ACTG611 講義


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  • From tool perspective to functional perspective, developed after financial liberation under Ronald Reagan. About Bernard
  • Preface: Role of accounting in capital markets to achieve social and even international prominent status, Kuhn’s scientific revolution Edwards and Bell, Chamber, current value accounting. A mixture of law and economics. 代表人物 Paul Samuelson, 統計找不到出路後 , Markowitz 解救了他們 , 創造一堆基金經理人的就業機會 Kuhn, Thomas, The Structure of Scientific Revolutions , 2ed., University of Chicago Press, Chicago, 1970.
  • Ball & Brown 的博士論文根本找不到出路, Dopuch 救了他們‧洞察 insight. Yes, Virginia, There is Hope. Investment research 如 Value Line, IBES, S&P Earnings Forecaster (Zacks Investment Research) ,台灣叫投顧 I first cooperated with 首席投顧 in 1995then with TEJ in 2000 More than information transfer (Judge) Black 的地位是在 Financial crisis 時確立‧台灣金融危機也帶來創新‧ MMFs, MBSs, 將銀行的資產與負債皆解凍‧ Merton & Scholes 倒在 hedge funds, discontinuous risk Insufficient disclosure and risk management practices result in even local government went bankrupt 追高殺低是保險還是反向操作
  • Surrogate for market expectation. High business risk (operating risk, intangible assets) should not be coupled with high financial risk. Credit rating & capital adequacy.
  • GOEs are SOBs for banks. The danger of no competitive models. National capitalism
  • 資本市場論壇 Why can we ask for corporate transparency rather than confidential information? Shareholder capitalism vs. capitalist capitalism.
  • My advice to accounting students working for CPA firms: not work sheets but industry expertise.
  • Noisy rational expectations hypothesis. Arbitrage free from arbitrage.
  • Flexible manufacturing, ABC, discontinuous reengineering, social responsibility accounting. Research interest before 1983. GIGO. Econometric analysis shows us what is on average, yet we need to know what is the best for a given issue at a given time and in a given context, therefore, only case studies are relevant research.
  • Quoted from Victor Bernard. Decomposed into product lines or lines of business. Financing decisions and dividend policy determines financial leverage. Financial investments include cost method because of difficulty to determine fair value
  • Vertical and horizontal (core competence). Lines of businesses can be treated as quasi 100% owned subsidiaries, which approach is better depends on group strategy (legal and tax considerations) and key personnel considerations. If using consolidated FSs, subsidiaries are treated like lines of businesses. Treated like an ordinary investment portfolio and setting a normal asset allocation policy.
  • Under accrual accounting, one can make a lot of profit but still runs into liquidity problem by overinvestment and borrowing.
  • Du Pont formula Rule of thumb: long term risk free rate 6%, one market risk premium = risk free rate.
  • Monopolistic rent, secret recipe or network effects (increasing returns to scale) Intangible assets excluded causing equity understated (amortization expenses or impairment understated). Nissim, Doron, and Stephen Penman, “Ratio Analysis and Valuation: From Research to Practice,” Review of Accounting Studies 6 (2001): 109-154.
  • Equity increases by E x sustainable growth rate, then earnings increases by ROE x equity increase assume ROE remains constant. Hence, earnings growth rate = earnings increase / earnings = equity increase / E = sustainable growth rate.
  • 細部 ( 非彙整 ) 資料‧ Subsidiaries may be treated as separated business units.
  • All gains and losses (expenses) are after tax.
  • Moving to idle assets treated as liquidation of long-term assets and as investments in idle assets.
  • External transactions FCF in determining firm value rather than equity value.
  • Long-term operating accruals have already been reflected in ΔNOA. Capital structure is NIBD and OE
  • ACTG611 講義

    1. 1. Business Analysis & Valuation Using Financial Statements Palepu, Krishna G., Paul M. Healy, and Victor L. Bernard 3rd edn, South-Western, Thomson, 2004
    2. 2. Content <ul><li>Gold Rush </li></ul><ul><li>Business Analysis </li></ul><ul><li>Ascendancy of Shareholder Value </li></ul><ul><li>Multibusiness Organizations </li></ul><ul><li>Motivation </li></ul><ul><li>Accounting Issues </li></ul><ul><li>Financial Analysis </li></ul><ul><li>Forecasting </li></ul><ul><li>Valuation </li></ul><ul><li>Credit rating </li></ul>
    3. 3. Gold Rush ( 鍊金術 ) <ul><li>Random behavior of stock prices (up to 1960s) </li></ul><ul><ul><li>Statistic distribution </li></ul></ul><ul><ul><li>Technical analysis ( 線仙 ) </li></ul></ul><ul><ul><li>Against weak form efficiency (Fama) </li></ul></ul><ul><ul><ul><li>Paul Samuelson </li></ul></ul></ul><ul><ul><li>Price/volume analysis </li></ul></ul><ul><ul><ul><li>Grossman & Stigliz’s noisy rational expectations equilibrium (insider trading) </li></ul></ul></ul>
    4. 4. <ul><li>Portfolio theory (70s) </li></ul><ul><ul><li>Diversification </li></ul></ul><ul><ul><ul><li>Markowitz’s portfolio theory </li></ul></ul></ul><ul><ul><li>Mutual funds </li></ul></ul><ul><ul><ul><li>CAPM, World CAPM (MSCI) </li></ul></ul></ul><ul><ul><ul><ul><li>Capital Asset Pricing Model (Sharpe) </li></ul></ul></ul></ul><ul><ul><ul><li>Policy (Fund Managers) </li></ul></ul></ul><ul><ul><ul><ul><li>Determines more than 90% of fund returns </li></ul></ul></ul></ul>
    5. 5. <ul><li>Information content analysis (late 70s) </li></ul><ul><ul><li>Fundamental Analysis </li></ul></ul><ul><ul><li>Selectivity (abnormal profit) </li></ul></ul><ul><ul><li>Against semi-strong form efficiency </li></ul></ul><ul><ul><li>Insider information </li></ul></ul><ul><ul><li>Investment research </li></ul></ul><ul><ul><ul><li>Value Line*, S&P, Moody, Fitch </li></ul></ul></ul><ul><ul><ul><li>Insight information (costly information) </li></ul></ul></ul><ul><ul><ul><li>Financial analysts (no Nobel prize yet) </li></ul></ul></ul><ul><ul><li>Micro foundation of macro economics </li></ul></ul><ul><ul><ul><li>Information aggregation (Nobel prize?) </li></ul></ul></ul><ul><ul><ul><li>Timing or allocation, for index futures </li></ul></ul></ul>
    6. 6. <ul><li>Value of accounting data and analysis </li></ul><ul><ul><li>Perfect foresight of the direction of earnings change one year prior to announcement (Ball & Brown) </li></ul></ul><ul><ul><ul><li>Buy up sell down, 37.5% 1954-1996 </li></ul></ul></ul><ul><ul><ul><ul><li>Equivalent to 44% of the return given perfect foresight of the direction of stock price change (85.2%). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Perfect foresight of ROE, 43% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Perfect foresight of cash flow, 9% </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Earnings management not so pervasive as to make earnings data unreliable. </li></ul></ul></ul></ul>
    7. 7. Business Analysis <ul><li>Questions Addressed </li></ul><ul><ul><li>Security analysis </li></ul></ul><ul><ul><ul><li>Actual vs. expected performance </li></ul></ul></ul><ul><ul><ul><ul><li>Analyst own & consensus forecasts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Why different? </li></ul></ul></ul></ul><ul><ul><ul><li>Valuation given assessment of current & future performance </li></ul></ul></ul><ul><ul><li>Credit analysis </li></ul></ul><ul><ul><ul><li>Credit risk involved in lending (trades) </li></ul></ul></ul><ul><ul><ul><ul><li>Management of liquidity & solvency </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Business risk & financial risk </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loan & credit derivatives pricing </li></ul></ul></ul></ul>
    8. 8. <ul><ul><li>Auditing </li></ul></ul><ul><ul><ul><li>Accounting policies & accrual estimates consistent with the business & its recent performance. </li></ul></ul></ul><ul><ul><ul><ul><li>Financial reports communicate current status & significant risks of the business. </li></ul></ul></ul></ul>
    9. 9. <ul><li>Role of Financial Reporting </li></ul><ul><ul><li>Channeling savings into business investments </li></ul></ul><ul><ul><ul><li>Socialist (communist) model </li></ul></ul></ul><ul><ul><ul><ul><li>Through central planning and government agencies to pool national savings and to direct investments in industries (GOEs). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Delegation of both the political power and economic power to the central planners. </li></ul></ul></ul></ul><ul><ul><ul><li>Capitalist model </li></ul></ul></ul><ul><ul><ul><ul><li>Capital markets: shareholder vs. capitalist capitalism (McKinsey). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Current status: capitalism without competing alternatives. </li></ul></ul></ul></ul>
    10. 10. <ul><ul><ul><ul><li>The functioning of capital markets </li></ul></ul></ul></ul>Savings Business Ideas Information Intermediaries Financial Intermediaries
    11. 11. <ul><li>Recreate credible “inside information” </li></ul><ul><ul><li>Information asymmetry & incentive compatibility problems </li></ul></ul><ul><ul><ul><li>Cost and credibility of communication. </li></ul></ul></ul><ul><ul><ul><ul><li>Lemon markets: unable to differentiate, bad proposals crowed out good proposals, and investors lose confidence in the market. </li></ul></ul></ul></ul><ul><ul><li>Financial & information intermediaries </li></ul></ul><ul><ul><ul><li>FSs for laymen vs. for experts </li></ul></ul></ul><ul><ul><ul><ul><li>The level of financial supervision. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Corporate governance & transparency (faithful & full disclosure). </li></ul></ul></ul></ul>
    12. 12. Business Environment Business Strategy Business Activities Accounting Environment Accounting Strategy Accounting System Financial Statements Summarize the economic consequences of business activities Financial Accounting
    13. 13. <ul><li>From FSs to business analysis </li></ul><ul><ul><li>Get at managers’ inside information from public FS data about </li></ul></ul><ul><ul><ul><li>current performance and future prospects </li></ul></ul></ul><ul><ul><ul><li>Reverse engineering </li></ul></ul></ul><ul><ul><ul><ul><li>Successful intermediaries have at least as good an understanding of the industry economies as well as a reasonable good understanding of the firm’s competitive strategy. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Although outside analysts have an information disadvantage, they are more objective. </li></ul></ul></ul></ul>
    14. 14. <ul><ul><li>Business strategy analysis </li></ul></ul><ul><ul><ul><li>Identify key profit drivers and business risks </li></ul></ul></ul><ul><ul><ul><ul><li>Assess the company’s profit potential at a qualitative level. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Frame the subsequent accounting and financial analysis, i.e., key accounting policies and sustainable profits. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Make sound assumptions in forecasting future performance. </li></ul></ul></ul></ul>
    15. 15. <ul><ul><li>Accounting analysis </li></ul></ul><ul><ul><ul><li>Evaluate the degree to which a firm’s accounting captures the underlying business reality. </li></ul></ul></ul><ul><ul><ul><ul><li>Undo any accounting distortions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Improve the reliability of conclusion from financial analysis (GIGO). </li></ul></ul></ul></ul><ul><ul><li>Financial analysis </li></ul></ul><ul><ul><ul><li>Evaluate the current and past performance and assess its sustainability. </li></ul></ul></ul><ul><ul><ul><ul><li>Analysis should be systematic and efficient. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Explore business issues through ratio analysis and cash flow analysis. </li></ul></ul></ul></ul>
    16. 16. <ul><ul><li>Prospective analysis </li></ul></ul><ul><ul><ul><li>Forecasting a firm’s future </li></ul></ul></ul><ul><ul><ul><ul><li>FS forecasting and valuation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Synthesis of the above analyses </li></ul></ul></ul></ul><ul><ul><ul><ul><li>For decision contexts such as securities analysis, credit evaluation, M&As, debt and dividend policies, and corporate communication strategies. </li></ul></ul></ul></ul><ul><ul><li>EMH </li></ul></ul><ul><ul><ul><li>Why FS analysis? </li></ul></ul></ul><ul><ul><ul><ul><li>Application outside the capital market context. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Driving force of market efficiency (market efficiency paradox). </li></ul></ul></ul></ul>
    17. 17. Multibusiness Organizations <ul><li>The average number of segments </li></ul><ul><ul><li>For the top 500 U.S. companies is 11 in 1992. </li></ul></ul><ul><ul><ul><li>An attempt to reduce the diversity and focus on core businesses </li></ul></ul></ul><ul><ul><ul><ul><li>Diversified companies trade at a discount in the stock market relative to a comparable portfolio of focused companies, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>M&A of two unrelated businesses often fail to create value, and value can be created through spin-offs and asset sales. </li></ul></ul></ul></ul>
    18. 18. <ul><ul><ul><ul><li>Managers’ decisions to diversify and expand are driven by a desire to maximize the size rather than shareholder value (incentive misalignment problems), and capital markets find it difficult to monitor and value multibusiness organizations . </li></ul></ul></ul></ul><ul><ul><li>The economic consequences of managing all the different businesses under one corporate umbrella. </li></ul></ul><ul><ul><ul><li>Sources of value creation </li></ul></ul></ul><ul><ul><ul><ul><li>Relative transaction costs of performing a set of activities inside the firm versus using the market mechanism, such as </li></ul></ul></ul></ul><ul><ul><ul><ul><li>production process involves specialized assets such as human capital skills, proprietary technology, other organizational know-how that is not easily available in the marketplace, and market imperfection such as information and incentive problem. </li></ul></ul></ul></ul>
    19. 19. Motivation <ul><li>Historical background </li></ul><ul><ul><li>Conglomerates in 1980 </li></ul></ul><ul><ul><ul><li>Diversification </li></ul></ul></ul><ul><ul><ul><ul><li>M&As after oil crises </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Evolution in management accounting (Kaplan) </li></ul></ul></ul></ul><ul><ul><li>Financial engineering in 1985 </li></ul></ul><ul><ul><ul><li>Off-balance-sheet and off-income-statement </li></ul></ul></ul><ul><ul><ul><ul><li>Revolution in financial accounting </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Committed to this area of research since 1983. </li></ul></ul></ul></ul>
    20. 20. <ul><ul><li>New economy in 1995 </li></ul></ul><ul><ul><ul><li>Intellectual properties </li></ul></ul></ul><ul><ul><ul><ul><li>Advocating increasing returns (network effect) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>No suitable data to analyze and no history to guide (P/Dream ratio). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Econometric analysis neglects regime shift. </li></ul></ul></ul></ul><ul><ul><li>Asia financial crisis in 1997 </li></ul></ul><ul><ul><ul><li>All three happened closely together. </li></ul></ul></ul><ul><ul><li>Corporate scandals 2000 </li></ul></ul><ul><ul><ul><li>Sarbanes-Oxley Act </li></ul></ul></ul><ul><ul><ul><li>IFRS </li></ul></ul></ul><ul><ul><ul><li>Basel II </li></ul></ul></ul><ul><ul><ul><li>IAVS </li></ul></ul></ul>
    21. 21. Accounting Issues <ul><ul><li>Fair value vs. historical cost </li></ul></ul><ul><ul><ul><li>Off-balance-sheet assets and liabilities </li></ul></ul></ul><ul><ul><ul><ul><li>Financial vs. non-financial firm commitments </li></ul></ul></ul></ul><ul><ul><ul><li>Impairment assessment </li></ul></ul></ul><ul><ul><ul><ul><li>If not measured at fair value through profit or loss (FVtPL). </li></ul></ul></ul></ul><ul><ul><li>Tangible vs. intangible assets </li></ul></ul><ul><ul><ul><li>Purchased vs. self-developed </li></ul></ul></ul><ul><ul><li>Groups vs. individual firms </li></ul></ul><ul><ul><ul><li>Definition of control </li></ul></ul></ul><ul><ul><ul><li>Variable interests </li></ul></ul></ul><ul><ul><ul><ul><li>Consolidation policies and segmental reporting </li></ul></ul></ul></ul>
    22. 22. <ul><ul><li>Others </li></ul></ul><ul><ul><ul><li>Shareholders’ Equity </li></ul></ul></ul><ul><ul><ul><ul><li>Compound instruments, equity-like debts </li></ul></ul></ul></ul><ul><ul><ul><li>True sales </li></ul></ul></ul><ul><ul><ul><ul><li>Continuing involvement </li></ul></ul></ul></ul><ul><ul><ul><li>Off-income-statement expenses </li></ul></ul></ul><ul><ul><ul><ul><li>Board members and employees stock (options) and/or cash bonus </li></ul></ul></ul></ul><ul><ul><ul><li>Dirty surplus </li></ul></ul></ul><ul><ul><ul><ul><li>Unrealized gains or losses recognized as equity adjustments (FVtEA) </li></ul></ul></ul></ul><ul><ul><ul><li>Over dilution </li></ul></ul></ul><ul><ul><ul><ul><li>Stock dividends recorded at par </li></ul></ul></ul></ul>
    23. 23. Firm Value Firm Growth & Profitability Product Market Strategies* Financial Market Policies Operating Management Operating Investments Financing Decisions Dividend Policy Managing Revenue & Expenses Managing WC & Fixed Assets Managing Liabilities & Equity Managing Repurchase & Payout Financial Investments Managing FVtPL AfS, & HtM
    24. 24. Firm Value Group Growth & Profitability Diversification Strategies Integration Strategies* Unrelated Investments** Strategic Investments Managing Risks & Returns Managing Subsidiaries Managing Associates Managing Joint Ventures Not recommended Treated as financial investments
    25. 25. Financial Analysis <ul><li>Goal </li></ul><ul><ul><li>Assess the performance in the context of stated goals and strategy. </li></ul></ul><ul><ul><li>Tools </li></ul></ul><ul><ul><ul><li>Ratio analysis </li></ul></ul></ul><ul><ul><ul><ul><li>How various line items relate to one another. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Evaluate the effectiveness of the firm’s competitive strategies </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Frame questions for further probing. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The foundation for making forecasts. </li></ul></ul></ul></ul><ul><ul><ul><li>Cash flow analysis </li></ul></ul></ul><ul><ul><ul><ul><li>Liquidity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cash management.* </li></ul></ul></ul></ul>
    26. 26. <ul><ul><li>Comparisons </li></ul></ul><ul><ul><ul><li>Time-series </li></ul></ul></ul><ul><ul><ul><ul><li>Holding firm-specific factors constant and examining the effectiveness of a firm’s strategy overtime. </li></ul></ul></ul></ul><ul><ul><ul><li>Cross-sectional (same industry) </li></ul></ul></ul><ul><ul><ul><ul><li>Holding industry-level factors constant. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>See the impact of different strategies on financial ratios and relative performance. </li></ul></ul></ul></ul><ul><ul><ul><li>Benchmarking </li></ul></ul></ul><ul><ul><ul><ul><li>Rates of return relative to the cost of capital, a competitor’s ROE or a goal. </li></ul></ul></ul></ul><ul><ul><ul><li>Standardized format (model) </li></ul></ul></ul><ul><ul><ul><ul><li>Facilitate direct comparison across firms and overtime. </li></ul></ul></ul></ul>
    27. 27. <ul><li>Assessing overall profitability </li></ul><ul><ul><li>Traditional decomposition* </li></ul></ul><ul><ul><ul><li>ROA = ROS x asset turnover (negatively related? winner takes all) </li></ul></ul></ul><ul><ul><ul><ul><li>On average over long periods, large publicly traded firms in the U.S. generated ROEs in the range of 11-13%.** </li></ul></ul></ul></ul><ul><ul><ul><ul><li>For ratio computation, use beginning balance. In practice, most analysts use ending balance for simplicity . </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Mean-reverting to the cost of equity in a long-run competitive equilibrium. </li></ul></ul></ul></ul>
    28. 28. <ul><ul><ul><ul><li>ROE > cost of equity over the long run -> market value > book value, and vice versa. </li></ul></ul></ul></ul><ul><ul><ul><li>Exceptions to mean-reverting </li></ul></ul></ul><ul><ul><ul><ul><li>Industry conditions and competitive strategy that cause a firm to generate supernormal 超常 (or subnormal 遜常 ) economic profits, at least over the short run.* </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Distortions due to accounting.** </li></ul></ul></ul></ul>
    29. 29. <ul><ul><li>Sustainable (earnings) growth rate SGR </li></ul></ul><ul><ul><ul><li>= ROE x (1 – Dividend payout ratios) </li></ul></ul></ul><ul><ul><ul><ul><li>The rate at which a firm can grow while keeping its policies and profitability unchanged. </li></ul></ul></ul></ul><ul><ul><li>Historical value of key financial ratios </li></ul></ul><ul><ul><ul><li>For each of the years 1984 to 2003 </li></ul></ul></ul><ul><ul><ul><ul><li>ROE (11.2%), NOP margin (6.3%), operating asset turnover (1.51), RoOA (7.8%), SPRD (2.6%), net financial leverage (1.06), sustainable growth rate (5.0%). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Average over the 20 years. </li></ul></ul></ul></ul>
    30. 30. Segmental Analysis <ul><li>Disaggregated data* </li></ul><ul><ul><li>Individual business segments </li></ul></ul><ul><ul><ul><li>Can reveal potential differences in the performance of each business unit </li></ul></ul></ul><ul><ul><ul><ul><li>to pinpoint areas where a company’s strategy is working and where it is not . </li></ul></ul></ul></ul><ul><ul><ul><li>Computing ratios of physical data </li></ul></ul></ul><ul><ul><ul><ul><li>Particularly useful for young firms and young industries where accounting data may not fully capture business economics due to conservative accounting rules. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Productivity (lead indicators, KPIs) </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Hotel: room occupancy rates </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cellular telephone: acquisition cost per new subscriber, subscriber retention rate. </li></ul></ul></ul></ul></ul>
    31. 33. Cash Flow Analysis <ul><li>Net income </li></ul><ul><ul><ul><ul><li>Non-operating losses (gains) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Operating accruals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bonus adjustment (Taiwan special) </li></ul></ul></ul></ul><ul><ul><ul><li>Operating cash flow before net working capital investments </li></ul></ul></ul><ul><ul><ul><ul><li>Net (investment in) liquidation of non-financial WC </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net increase (decrease) in XCL </li></ul></ul></ul></ul><ul><ul><ul><li>Operating cash flow before in net long-term operating investments </li></ul></ul></ul><ul><ul><ul><ul><li>Net (investment in) liquidation of LTOA </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net increase (decrease) in XLL </li></ul></ul></ul></ul>
    32. 34. <ul><ul><ul><li>Cash flow before financial investments (free cash flow from operation, FCFO) </li></ul></ul></ul><ul><ul><ul><ul><li>Gains (losses) from FI </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net (increase) in liquidation of FI </li></ul></ul></ul></ul><ul><ul><ul><li>Cash flow before non-operating-financial investments * </li></ul></ul></ul><ul><ul><ul><ul><li>Non-operating-financial gains (losses) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net (increase in) liquidation of XOFI </li></ul></ul></ul></ul><ul><ul><ul><li>Cash flow before equity-method investments </li></ul></ul></ul><ul><ul><ul><ul><li>EMI gains (losses) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net (increase in) liquidation of EMIs </li></ul></ul></ul></ul>
    33. 35. <ul><ul><ul><li>Cash flow before investments in innovative R&D </li></ul></ul></ul><ul><ul><ul><ul><li>(IPR&D expenses) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net (investment in) liquidation IPR&D </li></ul></ul></ul></ul><ul><ul><ul><ul><li>assets* </li></ul></ul></ul></ul><ul><ul><ul><li>Free 可支配 cash flow (FCF) available to debt and equity (to assets, FCFA) ** </li></ul></ul></ul><ul><ul><ul><ul><li>(After-tax net interest expense) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Net debt (repayment) or issuance </li></ul></ul></ul></ul><ul><ul><ul><li>FCF available to equity (FCFE) </li></ul></ul></ul><ul><ul><ul><ul><li>(Cash dividend payments) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Stock (repurchase) or issuance </li></ul></ul></ul></ul><ul><ul><ul><li>Net increase (decrease) in cash balance </li></ul></ul></ul>
    34. 36. Valuation <ul><li>Valuation of OE (VOE) </li></ul><ul><ul><li>DCF: FCF capitalization </li></ul></ul><ul><ul><ul><li>FCFO: FCF from operation = cash flow before financial investments </li></ul></ul></ul><ul><ul><ul><ul><li>FCFA: FCF available to debt and equity (asset) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>FCFE: FCF available to equity </li></ul></ul></ul></ul><ul><ul><li>Economic profit (abnormal earnings) capitalization (NOP – OE x cost of equity) </li></ul></ul>
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