Happy Times except for advising

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Happy Times (except for advising)
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Problems withDiscreet Categorization
The GMAT ESSAY book T. Boone
ETHICAL
UNETHICAL
At what point do you leave these categories? Is
99 ethical okay?
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Goya, 1799(Spanish Inquisition 1478 1834)
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Judgment and ill-defined topics everywhereeven
in statistics

• Flipping thumbtacks point-side up
• what matters in terms of thumb-tack shape?
• Flipping quartersthe odds of heads.
• This weeks Advising Moment
• ISQS 5349, Regression Analysis (unfortunately,
  you cant take it without ISQS 5347).

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Charades and Subprime

• SIVs, CDOs, etc.
• WSJ Oct. 31st Finally some stuff that makes
  sense (to me).
• There is still unquantified risk (in my opinion)

6
As an Auditor

• Think about incentives
• Propose and Test theories (you have limited time
  to dig aroundso dig in a smart way).
• Example todays stock market decline Exxons
  quarterly earnings.
• All will be well if you propose reasonable
  theories (managers and partners like
  thatseniorssometimes not so much but think
  about their incentives).

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Week 9 Assignment (due next weekbring it to
class).

• Get to know your company by reading through some
  public documents (bring this to class in your
  mind)dont look at anything older than 2003.
• Document (and hand in) interesting things about
  your company that you would like to compare to
  competitors.
• All preliminary evidence suggesting the CEO knew
  otherwise and briefly explain why your evidence
  is useful for this purpose.

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Sassy Assignments D0 2

• Following directions and meeting deadlines is
  relatively important in Public Accounting my
  incentives for you were bad.
• If this were a normal assignment, the content
  redo chance would arrive via email by Monday
  (if necessary).
• Clarifying the normal grading systemno email
  v or v
• Given the W8 instructions, why are emails
  unnecessary?

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Things we will work on

• economics vs. reporting how these concepts
  arent necessarily independent (beyond the
  obvious sense)e.g., AGAIN yesterdays WSJ
  articlesand T Boone.
• capitalizing annuitiesone thing I got from my
  grad. finance class (Klaus T.) Momentum for ACCT
  5314?
• Comingat least in partnext week.
• Today is next weekso lets see some new stuff.

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The Dividend Discount Model

• The fundamental equity valuation model any
  theoretical valuation model must be reconcilable
  to the DDM, or else it is conceptually flawed
  (Barker 2001).

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P0 ? Dt 1 kt
t 1
where k expect rate of return on equity
investment D dividends P share price
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Reconciling models

• Dividend yield model assumptions (1) constant
  dividends and (2) constant cost of capital.
• Formula P0 (D1 k)
• Dividend growth model lifts the constant
  dividend assumption, replaced by constant growth.
• Formula P0 (D1 k g)

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Tie to Week 3

• P0 (D1 k g)
• How have corporate dividend payments changed over
  time?
• P0 Earnings ? k - g From W3!
• This is the PE ratio story we saw in W3 (when
  highlighting the importance of growth).

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Subtle Differences Are Important

• P0 (D1 k g)
• P0 Earnings ? k - g
• Dividends per the DDM, mean all payments to
  shareholders.
• Does Earnings mean the same thing?
• How does this difference affect the value of
  balance sheet assets?

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Usable Valuation Metrics

• PE ratio like metrics
• rules of thumb income by 3 or 4 or 5 or 6 or 7
  or ???
• ROE ratio like metrics
• profit investment and everyone has a tweak
  to the numerator and denominator.

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Consistent Measurement Helps With Comparison
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In Some Form, Analysts Look at

• P0 Earnings ? k - g
• Have a strategy to affect the formula
• Blockbuster (a simple company)
• proposed merger fell through (Hollywood)
• investment in movie link is not working out

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Using Formulas and Herding Cats

• Many, if not most, analysts have a limited
  understanding of accounting rules.
• Most analysts look at some type of valuation
  model before taking a position on a companywhen
  a cat gets out of the herd, the analyst (and
  other investors) pay attention.

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Simple vs. Not-so-simple companies

• Blockbuster is simple
• Homebuilding is simple
• Do you understand your company?
• Did the accounting records help you?
• You know more about accounting than at least 75
  of Wall Street analysts
• Tech companies arent so simple

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Its all mysticthere are no objective
answersat least not in here
Shouldnt we have some answers?
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Chris Bau.s Final Exam

• Can you bring something unique to the class that
  would benefit everyone?
• Maybemaybe not.

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Simple vs. Not-so-simple companies

• Blockbuster is simple
• Homebuilding is simple
• Do you understand your company?
• Did the accounting records help you?
• You know more about accounting than at least 75
  of Wall Street analysts
• Tech companies arent so simple

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Q2s Mexico, Egypt, Nepal, Romania

• eBay and Amazon electronic commerce companies or
  retailing companies?
• Where is the growth?
• There is audit risk in growth
• Why would the electronic vs. retailing
  categorization matter?
• How complicated are these companies compared w/
  Blockbuster?

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Faith in Leaders?

• Amazon trades at 60 times expected earnings four
  times more than WalMartbut both companies have
  23 gross margins. (Oct. 13-14 WSJ)
• Investors see somethingand growth is a big part
  of the storybut how clear is that story?

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Faith in Leaders?

• Banging the Buffett drum
• Do things that make sense to you
• What will happen to Berkshire Hathaway Stock when
  Buffett dies?

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Q2s Mexico, Egypt, Nepal, Romania

• Some / many are betting (via call options) that
  Googles stock price will increase 25 in the
  next two months.
• Gphone vs. Iphone.
• Do you know enough to invest? If you get really
  interested in stuff like this, come back some day
  tell everyone thats why audit is better than
  tax!
• Is 700 per share scary?
• Shares were below 500 in mid-August.
• New information or a bunch of uncertainty?

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Q2s Mexico, Egypt, Nepal, Romania

• Poor Yahoo!
• NEW strategy
• be the starting point for consumer search
• be a must buy for advertisers
• have open technology for developers
• Oct. 17 WSJ Profit down 4.6, shares up 9.
• Yahoo had 3rd Q revenue of 1.3B.

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Q2s Mexico, Egypt, Nepal, Romania

• Apples recurring product price-drop growth
  prospects.
• Managing customer expectations reputation, price
  discrimination the cool factor.
• How do you measure the effect of these vague
  concepts?
• Growth via the Mac bought because my wife liked
  the look its great but do I know enough to
  invest?

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Week 10 Assignment?

• Get to know your company by reading through some
  public documents (bring this to class in your
  mind)dont look at anything older than 2003.
• Document (and hand in) interesting things about
  your company that you would like to compare to
  competitors.
• All preliminary evidence suggesting the CEO knew
  otherwise and briefly explain why your evidence
  is useful for this purpose.
• IS ANYTHING A MUST?