In Mr. Buffett`s opinion, intrinsic value is the present value of the future expected performance. It`s estimated calculating the discounted cash flow of a business during its remaining life. It`s important because the DCF is the only logical way to evaluate the attractiveness of a business or an investment. Other alternatives to intrinsic value fall short in determining whether an investor is indeed buying something which is really worth and is therefore truly operating on the most basic principle which is aggregating value. The $2.55 billion gain in Berkshire`s market value of equity and the 6.28% jump on Scottish Power`s stock means that the acquisition was a win-win situation, creating value for both companies.
In other words, the cost of raising fund is the firm’s cost of capital. Estimate a firm’s cost of capital is important because can help conclude required return for capital budgeting projects. Usually, the investor only picks up the project which provides higher return and lower risk on investments. Since the cost of capital is the minimum return required by investors, manager should invest only in projects that generate returns in excess of the cost of capital. Cost of capital can help define the acceptability of investment opportunities.
Should accounting numbers be measured on historical cost or market value? Critics have argued that the accounting numbers measured on historical cost are more reliability than accounting numbers measured on market value. This is due to the reason that historical cost is based on actual transactions, not merely possible transactions. Figures on the financial statements are supported by record of transactions and based on evidence. The figures are recorded based on receipt, therefore no judgment is needed.
Loyalty points program PDL operates a loyalty points program, which will impact on the measurement of sales revenue, important for analysts. Currently, a sale transaction with point value attached is recognized as a sale entirely in the current period. An expense and liability for the expected cost – not sales value – of goods to be redeemed in the future is recognized in the same time period as the sale. This policy maximizes the sales value recorded with the initial transaction. It does not reflect the substance of the transaction, though, which is that PDL has rendered multiple deliverables in sale: both the initial sale, and the subsequent sale based on points value are being sold.
In identifying the true contribution of the incremental cash flow, several factors must be considered. First, the costs of launching and continuing to operate the project are weighed against any income that the project generates. Assuming that the initial return is greater than the costs of launching and operating the project, a state of positive incremental cash flow exists. This is the ultimate goal for the business, since it serves as a strong indicator that the project is a viable source of revenue and has the potential to be integrated into the basic operations of the company. The cash flow statement should not include interest expense or dividends.
Kaplan, Steven E. and Ruland, Robert G., “Positive Theory, Rationality and Accounting Regulation” Critical Perspectives on Accounting, (1991). Existing agency theory fails as a positive theory since it does not provide theory of accounting regulatory development. Watts & Zimmerman are inconsistent w/ positive theory, since they evaluate rather than predict theories. If W&Z wish to argue normatively, they should not do so under the guise of positive theory. Failure of agency theory to provide a prediction of accounting regulatory development stems from its reliance on a rationality assumption which is both too narrow and too broad.
According to company spokesman Mark Dollins, Quaker uses a discounted cash flow model to evaluate acquisitions and divestitures, and merely uses EVA as an incentive compensation tool. "EVA does not take into account, in mergers and acquisitions, things such as market conditions," Dollins says. Not surprisingly, Stern Stewart & Co. says EVA is a wonderful tool for valuing acquisitions. "Whether it had been an EVA analysis or a discounted cash flow or price-to-earnings analysis, it's really the old adage--garbage in, garbage out," says Stern Stewart senior partner and co-founder G. Bennett Stewart III. "It all depends on the assumptions."
Eugene Fama and Robert Shiller of Asset Bubbles Analysis Eugene Fama is known for his development of the famous efficient-market hypothesis. According to the EMH, investors are rational and prices would reflect information investors receive. Fama himself even denied the existence of economic bubbles. Robert Shiller on the other hand has been known for his study of behavioral finance and the prediction of the dot-com bubble. There seems to be no agreements Shiller and Fama can have the subject of asset bubbles since the two have different opinions on how the market behaves.
Why or why not? If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions (compare yours with Cohen’s) • For the costs of equity, calculate using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? I do not agree with Cohen’s
This method converts net income to net cash from operating activities. When using the indirect method a company must convert net income to net cash by gathering net income and adding or subtracting adjustments, this would give the company the Net cash, without having to go thru detail transactions. . Even though the indirect method may be easier for a company to manage their cash flow, I believe that this method may bring more work in case of an audit. (Weygandt, Kimmel, & Kieso, 2010. p 618).