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on 11 August 2003
Determining Value: Valuation Models and Financial Statements by Richard Barker
Publisher: Financial Times-Prentice Hall 2001. ISBN: 0 273 63979 X
This book is about the valuation of companies by using financial statements data. The author (a senior lecturer in Accounting of the Judge Institute, Cambridge Business School and director of MBA programme) has successfully made a link between finance theory and accounting. It is primarily concerned with various valuation models available to value a company which should be of interest not only to the market participants such as finance directors, analysts and fund managers, but also to the advanced students in accounting and finance.
Although some of the chapters are more suitable as text in Universities, some are essential readings for professional examinees including CFAs. The main body of the text begins by demonstrating the formal relationship between a company’s share price and the “dividend discount model” (DDM). The book is split into the following chapters: Introduction; Stock market valuation; Growth in dividends and share prices; The price-earnings ratio; Financial accounting; Interpreting the balance sheet; Measuring earnings; Measuring the return on capital; Abnormal earning valuation and EVA; Cash flow models–from shareholder value analysis to CFROI; Summary and review
One of the main strengths of this text is its ability to go beyond the specific technique and look at the meanings of the valuations and the drivers of the valuation. Importantly the role of growth and various accounting variables have been explored in details. There are very few books {it is worth of using this book with two other books titled Financial Statement Analysis and Security Valuation by Penman (2001) and Investment by Damodaran (2002)}, which have such an in-depth coverage of these issues, and importantly it has made an explicit link between finance theory and accounting data. This has made this book extremely useful. It provides many numerical examples/extracts from real life and explains these in a very straightforward manner without making things complicated. (305 words)
Reviewed by Shahed Imam
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on 12 June 2007
The problem with other books on valuation is that, while they may be theoretically sound, they ignore the limitations of the data available in the real world that is required to be input into the models . This book helps in choosing and using the theoretically sound valuation models with the imperfect data that is available.
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