Valuation Using Financial Statements,
2nd Edition
by Gregory A. Sommers
Complete Chapter Solutions Manual
are included (Ch 1 to 14)
** Immediate Download
** Swift Response
** All Chapters included
, Chapter 1
The Link between Valuation
and Financial Statement Analysis
QUESTIONS
1. Understanding the Business Environment
Reformulation of the Financial Statements
Financial Statement Analysis
Forecasting Future Payoffs
Calculating Value
2. The goal of every business decision should be the maximization of shareholder value. If
we do not understand valuation, it is very hard to determine the impact of potential
choices.
3. Potential processes include organizing information in line with Porter’s value chain,
Porter’s five forces, or as analyzing SWOT.
4. To be able to reformulate (separate operating from financial activities) we must
understand the business activities of the company. Something that is financial for a
manufacturer could be part of enterprise operations for a company in the financial
industry. Our outstanding of the information gained in financial statement analysis will be
highly dependent on the degree to which we have understood the company. We cannot
compare two companies unless we understand the differences in their approach that
may have led to differing operating results. Finally, our forecasts will directly depend on
our understanding of the company, its’ plans, and the impacts of outside forces on the
company. The reasonableness of our forecasts will be directly driven by the
understanding we have arrived at about the company. Thus in each of these three steps
we see a direct impact of the extent to which we have gained an understanding of the
company.
5. Reformulation is the process of separating the operations from the financial activities.
This will be beneficial because the focus of valuation is generally on operations where
value is created.
2021
Solutions Manual, Chapter 1 1-1
, 6. Accounting-based valuation models as based on readily available information from
reported financial statements prepared in accordance with GAAP. Earnings, a focus of
financial market participants, is at the core of accounting-based models and is what most
analysts forecast. Additionally, accounting-based valuation models are mathematically
the same as cash-flow based valuation models. Differences in valuation are due to the
estimates used in the respective models. With accounting-based estimates, the analyst
is using estimates that commonly used (e.g., sales, earnings, asset turnover).
7. Generally speaking, value is created through a firm’s operating activities (e.g., the
buying and selling of goods and services), not through its financing activities (e.g.,
borrowing debt or issuing equity). The firm’s enterprise operations lead to the firm’s
profitability and growth, which determines whether value is created or destroyed.
8. Valuation models are based on estimates of future payoffs discounted back to the
valuation date. Various future payoffs can include free cash flows, earnings per share,
residual income and dividends.
9. As a firm moves through the various life cycle stages, the expected profitability and
growth changes along each stage. For example, as a start-up, a firm is not currently
profitable, but may have growth opportunities leading to expected profitability in the
future. These expectations impact the amount, timing and uncertainty of future payoffs
used in the fourth step of valuation, forecasting future payoffs. Similarly, a firm in the
Decline stage may be currently profitable, but with expected declining sales growth
along with lower profit margins. These expectations are reflected in estimating future
payoffs as well.
10. Often referred to as the submarine problem, cash flow-based valuation models require
firms with negative free cash flows to have a positive free cash flow by the end of the
forecast horizon. An accounting-based model provides an alternative for such situations.
In many instances, negative free cash flows are the result of intensive growth in which
investments swamp any operating cash flows (e.g., Netflix). While cash flow-based
models treat investments as a reduction in valuation, accounting-based models allow for
such investments to increase firm value.
2021
1-2 Valuation Using Financial Statements, 2nd Edition
2nd Edition
by Gregory A. Sommers
Complete Chapter Solutions Manual
are included (Ch 1 to 14)
** Immediate Download
** Swift Response
** All Chapters included
, Chapter 1
The Link between Valuation
and Financial Statement Analysis
QUESTIONS
1. Understanding the Business Environment
Reformulation of the Financial Statements
Financial Statement Analysis
Forecasting Future Payoffs
Calculating Value
2. The goal of every business decision should be the maximization of shareholder value. If
we do not understand valuation, it is very hard to determine the impact of potential
choices.
3. Potential processes include organizing information in line with Porter’s value chain,
Porter’s five forces, or as analyzing SWOT.
4. To be able to reformulate (separate operating from financial activities) we must
understand the business activities of the company. Something that is financial for a
manufacturer could be part of enterprise operations for a company in the financial
industry. Our outstanding of the information gained in financial statement analysis will be
highly dependent on the degree to which we have understood the company. We cannot
compare two companies unless we understand the differences in their approach that
may have led to differing operating results. Finally, our forecasts will directly depend on
our understanding of the company, its’ plans, and the impacts of outside forces on the
company. The reasonableness of our forecasts will be directly driven by the
understanding we have arrived at about the company. Thus in each of these three steps
we see a direct impact of the extent to which we have gained an understanding of the
company.
5. Reformulation is the process of separating the operations from the financial activities.
This will be beneficial because the focus of valuation is generally on operations where
value is created.
2021
Solutions Manual, Chapter 1 1-1
, 6. Accounting-based valuation models as based on readily available information from
reported financial statements prepared in accordance with GAAP. Earnings, a focus of
financial market participants, is at the core of accounting-based models and is what most
analysts forecast. Additionally, accounting-based valuation models are mathematically
the same as cash-flow based valuation models. Differences in valuation are due to the
estimates used in the respective models. With accounting-based estimates, the analyst
is using estimates that commonly used (e.g., sales, earnings, asset turnover).
7. Generally speaking, value is created through a firm’s operating activities (e.g., the
buying and selling of goods and services), not through its financing activities (e.g.,
borrowing debt or issuing equity). The firm’s enterprise operations lead to the firm’s
profitability and growth, which determines whether value is created or destroyed.
8. Valuation models are based on estimates of future payoffs discounted back to the
valuation date. Various future payoffs can include free cash flows, earnings per share,
residual income and dividends.
9. As a firm moves through the various life cycle stages, the expected profitability and
growth changes along each stage. For example, as a start-up, a firm is not currently
profitable, but may have growth opportunities leading to expected profitability in the
future. These expectations impact the amount, timing and uncertainty of future payoffs
used in the fourth step of valuation, forecasting future payoffs. Similarly, a firm in the
Decline stage may be currently profitable, but with expected declining sales growth
along with lower profit margins. These expectations are reflected in estimating future
payoffs as well.
10. Often referred to as the submarine problem, cash flow-based valuation models require
firms with negative free cash flows to have a positive free cash flow by the end of the
forecast horizon. An accounting-based model provides an alternative for such situations.
In many instances, negative free cash flows are the result of intensive growth in which
investments swamp any operating cash flows (e.g., Netflix). While cash flow-based
models treat investments as a reduction in valuation, accounting-based models allow for
such investments to increase firm value.
2021
1-2 Valuation Using Financial Statements, 2nd Edition
