please discuss exhibits 14.1 and 14.2 specifically discuss how you believe fundamental value drivers impact firm value
Please discuss exhibipg 14.1 and 14.2 . Specifically, discuss how you believe fundamental value drivers impact firm value Your answer must be dividind into two paragraphs; one for each exhitit Noter This weelcs HW assibnonent will not be covered on the final exam. Analyze Fundamental Determinants of Firm Value: Profitability, Growth, Risk Forecast Future Financial Statements and Derive Fundamental Value Drivers over the Remaining Llfe of the Firm: Expected Future Earnings, Cash Flows, Dividends, Risk In this chapter, we continue our focus on fundamental characteristics of profitability, risk, growth, and value, but we augment that approach by exploiting the information in share price. We apply a variety of techniques that compare the firm's share price to the firm's fundamentals. The techniques described in this chapter include commonly used market multiples market-to-book (MB) ratios, price-earnings (PE) ratios, and price-earnings-growth (PEG) ratios - which provide efficient shortcuts in the valuation and analysis processes, As Exhibit 14.2 depicts, market multiples require an understanding of the same set of value drivers expected profitablity, growth, and risk. But market multiples impose restrictive assumptions on the valuation process. Rather than developing financial statement forecasts and computing present values of expected future payoffs, users of market multiples rely on simple ratios of share price relative to just one summary accounting number, such as earnings per share or book value of common equity per share. Analyze Fundamental Determinants of Firm Value: Profitability, Growth, Risk Summary Accounting Numbers: Book Value of Common Equity per Share, Earnings per Share, Long-Run Earnings Growth In this chapter, we also demonstrate reverse engineering share prices, a technique that enables you to infer the assumptions the capital market appears to be making in pricing a particular share. In essence, reverse engineering share prices amounts to reversing the directions of the arrows in Figure 14.1, and beginning with share price and working backward to deduce the market's expectations for future profitability, growth, and risk. In the last section of the chapter, we summarize a few key insights from the last 50 years of accounting and finance research suggesting that the capital makkets are highly but not perfectly efficient in using accounting earnings information to price stocks. These research findings are encouraging for those interested in using eayings and accounting information for tundamental analysis and valuation of stocks and for developing trading strategies to exploit accounting information
