MGT330H5 Lecture Notes - Lecture 3: Futures Contract, Dow Theory, Mental Accounting
Document Summary
Lecture #3 - security analysis: equity valuation (fundamental + Uses accounting data: can identify mispriced securities. Income statement: statement of changes in financial position. Measuring performance: managers responsibilities are investment and financing decisions, ratios used to show efficiency and profitability of these decisions. Roa - income earned per dollar deployed (ebit/assets) Roc - income earned per dollar invested (ebit/lt capital) Roe - net income realized by shareholders per dollar invested. Economic value added - difference between roa and opportunity cost of capital (k) multiplied by capital invested by firm. If roa>k then value is added to the firm. Economic value added is also called the residual income and can be positive or negative. It treats the opportunity cost of k as a real cost that, like other costs, are deducted from revenue to determine bottom line. A firm earning profit but not covering oc should redeploy capital to better uses.
