Question 1: What Would Your Accountant Say?

As a marketing employee of a small company that is preparing to go public, you are skeptical about the validity of your firms accounting system. You note that your firm reports $1 million dollars of assets on its balance sheet, but the firms investment bank places a $3 million value on the company. You tell your firms controller, Its obvious our accounting is flawed because we dont report the value of economic resources. What would your accountant say?

Question 2: What Would Your Finance Manager Say?

As a new financial analyst at your investment bank, you are struggling with how your firm values companies. You note that companies report on the accrual basis of accounting. It seems that the discipline of financial reporting favors measuring income earned during a reporting period rather than the amount of cash generated. Yet, your investment bank, like all others, uses free cash flows to determine firm value. How would your manager respond to this seeming inconsistency?

Question 3: Theory Vs. Practice

Economic theory asserts that a firms value equals the present value of cash flows one expects its net economic assets to produce; a financial statement analyst could convert this firm value to intrinsic common equity value in order to estimate share price. In practice; however, it is the capital market, serving as an intermediary by bringing together the interested buyer and seller that determines the overall market price for a share of stock. Using your own experience with the stock market as a guide, discuss the various factors that determine the market price of the stock.