks at turnover and profit margins
-financial services wants ROE
-technology wants PEG and growth
Application of comparables method
corporations holding onto cash article
accounting statement of cash flows
profitability ratio (historical)
,Term 5 of 109
Media is ___ information
current
outdated
historical
past
Definition 6 of 109
the firm should be worth whatever the comparable firms are worth
reinvestment assumption
comparables approach
economic value added approach
dividends approach
Term 7 of 109
payback period method disadvantages
-ignores TVM (discounted doesn't though)
-ignores cash flows after the payback period (biased against long-term projects)
-requires an arbitrary acceptance criteria set by management
-a project based on the payback criteria might not have a positive NPV
cash flows generated by the project are discounted
always higher payback than regular
NPV
if the firms is undervalued or overvalued relative to other comparable firms
price estimate for non-traded firms
(IPO, private equity)
, Term 8 of 109
Profitability Index
efficiency of asset use
number Of years to recover the initial investment
pv of future cash flows from all existing projects
discounted cash flow valuation - absolute valuation
total PV of future cash flows/ initial investment
Definition 9 of 109
PV of future cash flows from all existing projects
Discounted cash flow valuation - absolute valuation
economic profits
matching principle of gaap
sum of squared errors
value of a firm
Term 10 of 109
advantage of discounted cash flow
1, hurts earnings and later survival
efficiency of asset use
there are not always comparable assets
provides information only regarding the value of the firm relative to other firms in the
industry
differences in ratios are likely due to differences in expected future growth rates and risk
can best be viewed as a shortcut to the absolute valuation method
uses actual stock prices
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