kaplan_f9
TRANSCRIPT
AC
CA
Paper
F9
Fin
ancia
l Man
ag
em
en
t
Co
re a
rea
s o
f th
e s
ylla
bu
s
•F
ina
ncia
l ma
nag
em
en
t fu
nctio
n
•F
inancia
l managem
ent environm
ent
•W
ork
ing
ca
pita
l m
an
age
me
nt
•In
ve
stm
en
t a
pp
rais
al
•B
usin
ess fin
ance
•C
ost o
f ca
pita
l
•B
usin
ess v
alu
ation
s
•R
isk m
an
ag
em
en
t
Fo
rma
t o
f th
e e
xa
m
•F
ou
r co
mp
uls
ory
qu
estio
ns
•25 m
ark
s e
ach
•B
ala
nce
of
ca
lcu
lative
an
d d
iscu
rsiv
e
ele
me
nts
in q
ue
stio
ns
The fin
ancia
l mana
gem
ent
function
The fin
ancia
l mana
gem
ent
function
•(1
) R
ais
ing
fin
an
ce
•(2
) In
vesti
ng
fu
nd
s r
ais
ed
–th
is
inc
lud
es
•a
lloca
tin
g fu
nd
s a
nd
•contr
olli
ng in
vestm
ents
•(3
) D
ivid
en
d p
oli
cy
–re
turn
ing
ga
ins
to s
ha
reh
old
ers
Corp
ora
te s
trate
gy a
nd
obje
ctives
Co
rpo
rate
sta
ke
ho
lde
rs
Ag
en
cy th
eo
ry
•A
ge
ncy r
ela
tion
sh
ips o
ccu
r w
he
n o
ne
part
y, th
e p
rin
cip
al, e
mplo
ys a
noth
er
pa
rty, th
e a
ge
nt,
to
perf
orm
a t
ask o
n
the
ir b
eh
alf
•O
bje
ctives o
f princip
als
and a
gents
may
no
t co
incid
e
•P
rob
lem
of g
oa
l co
ng
rue
nce
No
t fo
r p
rofit
org
an
isa
tio
ns
Va
lue
fo
r m
on
ey
•E
ffe
ctive
ne
ss
–A
me
asure
of ou
tputs
–e.g
. nu
mb
er
of pu
pils
ta
ug
ht
•E
ffic
ien
cy
–A
me
asu
re o
f o
utp
uts
ove
r in
pu
ts
–e.g
. A
ve
rage
cla
ss s
ize
•E
co
no
my
–B
ein
g e
ffe
ctive
an
d e
ffic
ien
t a
t th
e lo
we
st
po
ssib
le c
ost
Syste
m a
na
lysis
Inve
stm
en
t a
pp
rais
al
•R
OC
E
•P
ayback
•N
et p
rese
nt va
lue
•In
tern
al r
ate
of
retu
rn
RO
CE
Pa
yb
ack
Pa
yb
ack
Th
e tim
e v
alu
e o
f m
on
ey
•M
on
ey r
ece
ive
d to
da
y is
wo
rth
mo
re
than the s
am
e s
um
receiv
ed in
the
futu
re b
eca
use
of:
–T
he
pote
ntia
l fo
r ea
rnin
g in
tere
st
–T
he
im
pact o
f in
flatio
n
–T
he
effe
ct of
risk
Co
mp
ou
nd
ing
•C
om
po
und
ing c
alc
ula
tes t
he
fu
ture
valu
e o
f a g
iven s
um
of m
oney
F =
P (
1 +
r)n
where
F
= f
utu
re v
alu
e a
fter
n p
eriods
P =
pre
se
nt o
r in
itia
l va
lue
r =
ra
te o
f in
tere
st
pe
r p
erio
d
n =
num
ber
of periods
Dis
co
un
tin
g
•D
isco
un
tin
g is
the
co
nve
rsio
n o
f fu
ture
cash flo
ws to their p
resent valu
e
An
nu
itie
s a
nd
pe
rpe
tuitie
s
•A
n a
nn
uity is a
co
nsta
nt a
nn
ua
l ca
sh
flow
for
a n
um
ber
of years
An
nu
itie
s a
nd
pe
rpe
tuitie
s
•A
n p
erp
etu
ity is a
n a
nn
ua
l ca
sh
flo
w
that occurs
for
ever
An
nu
itie
s a
nd
pe
rpe
tuitie
s
Re
leva
nt ca
sh
flo
ws
•O
nly
co
nsid
er
futu
re, in
cre
me
nta
l ca
sh
flow
s
•Ig
no
re:
–‘S
unk c
osts
’
–C
om
mitte
d c
osts
–D
ep
recia
tio
n
–In
tere
st &
div
iden
d p
aym
ents
•In
clu
de o
pport
unity c
osts
Ne
t p
rese
nt va
lue
•A
ll fu
ture
cash f
low
s
are
dis
cou
nte
d to
th
eir
pre
sen
t valu
e
an
d th
en
add
ed
•A
po
sitiv
e r
esult
ind
ica
tes th
e p
roje
ct
sho
uld
be
accep
ted
•A
ne
ga
tive r
esult
an
d t
he
pro
ject
sho
uld
be
reje
cte
d
Inte
rna
l ra
te o
f re
turn
•T
he
ra
te o
f in
tere
st
(dis
co
un
t) a
t w
hic
h
the N
PV
= 0
Inte
rna
l ra
te o
f re
turn
NP
V w
ith
in
fla
tio
n
Re
al a
nd
mo
ne
y r
ate
s
Ta
xa
tio
n
•T
wo
ta
x e
ffe
cts
to
co
nsid
er:
–T
ax p
aym
ents
on o
pera
tin
g p
rofits
–T
ax b
ene
fit
from
cap
ita
l a
llow
an
ces a
nd a
po
ssib
le ta
x p
aym
ent
from
a b
ala
ncin
g
cha
rge o
n a
sset dis
po
sal
Writin
g d
ow
n a
llow
an
ce
s
Pro
Fo
rma
NP
V c
alc
ula
tio
n
Work
ing c
apital in
NP
V
question
s
•W
ork
ing
ca
pita
l is
tre
ate
d a
s a
n
investm
ent at th
e s
tart
of th
e p
roje
ct
•A
ny in
cre
ase
s d
urin
g th
e p
roje
ct a
re
tre
ate
d a
s a
re
leva
nt ca
sh
ou
tflo
w
•A
t th
e e
nd o
f th
e p
roje
ct th
e w
ork
ing
ca
pita
l is
‘re
lea
se
d’ –
an
in
flow
•T
he
wo
rkin
g c
ap
ita
l re
qu
ire
men
t m
ay b
e
giv
en a
s a
% o
f (u
sually
) sale
s
Le
ase
ve
rsu
s b
uy d
ecis
ion
•C
om
pa
re th
e p
rese
nt va
lue
co
st o
f le
asin
g w
ith the p
resent valu
e c
ost of
bo
rro
win
g to
buy
•L
ea
sin
g c
ash
flo
ws:
–R
en
tal p
aym
en
ts (
usu
ally
in
ad
va
nce
)
–T
ax r
elie
f o
n t
he r
enta
l p
aym
ents
•B
uyin
g c
ash
flo
ws:
–A
sse
t p
urc
ha
se
–W
riting
do
wn a
llow
an
ces
Re
pla
ce
me
nt d
ecis
ion
s
•U
se
d w
he
n th
e a
sse
ts o
f a
pro
ject n
ee
d
repla
cin
g p
eriodic
ally
•C
ho
ose
th
e o
ptio
n w
ith
the
low
est
eq
uiv
ale
nt a
nn
ua
l co
st
•T
he o
ptim
um
repla
cem
ent cycle
is that
pe
rio
d w
hic
h h
as t
he
low
est E
AC
Ca
pita
l ra
tio
nin
g
•In
su
ffic
ien
t fu
nd
s to
und
ert
ake
all
positiv
e N
PV
pro
jects
•M
utu
ally
exclu
siv
e p
roje
cts
–ch
oo
se
th
e p
roje
ct w
ith
th
e h
ighe
st
NP
V
•D
ivis
ible
pro
jects
–calc
ula
te the
pro
fita
bili
ty ind
ex
•In
div
isib
le p
roje
cts
–tr
ial an
d e
rro
r
Ris
k in
inve
stm
en
t a
pp
rais
al
•R
isk =
pro
ba
bili
tie
s o
f d
iffe
rent
outc
om
es c
an b
e e
stim
ate
d
•E
xp
ecte
d v
alu
es
p =
pro
ba
bili
ty o
f e
ach
ou
tco
me
x =
the c
ash f
low
fro
m e
ach o
utc
om
e
•P
ayb
ack u
se
d in
ad
ditio
n to
NP
V
•R
isk a
dju
ste
d d
iscount ra
tes
Unce
rtain
ty in
inve
stm
ent
appra
isal
•U
nce
rta
inty
= p
rob
ab
ilitie
s o
f d
iffe
rent
outc
om
es c
annot be e
stim
ate
d
•S
en
sitiv
ity a
na
lysis
•M
inim
um
payback p
eriod
•A
ssess the w
ors
t possib
le s
ituation
•O
bta
in a
ra
ng
e b
y a
sse
ssin
g th
e b
est
an
d w
ors
t p
ossib
le s
itu
atio
ns
Se
nsitiv
ity a
na
lysis
•C
alc
ula
te h
ow
mu
ch
on
e in
pu
t va
lue
m
ust change b
efo
re the d
ecis
ion
ch
an
ge
s (
sa
y fro
m a
cce
pt to
re
ject)
•T
he
sm
alle
r th
e m
arg
in t
he
more
sensitiv
e is
the d
ecis
ion to the facto
r b
ein
g c
on
sid
ere
d
Wo
rkin
g c
ap
ita
l
•T
he
ca
pita
l ava
ilab
le f
or
co
nd
uctin
g th
e
day-t
o-d
ay o
pera
tions o
f th
e b
usin
ess
•A
ll a
sp
ects
of b
oth
cu
rre
nt a
sse
ts a
nd
cu
rre
nt lia
bili
tie
s n
ee
d t
o b
e m
an
ag
ed
to
:
–M
inim
ise t
he r
isk o
f in
solv
en
cy
–M
axim
ise t
he r
etu
rn o
n a
ssets
Ca
sh
op
era
tin
g c
ycle
Ca
sh
op
era
tin
g c
ycle
•T
he
len
gth
of
the
cycle
=
Inven
tory
days +
Receiv
ab
le d
ays –
Payab
les d
ays
•T
he
am
oun
t o
f ca
sh
re
qu
ire
d to
fu
nd
th
e
op
era
ting
cycle
will
incre
ase
as e
ith
er:
–T
he
cycle
ge
ts lo
ng
er
–T
he
le
vel o
f activity o
r sale
s in
cre
ases
Ca
sh
op
era
tin
g c
ycle
•R
ed
uce
cycle
tim
e b
y:
–Im
pro
vin
g p
rod
uctio
n e
ffic
iency
–Im
pro
vin
g f
inis
he
d g
ood
s a
nd
/ o
r ra
w
ma
teri
al in
ven
tory
tu
rnover
–Im
pro
vin
g r
eceiv
ab
le c
olle
ctio
n a
nd
pa
yab
les p
aym
ent
pe
riod
s
Wo
rkin
g c
ap
ita
l ra
tio
s
Wo
rkin
g c
ap
ita
l ra
tio
s
Ma
na
gin
g in
ve
nto
ry
Eco
no
mic
ord
er
qu
an
tity
Whe
re:
Co
=
co
st pe
r o
rder
D =
an
nu
al de
man
d
Ch
=
co
st of ho
ldin
g
on
e u
nit fo
r one
ye
ar
Q =
qu
an
tity
ord
ere
d
Inve
nto
ry m
an
ag
em
en
t syste
ms
•B
in s
yste
ms
–A
ctio
n ta
ken
if in
ven
tory
fa
lls o
uts
ide a
pre
set m
axim
um
an
d m
inim
um
•P
erio
dic
re
vie
w
–In
ven
tory
levels
revie
wed
at fixed
in
terv
als
•Ju
st in
tim
e
–A
ims fo
r elim
inatio
n o
f in
ven
tory
–F
inis
he
d g
oo
ds m
ad
e t
o o
rde
r
–R
aw
ma
teri
al in
ven
tory
is d
eliv
ere
d t
o p
oin
t of use w
he
n n
eed
ed
Acco
un
ts r
ece
iva
ble
•H
ave
a c
red
it p
olic
y
•A
ssess c
redit
wort
hin
ess
•C
on
tro
l cre
dit li
mits
•In
vo
ice
pro
mp
tly a
nd
co
llect
ove
rdu
e
debts
•F
ollo
w u
p p
roce
du
res
•M
on
itorin
g th
e c
red
it s
yste
m
•O
ffe
r d
isco
un
ts
Pro
mp
t p
aym
en
t d
isco
un
ts
De
bt fa
cto
rin
g
De
bt fa
cto
rin
g
Invo
ice
dis
co
un
tin
g
Acco
un
ts p
aya
ble
•S
imp
le a
nd c
on
ve
nie
nt so
urc
e o
f sh
ort
te
rm fin
ance
•N
orm
ally
se
en
as ‘fr
ee
’ b
ut:
–S
up
plie
r m
ay o
ffe
r a d
iscou
nt
for
pro
mpt
pa
ym
en
t
–U
nd
ue
dela
ys in
paym
ents
can
re
sult in:
•S
upplie
r re
fusin
g t
o s
upply
in futu
re
•Loss o
f re
puta
tion a
nd g
oodw
ill
•S
upplie
r in
cre
asin
g p
rice in futu
re
Ca
sh
Ma
na
ge
me
nt
•R
etu
rn p
oin
t =
low
er
limit +
(⅓
x s
pre
ad
)
•S
pre
ad
= 3
[(¾
tr
an
sa
ctio
n c
ost
va
ria
nce
of
ca
sh
flo
ws)
inte
rest ra
te]⅓
Ca
sh
ma
na
ge
me
nt
Ca
sh
ma
na
ge
me
nt
Ca
sh
ma
na
ge
me
nt
Fin
an
cin
g w
ork
ing
ca
pita
l
Fin
an
cin
g w
ork
ing
ca
pita
l
Cu
rre
ncy r
isk
•T
ran
sa
ctio
n e
xp
osu
re –
the
ris
k o
f th
e
exchange r
ate
changin
g b
etw
een the
tra
nsa
ctio
n d
ate
an
d th
e s
ett
lem
en
t d
ate
.
•T
ran
sla
tio
n e
xp
osu
re –
the
ch
an
ge
in t
he
valu
e o
f a s
ubsid
iary
due to c
hanges in
e
xch
an
ge
ra
te.
•E
co
no
mic
exp
osu
re –
the
lo
ss o
f com
petitive s
trength
due to c
hanges in
e
xch
an
ge
ra
tes.
Ch
an
ge
s in
exch
an
ge
ra
tes
He
dg
ing
fo
reig
n c
urr
en
cy r
isk
•F
orw
ard
co
ntr
acts
•M
oney m
ark
et hedge
•F
utu
res
•O
ptio
ns
Inte
rest ra
te r
isk –
the y
ield
curv
e
He
dg
ing
inte
rest
rate
ris
k
•F
orw
ard
ra
te a
gre
em
en
ts
•In
tere
st ra
te g
uara
nte
es
•In
tere
st ra
te f
utu
res
•In
tere
st ra
te s
wa
ps
Ma
cro
eco
no
mic
po
licy
Mo
ne
tary
po
licy
Fis
ca
l po
licy
Fin
an
cia
l ma
rke
ts
So
urc
es o
f fin
an
ce
Ne
w s
ha
re issu
es
•P
lacin
g
•O
ffer
for
sale
•O
ffe
r fo
r sa
le b
y t
en
de
r
•In
term
edia
rie
s’ o
ffe
r
•R
ights
issue
Rig
hts
issu
es
•E
xis
tin
g s
ha
reh
old
ers
ha
ve
th
e r
ight to
subscribe to n
ew
share
issues in
p
rop
ort
ion
to
th
eir e
xis
tin
g h
old
ing
s
•T
he
ore
tica
l Ex-r
igh
ts p
rice
(T
ER
P)
TE
RP
= V
alu
e o
f e
xis
tin
g s
ha
res +
pro
ce
ed
s fro
m is
su
e
No
. o
f sh
are
s in
issu
e a
fte
r th
e r
igh
ts is
su
e
•V
alu
e o
f a
rig
ht
Va
lue
of a
rig
ht =
TE
RP
–is
su
e p
rice
Va
lue
of a
rig
ht p
er
exis
tin
g s
ha
re =
V
alu
e o
f a
rig
ht .
No
. o
f sh
are
s n
ee
de
d to
h
ave
a r
igh
t
Isla
mic
fin
an
cin
g
•In
tere
st (r
iba
) is
str
ictly
pro
hib
ite
d w
ith
in Isla
mic
fin
an
ce
.
•In
ste
ad
inte
rest is
re
pla
ce
d w
ith
ca
sh
flo
ws fro
m p
rod
uctive
sourc
es, such a
s r
etu
rns fro
m w
ealth g
en
era
ting in
vestm
ent
activi
tie
s
•In
an
Isla
mic
ba
nk, th
e m
on
ey p
rovid
ed
by d
ep
osite
rsis
no
t le
nt,
bu
t is
in
ste
ad
ch
an
ne
led
into
an
un
de
rlyin
g in
ve
stm
en
t a
ctivi
ty,
wh
ich
will
ea
rn p
rofit. T
he
de
po
site
ris
re
wa
rde
d b
y a
sh
are
in
that pro
fit, a
fter
a m
ana
gem
ent fe
e is
ded
ucte
d b
y the b
an
k.
•K
ey te
rms in
Isla
mic
fin
an
ce
inclu
de
:–
Mura
bah
a (
trade
cre
dit)
–Ijara
(le
ase fin
ance)
–S
ukuk (
deb
t fina
nce)
–M
ud
ara
ba
(e
qu
ity
fin
an
ce
)
–M
usha
raka (
ven
ture
cap
ital)
Estim
ating the c
ost of capital -
The d
ivid
end v
alu
ation m
ode
l
•T
he
cu
rre
nt sh
are
price
is d
ete
rmin
ed
by the futu
re d
ivid
ends, dis
counte
d a
t th
e in
ve
sto
rs r
eq
uire
d r
ate
of re
turn
•A
ssu
me
s:
–D
ivid
en
ds w
ill b
e p
aid
in
pe
rpe
tuity
–D
ivid
en
ds a
re c
on
sta
nt or
gro
win
g a
t a
fixed
ra
te
Th
e c
ost o
f e
qu
ity
Th
e c
ost o
f e
qu
ity
Estim
atin
g g
row
th
•T
he
ave
rag
ing
me
thod
•G
ord
on’s
gro
wth
model
Th
e c
ost o
f d
eb
t
Wh
ere
:
I =
the p
re-t
ax
inte
rest p
aid
o
n £
10
0
T
= tax r
ate
P0
= e
x-in
tere
st
mark
et va
lue
of $100
nom
ina
l of
debt
Weig
hte
d a
vera
ge c
ost of
capital (
WA
CC
)
WA
CC
–th
e c
alc
ula
tio
ns
The s
tep
s:
1.
Calc
ula
te w
eig
hts
fo
r ea
ch
sou
rce o
f ca
pital
2.
Estim
ate
the
cost
of ea
ch
sou
rce
3.
Multip
ly the
weig
hts
fo
r ea
ch
sou
rce o
f ca
pita
l b
y its
co
st
4.
Sum
th
e r
esults
Cap
ital a
sset pricin
g m
ode
l (C
AP
M)
•T
ota
l ris
k c
om
prise
s s
yste
ma
tic r
isk a
nd
unsyste
matic r
isk
–S
yste
ma
tic r
isk =
ma
rket
wid
e f
acto
rs s
uch
as th
e s
tate
of th
e e
con
om
y
–U
nsyste
ma
tic r
isk =
com
pa
ny / ind
ustr
y
spe
cific
fa
cto
rs
•B
y h
old
ing
a d
ive
rsifie
d p
ort
folio
, in
vesto
rs c
an a
lmost elim
inate
u
nsyste
ma
tic r
isk
CA
PM
CA
PM
•In
ve
sto
rs s
ho
uld
on
ly b
e c
om
pe
nsa
ted
fo
r syste
matic
ris
k
•C
AP
M u
se
s th
e β
va
lue
of a
sh
are
to
m
ea
su
re it
s s
yste
ma
tic r
isk a
nd
fro
m
that pre
dic
ts the r
etu
rn a
n investo
r sh
ou
ld r
eq
uire
β=
0 =
ris
k f
ree
inve
stm
en
t
β=
1 =
the m
ark
et port
folio
(avg r
isk)
Cap
ital A
sset P
ricin
g M
odel
(CA
PM
)
Wh
ere
:
Rj=
th
e r
equ
ired
re
turn
fro
m t
he in
vestm
ent
Rf=
th
e r
isk fre
e r
ate
of
retu
rn
βj=
th
e b
eta
valu
e o
f th
e in
vestm
ent
Rm
= t
he r
etu
rn fro
m th
e m
ark
et
port
folio
CA
PM
can
th
ere
fore
be
used
to
calc
ula
te a
ri
sk a
dju
ste
d c
ost of eq
uity
Bu
sin
ess r
isks
Op
era
tin
g g
ea
rin
g
•L
oo
kin
g a
t th
e c
ost str
uctu
re (
ca
use
)
•Lookin
g a
t th
e im
pact on the incom
e
sta
tem
en
t (e
ffe
ct)
Fin
an
cia
l ge
arin
g
•A
me
asu
re o
f risk r
ela
ted to
how
th
e
com
pany is
fin
anced
Ca
pita
l str
uctu
re a
nd
WA
CC
Th
e tra
ditio
na
l vie
w
Mo
dig
lian
i an
d M
ille
r w
ith
ou
t ta
x
Mo
dig
lian
i an
d M
ille
r w
ith
ta
x
Ge
arin
g le
ve
ls in
pra
ctic
e
•P
rob
lem
s w
ith
hig
h leve
ls o
f g
ea
rin
g:
–B
an
kru
ptc
y r
isk
–A
ge
ncy c
osts
–T
ax e
xha
ustio
n
–E
ffe
ct o
n b
orr
ow
ing
ca
pa
city
–R
isk to
lera
nce o
f in
vesto
rs
–B
reach o
f A
rtic
les o
f A
ssocia
tio
n
–In
cre
ase
s in
th
e c
ost o
f b
orr
ow
ing
as
ge
ari
ng le
vels
ris
e
CA
PM
an
d g
ea
rin
g r
isk
•W
he
n u
sin
g b
eta
s in
pro
ject a
pp
rais
al,
the im
pact of gearing o
f th
e fin
ance
use
d m
ust b
e b
orn
e in
min
d
CA
PM
an
d g
ea
rin
g r
isk
Fin
an
cia
l ra
tio
s:
Pro
fita
bili
ty
RO
CE
Fin
an
cia
l ra
tio
s:
Inve
sto
r ra
tio
s
Po
ten
tia
l pro
ble
ms
•R
OC
E
–U
se
s p
rofit,
no
t m
axim
isatio
n o
f sha
reho
lder
we
alth
•E
PS
–D
oe
s n
ot re
pre
sen
t a
ctu
al in
com
e
•R
OE
–S
en
sitiv
e to
gea
ring
le
vels
•D
ivid
end y
ield
–Ig
no
res c
ap
ita
l gro
wth
Div
ide
nd
irre
leva
ncy th
eo
ry
•T
he
ory
: sh
are
ho
lders
do
no
t m
ind
how
th
eir r
etu
rns a
re s
plit
betw
een d
ivid
ends
an
d c
ap
ita
l ga
ins
•R
ea
lity: M
ark
et im
perf
ectio
ns d
ue
to
:
–D
ivid
en
d s
ign
alli
ng
–T
he
clie
nte
le e
ffe
ct
–T
axatio
n
–L
iqu
idity r
eq
uir
em
en
ts
•C
on
clu
sio
n: co
mp
an
ies te
nd
to
ado
pt a
sta
ble
div
ide
nd
po
licy
Bu
sin
ess v
alu
atio
ns
•V
alu
atio
ns a
re s
ub
jective
an
d a
re a
com
pro
mis
e b
etw
een b
uyer
and s
elle
r
•M
eth
od
s e
xis
t to
get a
sta
rtin
g p
oin
t fo
r n
eg
otia
tio
ns
–D
ivid
en
d g
row
th m
od
el (c
ove
red
pre
vio
usly
)
–A
sset ba
sed
valu
atio
ns
–P
rice
-ea
rnin
gs r
atio
me
thod
–D
iscou
nte
d c
ash f
low
basis
Asse
t b
ase
d v
alu
atio
ns
Asse
t b
ase
d v
alu
atio
ns
•P
rob
lem
s:
–Y
ou
’ll u
sua
lly g
et
a v
alu
e c
on
sid
era
bly
low
er
than
th
e m
ark
et
valu
e o
f a
ll th
e
com
pa
ny’s
sha
res w
hic
h r
efle
ct g
oo
dw
ill
–T
he
com
pa
ny is u
sua
lly b
ein
g b
oug
ht
for
its fu
ture
in
com
e p
ote
ntia
l, n
ot its a
ssets
Price
-ea
rnin
gs r
atio
mo
de
l
Usin
g a
n a
dju
ste
d P
/E m
ultip
le f
rom
a s
imila
r qu
ote
d c
om
pa
ny (
or
indu
str
y a
vera
ge):
Valu
e o
f com
pa
ny =
To
tal ea
rnin
gs
P/E
ra
tio
Valu
e p
er
sha
re =
EP
S
P/E
ra
tio
Pro
ble
ms:
•F
indin
g a
sim
ilar
qu
ote
d c
om
pa
ny
•Id
en
tify
ing r
equ
ired
ad
justm
ents
(if a
ny)
•M
ark
eta
bili
ty d
iscou
nt
to r
efle
ct th
at th
e
sha
res a
ren
’t q
uote
d
Dis
co
un
ted
ca
sh
flo
w b
asis
•C
alc
ula
te a
co
mp
an
y-w
ide
NP
V u
sin
g:
–D
eta
ils o
f a
ll fu
ture
com
pa
ny c
ash flo
ws
–T
he
com
pa
ny d
iscou
nt
rate
•P
rob
lem
s
–It
re
lies o
n e
stim
ate
s o
f b
oth
ca
sh
flo
ws
an
d d
iscou
nt
rate
s
–It a
ssum
es d
iscou
nt ra
te a
nd
ta
x r
ate
s a
re
co
nsta
nt th
rou
gh
th
e p
eri
od
–It d
oes n
ot evalu
ate
fu
rthe
r op
tio
ns
Ma
rke
t e
ffic
ien
cy –
We
ak fo
rm
•S
ha
re p
rice
s r
efle
ct a
ll kn
ow
n p
ub
licly
availa
ble
past in
form
ation a
bout
co
mp
an
ies a
nd
th
eir s
ha
res.
•Im
po
ssib
le to
pre
dic
t fu
ture
sh
are
price
m
ovem
ents
fro
m h
isto
rical p
attern
s
•S
ha
re p
rice
s fo
llow
a r
an
dom
wa
lk
Mark
et effic
iency –
Sem
i-str
ong
form
•S
ha
re p
rice
s r
efle
cts
his
torica
l in
form
ation a
bout com
panie
s a
nd
resp
on
d im
med
iate
ly t
o o
ther
cu
rre
nt
pu
blic
ly-a
va
ilable
info
rma
tio
n.
•E
vid
ence s
uggests
most le
adin
g s
tock
ma
rke
ts a
re s
em
i-str
on
g e
ffic
ien
t
Ma
rke
t e
ffic
ien
cy –
Str
on
g fo
rm
•S
ha
re p
rice
s r
efle
cts
all
info
rmatio
n
about com
panie
s in
clu
din
g info
rmation
tha
t h
as n
ot
ye
t b
ee
n m
ad
e p
ub
lic.
•P
ub
lica
tio
n o
f n
ew
in
form
atio
n d
oe
s n
ot
impact on the s
hare
price
•It
is u
nlik
ely
th
at
str
on
g-f
orm
exis
ts in
re
alit
y