Notes

ACTG 3000 Notes

Class

EBITDA x Multiple = Capitalized EV

Capitalized EV + redundant assets = EV price

EV price – net debt = equity value

Ch. 1: A Framework for Business Analysis and Valuation Using Financial Statements

* The industrial age has been dominated by two distinct and broad ideologies for channelling savings into business investments – capitalism and central planning

* The capitalist market model broadly relies on the market mechanism to govern economic activity, and decisions regarding investments are made privately

* Centrally planned economies have used central planning and government agencies to pool national savings and to direct investments in business enterprises

* Most have abandoned this method in favour of a market model

The Role of Financial Reporting in Capital Markets

* Both savers and entrepreneurs would like to do business with each other

* Matching savings to business investment opportunities is complicated for reasons:

* Entrepreneurs typically have better information than savers on the value of business investment opportunities

* Communication by entrepreneurs to investors is not completely credible because investors know entrepreneurs have an incentive to inflate the value of their ideas

* Savers generally lack the financial sophistication needed to analyze and differentiate between the various business opportunities

* Lemons problem: break down the functioning of the capital market

* Where investors cannot distinguish between “good” and “bad” ideas, they average out the value of both.

* Entrepreneurs with good ideas find the terms of financing unattractive and leave the market; the percentage of bad ideas increases

* Emergence of intermediaries can prevent problems of market breakdown

* Financial intermediaries and information intermediaries

* Over the past decade, many countries in Europe have been moving towards a model...