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Lecture 2

BUS 312 Lecture Notes Week 2 of 15 (ch2)

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Simon Fraser University
Business Administration
BUS 312
George Blazenko

MVA market value of assets enterprise value MVE market value of equityshare pricenumber of shares BVAbook value of assets BVE book value of equityBefore capital expenditure and before financing AccountingMarket Value balance sheet 0 0MVA700000 Debt0NPV MVE700000After CAPX and after financing AccountingMarket Value balance sheet BVA300000 BVE300000MVA1000000 Debt0 MVE100000070000 1000000 007Market to book ratio price to book ratio measures value to expenditure If less than 1 and NPV0 this its a bad investment100000010000003331 3331 300000300000 Therefore value is greater than expenditure good investment Principle determinants of marketbook ratioFirms that have marketbook ratio of 1 have the following characteristics 1 Younger new venture 2 Profitability 3 Growth orientated Firms that have marketbook 1 1 Older mature 2 Lower profitability that originally expected Limitations of financial statements in financial analysis 1 Accounting policy limits comparability of ratios across firms 2 Off balance sheet liabilities 3 Historical cost accounting our theory of value NPV is future oriented However return ratios IRR are random walks best future forecast is last periods calculation 4 The theory of business is not sufficiently strong to give us an absolute standard benchmark for most ratios
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