A Guide for Managers Worldwide Summary of Ming-Jer Chen’s Book   Note: The following text is a summary of part of Ming-Jer Chen’s book. We recommend that you purchase the book in order to benefit from the full depth of the author’s own words. Chapter 1.      Introduction: Who (and Where) are the Chinese? Many non-Chinese find the [...]

  Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in [...]

A firm’s performance can be evaluated using financial ratios. Referencing these ratios to those of other firms allows a comparison to be made. The following is a listing of some useful ratios. Leverage :   Assets / Shareholder’s Equity Gross Margin   =   Gross Profit / Sales. Gross margin measures the profitability considering only variable costs and [...]

When valuing the operations of a firm using a discounted cash flow model, the operating cash flow is needed. This operating cash flow also is called the unlevered free cash flow (UFCF). The term “free cash flow” is used because this cash is free to be paid back to the suppliers of capital. Calculating Free [...]

  In a discounted cash flow valuation, the cash flow is projected for each year into the future for a certain number of years, after which unique annual cash flows cannot be forecasted with reasonable accuracy. At that point, rather than attempting to forecast the varying cash flow for each individual year, one uses a [...]

  In the enterprise model of valuation, the firm’s equity value is calculated by subtracting the value of the firm’s debt from the enterprise value. Debt valuation then becomes an important component of a valuation of the firm’s equity. A company’s debt is valued by calculating the payoffs that debt holders can expect to receive, [...]

(pre-merger value of both firms  +  synergies)    =   pre-merger stock price post-merger number of shares The above equation then can be solved for the value of the minimum required synergies. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent [...]

In their 1973 paper, The Pricing of Options and Corporate Liabilities, Fischer Black and Myron Scholes published an option valuation formula that today is known as the Black-Scholes model. It has become the standard method of pricing options. The Black-Scholes formula calculates the price of a call option to be: C  =  S N(d1)  -  [...]

Stock indexes are useful for benchmarking portfolios, for generalizing the experience of all investors, and for determining the market return used in the Capital Asset Pricing Model (CAPM). A hypothetical portfolio encompassing all possible securities would be too broad to measure, so proxies such as stock indexes have been developed to serve as indicators of [...]

Some investment managers and individual investors attempt to improve their performance by timing the market and adjusting their portfolio according to predictions about the market or specific sectors. Examples of market timing include switching among sectors, switching among different countries’ securities, switching between stocks and bonds, or switching between stocks and risk-free treasury bills. The [...]