Part 5. Interpretation and evaluation of accounting and financial information. 16. Interpretation and evaluation of accounting and financial information

Question 1

Chapter summary

Answer 1

‹ The efficient market hypothesis (EMH) can also be applied together with a
share valuation model (such as P/E ratio or DVM), to estimate the intrinsic
value of the shares. The market value of the company will only be as good
an estimate of intrinsic value as the quality of public information available.
‹ Shareholder value analysis (SVA) is a management strategy that focuses
on the creation of economic value or wealth for shareholders. The basic
assumption of SVA is that a company is worth its ability to create value
for shareholders, which is measured as the NPV of its future cash flows,
discounted at the appropriate cost of capital. Value drivers are identified
to understand the drivers of the company that creates value in a company.
Free cash flow, a concept central to the idea of SVA, is the surplus cash
available after recovering all the costs and incremental investment in noncurrent
assets and working capital.
‹ Economic value added (EVA) is a measure of profitability and wealth
created for shareholders over and above the cost of invested capital.
‹ Market value added (MVA) measures the value of the company as a result
of its existence and operation in the market. It represents the market value
added over and above the funds invested by the shareholders and longterm
debt holders.