looking at the assignments and exams, i think i understand the concepts just fine, although the intricacies of interpreting how management might be manipulating their accounting numbers are not easy.
2
http://mit.edu/wysockip/www has useful stuff but doesn't have all the stuff from class anymore
peg ratios, often cited
3
cash flows over firm's life cycle
trend analysis: cfo vs ebx
red flags: growing discrepancy between net income and cash flows
undervalued liabilities, overcapitalization
investment activity
key: proceeds from exercise of stock options. good?
firm type: growth options vs assests in place
tech, growth: not much depreciation, financing primarily related to equity
airlines: cfo large compared to net income, even in loss years; large depreciation, investing; debt financing
retailers: walmart has large difference between cfo and net income
4
problems with residual income valuation
p/e or m/b with real options?
5
abnormal earnings with dcf (discrete cash flows)
what do analysts use? refs asquith et al., 2001
earnings multiple 99%
p/e 97
relative p/e 35
revenue multiple 15
price-to-book 25
cf multiple 13
dcf 13
eva 2
'model' 4
estimate price multiples for comparable firms avg/median/etc. why not use distro?
if current earnings are not good prediction for future: forward p/e or pro forma earnings (remove non-recurring) or price to operating cash flow
other p/e: peg, p/cf, levered, (debt+equity)/ebitda
m/b market to book
stock screener links
profitability: roa (return on assets)
roa decomposed into profit margin and asset turnover
roe (return on common equity)
roe decomposed into profit margin, turnover, leverage
short term liquidity
current ratio = current assets/current liabilities: short-term debt paying ability
quick ratio = (current assets-inventory)/current liabilities: acid test ratio
long-term solvency
long term debt ratio = long term debt/(long term debt+shareholder's equity)
d/e = long term debt/shareholders' equity
total liabilities/total assets
forecast eps goes down the last 6 months before release due to expectations management
8
detecting earnings management
ratio of volatility (stddev/mean) of accrual income measures to underlying volatility of sales and cfo
12
risk assessment
turnover: accounts receivable turnover, inventory turnover, fixed asset turnover, accounts payable turnover, days payable outstanding
short-term liquidity: current ratio, quick ratio (acid test), operating cash flow to current liabilities
long-term solvency (maybe a good way to value bonds?): debt/equity, long-term debt ratio (simple function of d/e), liabilities/assets
interest coverage ratio, in terms of both income and expenses or cash flow
refs modigliani-miller theorem without explaining: debt and equity financing are equivalent
absolute metrics: interest coverage, current ratio
13
cost of capital
equity cost of capital (discount rate)
capm: estimate beta (key issue) period typically 5 years; bloomberg, analysts, yahoo finance, etc
http://research.stlouisfed.org/fred/data/irates.html for risk-free rate and other data
fama-french 3-factor model extends capm with size, b/m (higher b/m->higher returns)
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html for rates, other data
long run averages: r_m-r_f (market-riskfree) 7.95% per year, r_smb (size premium) 3.32%, r_hml 5.05%
international
segmented/integrated capm: bekaert and harvey 1995
world capm holds if country stock market is integrated: http://www.msci.com/equity/index.html
ow, use r_country
'institutional investor' magazine ranks country credit risk 0-100
impressive fit to data: r_country = alpha + beta*rank
15
expected return depends on systematic risk
alpha = abnormal return = actual return - capm, for example
multiples valuation key assumption: earnings and book equity are comparable
drift strategies
returns over last 6-12 months predict next 6-12 months
post earnings announcement drift from under-reaction to news
red flag: again, gap between reported income and cfo
quality of earnings ratio: (earnings-cfo)/avg total assets
'widely accepted' evidence on fundamental trading strategies
e/p, b/m, cf/p: high->high future abnormal stock returns
var(cf)/p: high->low future abnormal stock returns
v/p (firm value from abnormal earnings model/price): high->low returns
short term reversal: high return this month->low next month
medium term momentum: high return past 6-12 months->high return next 6-12
accrual anomaly: high accounting accruals this quarter->low returns next quarter and beyond
16
bankruptcy detection
http://www.ibbotson.com/content/cc_1v11.asp cost of capital:$15/beta
altman z-score fit from manufacturing firm data
linear function of ratios
moody's, s&p use similar models to z-score to rate corp bonds
http://riskcalc.moodysrms.com/us/research/crm/45768.pdf
http://riskcalc.moodysrms.com/us/research/defrate.asp
17
mergers and acquisitions
'old' purchase method: goodwill asset created and amortized over 40 years
pooling of interests no longer permitted for valuing
18
employee stock options
20
off balance sheet activities
enron background
21
pension plans
defined benefit plans cause accounting problems
22
international financial analysis
insider (code law) codified system
close interplay gov, banks, unions, big firms
continental euro, japan
less public disclosure
outsider (common law)
us, uk, english-speaking
us vs uk differences
23
sarbanes-oxley and review
sarbox 2002
identify comparable firms
multex (?) via yahoo for quick industry benchmarks
will change: accounting rules, tech, market integration, contracting methods
won't change: thought process, economics
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