SUMMARY ENTIRE BOOK + COMPLETE TEST BANK
Business Analysis and Valuation: IFRS 6th Edition 2022
by Erik Peek (Author), Krishna Palepu (Author), Paul Healy (Author)
-1473779075
Cengage Learning EMEA
+ 115 test bank questions with answers (separately)
+ 60 important core concepts explained briefly alphabetically
Now in its sixth edition, Business Analysis and Valuation: IFRS Standards edition has successfully taught
students how to interpret IFRS-based financial statements for more than twenty years. With the help of
international cases, the authors illustrate the use of financial data in various valuation tasks and motivate
students to build a thorough understanding of theoretical approaches and their practical application.
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, Summary entire book all chapters
Chapter 1: A Framework for Business Analysis and Valuation Using Financial
Statements
Financial statements provide the most widely available data on financial reports on public
corporations’ activities and so investors and other stakeholders rely on financial reports to
assess the plans and performance of firms and corporate managers.
The capitalist market model broadly relies on the market mechanism to govern
economies activity, and decisions regarding investments made privately. Centrally
planned economies have used central planning and government agencies to pool national
savings and to direct investments in business enterprises, obviously, this model failed.
Matching savings to business investments opportunities is complicated because:
1. Entrepreneurs typically have better information than savers on the value of investment
opportunities.
2. Communication by entrepreneurs to investors isn’t completely credible, because
entrepreneurs have an incentive to inflate value of their ideas.
3. Savers lack financial sophistication needed to analyze and differentiate between various
business opportunities.
These issues can lead to the so called lemons problem, which can potentially breakdown
the capital market system. It basically means that all ideas are valued as average, because
investors can’t distinguish the good from the bad ideas. That means the good ideas are
undervalued and bad ideas ‘crowd out’ good ideas. The emergence of intermediaries can
prevent such a market breakdown; they help invertors distinguish good and bad ideas. There
are financial intermediaries like venture capital firms, banks, insurance companies etc. and
there are information intermediaries such as auditors, financial analysts, credit rating
agencies etc.
A firm creates value when it earns a return on its investment in excess of the return required by
its capital suppliers. Business strategies are formulated to achieve this goal, together with a
certain business environment this leads to a set of business activities. An Accounting system
measures and reports the economies consequences of these business activities. Financial
statements summarize the economies consequences of the business activities.
The institutional features of accounting systems are:
1. Accrual accounting: unlike cash accounting, accrual accounting, distinguishes between
the reporting of costs and benefits associated with economic activities and the actual
payment and receipt of cash, this provides more complete information on a firm’s periodic
performance.
2. Accounting conventions and standards: a number of accounting conventions have
evolved, for example measurability and conservatism conventions, that concern about
distortions from managers’ potentially optimistic bias. There is also an increased uniformity
from accounting standards (IFRS).
3. Managers’ reporting strategy: the manner in which managers use their
accounting discretion.
, 4. Auditing: this is a verification of the integrity of the reported financial statements by some
one other that the preparer and it ensures that managers use accounting rules and
conventions consistently over time, and that their accounting estimates are reasonable.
Business intermediaries add value by improving investors understanding of a firms ‘current
performance and its future prospects, they use financial statements to accomplish four key
steps:
1. Business strategy analysis: analyzing a firm’s industry and its strategy to create a
sustainable competitive advantage.
2. Accounting analysis: evaluate the degree to which a firm’s accounting captures the
underlying business reality.
3. Financial analysis: has the goal of using financial date to evaluate the current and past
performance of a firm and assess its sustainability. Ratio analysis and cashflow analysis
are important tools.
4. Prospective analysis: focuses on forecasting a firm’s future and is the final step in
business analysis. Two commonly used techniques are financial statement forecasting and
valuation
Chapter 2: Strategy Analysis
The profit potential of a company is determined by its own strategic decisions. Strategy
analysis involves industry analysis, competitive analysis and corporate strategy analysis.
Industry analysis
The firm assesses the profit potential of each of the industries in which the firm is competing
because the profitability of various industries differs systematically and predictably over time.
This profitability is influenced by five forces. The intensity of competition (rivalry among firms,
threat of new entrants and substitutes) determines the potential for creating abnormal profits
and whether or not these profits are kept by the industry is determined by the relative
bargaining power of the buyers and suppliers. The five forces are as follows:
1. Rivalry among existing firms: the nature of rivalry among existing firms is influenced by
the factors:
Industry growth rate: when growing very rapidly; no need to grap market share,
when stagnant; taking market share from each other is the only way to grow.
Concentration and balance of competitors: if an industry is fragmented, price
competition is likely to be severe, if there is one firm it can set and enforce the
rules of competition and if there are only two or three companies they can
implicitly cooperate with each other to avoid destructive price competition.
Degree of differentiation and switching costs: if the products are similar, customers
will switch on the basis of price; when switching costs are low, there is a greater
incentive for firms to engage in price competition.
Scale/learning economies and the ratio of fixed to variable costs: is there is a
steep learning curve or other economies of scale, there are incentives to engage in
aggressive competition for market share. If the ratio of fixed to variable costs is
high, prices will be reduced to utilize installed capacity.
Excess capacity and exit barriers: if capacity is larger than demand, firms cut
prices to fill capacity.
