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Describe role of accounting numbers in corporate valuation

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Reference no: EM132261243

CASE ASSIGNMENT

The case assignment is a formal paper 5 pages in length. The paper should have a title page and reference page, which is not included in the 5 page count. The paper should be formatted using APA style. If you use any text book and/or external sources, please provide your citation and references.

Free cash flow is operating cash flow minus cash outlays for operating capacity like buildings, equipment, and furnishings. A company's free cash flow thus represents the amount available to finance planned expansion of operating capacity, to reduce debt, to pay dividends, or to repurchase stock. Under the free cash flow approach to valuation, the price of the stock at time = 0, P0, is equal to the sum of the future stream of expected free cash flow per share discounted back to the present at the firm's cost of equity capital.

Multiplying the estimated stock price, P0, by the number of common shares outstanding produces an estimate of the total common equity value of the company.

Simply put, the free cash flow model expresses today's market value of each common share as a function of investors' current expectations of the firm's future economic prospects as measured by its expected future free cash flows.

Discuss the following question in detail:

1- Describe the role of accounting numbers in corporate valuation.

2- P/E ratios are a useful indicator and tool when performing valuation and comparing firms. List three factors that should be considered or adjusted for when comparing P/E ratios among different firms.

3-.What is meant by sustainable earnings?

4. Discuss how a firm's P/E ratio is related to the firm's choice of accounting methods.

5. Discuss how a firm's P/E ratio is related to the present value of growth opportunities available to the firm.

6. One measure for determining expected earnings this quarter (t) could be considering earnings for the same quarter last year (t-4). List some of the disadvantages to using this measure.

7. Define "abnormal earnings" and describe the key features of the abnormal earnings approach to valuation.

8. Why do the stock returns of firms reporting "good news" drift upwards before the earnings announcement date?

Verified Expert

The assignment will include the different aspects of the different valuation methods. In the first part, the accounting number role in corporate valuation had been described. Then the three factors that should be adjusted before the comparison of the different firms P/E ratios had been given. The definition of sustainable earning had been given. Then the relationship of different factors in the P/E ratio had been explained. Then the limitation of taking the past earning as the measure for estimating future earnings of the business had been given. Then the abnormal earnings different aspects had been explained. In the end, the cause of an increase in stock price in a certain given situation had been identified.

Reference no: EM132261243

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Please follow the instructions on the attachment. Please include professional references APA style. about 7 references The case assignment is a formal paper 5 pages in length. The paper should have a title page and reference page, which is not included in the 5 page count. The paper should be formatted using APA style. It is due no later than Sunday at 11:59 pm (PST). If you use any text book and/or external sources, please provide your citation and references.

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