Measures of Income and Firm Valuation (From Corporate Finance Review, March / April, 2008) By Anderson, A.M; Bey, R.P. and S.C. Weaver Presented by: Yuri Vedrashko ID: April 8, 2008

Contents: 1. Focus of the paper 2. Context and mandate 3. Study design 4. Method 5. Finds 6. Conclusions

1. Focus: MVA and Measures of Income Relationships: MVA – MOI The most effective MOI Limitations and possibilities

2. Context and mandate Is income necessarily a strong indicator of current stock market value? Accounting overhaul Financial reporting

3. Study design: Variables Constant: Nine measures of income (3 non-US-GAAP) Dependent: MVA Controlling: Industries

3. Traditional measures: 1.Earnings before interest, Taxes, Depr. & Amort. (EBITDA) 2.EBIT 3.After Tax Operating Income (ATOI) 4.Earning After Tax Before One-Time Items (EATBOT) 5.Net Income (NI) 6.Free Cash Flow (FCF)

3. Non-traditional: 1. After Tax Operating Income less Cash Taxes (ATOICT) 2. Residual Income (RI) 3. Economic Value Added (EVA)

4. Method 1.Companies: 736 US-based 2.Observations: 8,393 3.Duration: 1995 – Simple linear regression analysis 5.R-squared data 6.x-coefficient data

So far … 1. Focus of the paper 2. Context and mandate 3. Study design 4. Method 5. Finds 6. Conclusions

5. Finds: MVA & Income Measures

5. MVA and Income Relationship

5. MVA and non-US-GAAP Accounting Adjustments

6. Conclusions: Traditional vs. Nontraditional Measures

6. More general conclusions: 1.Doubts of EVA’s effectiveness reconfirmed 2.MVA and EVA are negatively correlated 3.EBITDA is the most reliable indicator 4.Other factors for business-valuation analysis

My opinion Study design Personal confusion Future of GAAP

Review: 1. Focus of the paper 2. Context and mandate 3. Study design 4. Method 5. Finds 6. Conclusions