Cfa_-_Analysis_Of_Equity_Investments_Valuation__pdf_.pdf

John D. Stowe, CFA

University of Missouri-Columbia

Thomas R. Robinson, CFA

University of Miami

Jerald E. Pinto, CFA

TRM Services

Dennis W. McLeavey, CFA

Association for Investment Management and Research

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02002 by Association for Investment Management and Research.

electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without

permission of the copyright holder. Requests for permission to make copies of any part of the work should be mailed

to: AIMR, Permissions Department, P.O. Box 3668, Charlottesville, VA 22903.

This publication is designed to provide accurate and authoritative information in regard to the subject matter

covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other

professional service. If legal advice or other expert assistance is required, the services of a competent professional

should be sought.

ISBN 0-935015-76-0

Printed in the United States of America

by United Book Press, Inc., Baltimore, MD

August 2002

owned by the Association for Investment Management and ~esearch~.

Analysis of Equity Investments: Valuation represents the third step in an effort by the Asso-

ciation for Investment Management and ~esearch~

(AIMR@)to produce a set of coordi-

nated, comprehensive, and practitioner-oriented textbook readings specifically designed

for the three levels of the Chartered Financial ~nal~st@

Program. The first step was the

publication in June 2000 of two volumes on fixed income analysis and portfolio manage-

ment: Fixed Income Analysis for the Chartered Financial Analyst Program and Fixed

Income Readings for the Chartered Financial Analyst Program. The second step was the

publication in August 2001 of Quantitative Methods for Investment Analysis. Given the fa-

vorable reception of these books and the expected favorable reception of the current book,

similar textbooks in other topic areas are planned for the future.

This book uses a blend of theory and practice to deliver the CFA@Candidate Body of

Knowledge (CBOK) in the equity analysis portion of the cumculum. The CBOK is the re-

sult of an extensive job analysis conducted periodically, most recently during 2000-01.

Regional job analysis panels of CFA practitioners were formed in ten cities around the

world: Boston, Chicago, Hong Kong, London, Los Angeles, New York, Toronto, Seattle,

Tokyo, and Zurich. These and other panels of practitioners specified what the expert needs

to know as the Global Body of Knowledge, and what the generalist needs to know as the

CBOK. Analysis of Equity Investments: Valuation is a book reflecting the work of these

expert panels.

In producing this book, AIMR drew on input from numerous CFA charterholder re-

viewers, equity analysis specialist consultants, and AIMR professional staff members. The

chapters were designed to include detailed learning outcome statements at the outset, illus-

trative in-chapter problems with solutions, and extensive end-of-chapter questions and prob-

lems with complete solutions, all prepared with CFA candidate distance learning in mind.

This treatment of equity analysis represents a substantial improvement for CFA candidates

compared to the previous readings. Although designed with the CFA candidate in mind, the

book should have broad appeal in both the academic and practitioner marketplaces.

AIMR Vice President Dennis McLeavey, CFA, spearheaded the effort to develop this

book. Dennis has a long and distinguished history of involvement with the CFA Program.

Before joining AIMR full-time, Dennis served as a member of the Council of Examiners

(the group that writes the CFA examinations), an examination reviewer, and an examina-

tion grader. Co-authors John Stowe, Tom Robinson, and Jerry Pinto bring unique perspec-

tives to the equity analysis process. John is a professor of finance and associate dean at the

University of Missouri. Tom is an associate professor of accounting at the University of

Miami. Jerry is an investment practitioner who has a successful consulting practice spe-

cializing in portfolio management. All three are CFA charterholders and have served as

CFA examination graders. In addition, Tom and John have served on the Council of Exam-

iners, and Jerry and John have served as CFA examination standard setters (the group that

provides a recommended minimum passing score for the CFA examinations to the Board

of Governors). We were fortunate that Jerry was able to take a leave of absence to work at

AIMR on this project.

Preface

The treatment in this volume is intended to communicate a practical equity valuation

process for the investment generalist. Unlike many alternative works, the book integrates

accounting and finance concepts, providing the evenness of subject matter treatment, con-

sistency of notation, and continuity of topic coverage so critical to the learning process.

The book does not simply deliver a collection of valuation models, but challenges the

reader to determine which models are most appropriate for specific companies and situa-

tions. Perhaps the greatest improvement over previous materials is that this book contains

many real-life worked examples and problems with complete solutions. In addition, the ex-

amples and problems reflect the global investment community. Starting from a U.S.-based

program of approximately 2,000 examinees each year during the 1960s and 1970s, the

CFA Program has evolved into a pervasive global certification program that currently in-

volves over 101,000 candidates from 149 countries. Through curriculum improvements

such as this book, the CFA Program should continue to appeal to new candidates across the

globe in future years.

Finally, the strong support of Tom Bowman and the AIMR Board of Governors

through their authorization of this book should be acknowledged. Without their encour-

agement and support, this project, intended to materially enhance the CFA Program, could

not have been possible.

Robert R. Johnson, Ph.D., CFA

Senior Vice President

Association for Investment Management and Research

July 2002

We would like to acknowledge the assistance of many individuals who played a role in

producing this book.

Robert R. Johnson, CFA, Senior Vice President of Curriculum and Examinations

(C&E) at AIMR, saw the need for specializedcurriculum materials and initiated this project

at AIMR. Jan R. Squires, CFA, Vice President in C&E, contributed an orientation stressing

motivation and testability. His ideas, suggestions, and chapter reviews have helped to shape

the project. Philip J. Young, CFA, Vice President in C&E, provided a great deal of assistance

with learning outcome statements. Mary K. Erickson, CFA, Vice President in C&E, pro-

vided chapter reviews with a concentrationin accounting.Donald L. Tuttle, CFA, Vice Pres-

ident in C&E, oversaw the entire job analysis project and provided invaluable guidance on

what the generalist needs to know.

The Executive Advisory Board of the Candidate Curriculum Committee provided

invaluable input: Chair, Peter B. Mackey, CFA, and members James W. Bronson, CFA,

Alan M. Meder, CFA, and Matthew H. Scanlan, CFA, as well as the Candidate Curricu-

lum Committee Working Body.

Detailed manuscript reviews were provided by Michelle R. Clayman, CFA, John H.

Crockett, Jr., CFA, Thomas J. Franckowiak, CFA, Richard D. Frizell, CFA, Jacques R.

Gagne, CFA, Mark E. Henning, CFA, Bradley J. Herndon, CFA, Joanne L. Infantino, CFA,

Muhammad J. Iqbal, CFA, Robert N. MacGovern, CFA, Farhan Mahrnood, CFA, Richard

K. C. Mak, CFA, Edgar A. Norton, CFA, William L. Randolph, CFA, Raymond D. Rath,

CFA, Teoh Kok Lin, CFA, Lisa R. Weiss, CFA, and Yap Teong Keat, CFA.

Detailed proofreading was performed by Dorothy C. Kelly, CFA, and Gregory M.

Noronha, CFA: Copy editing was done by Fiona Russell, and cover design is by Lisa

Smith, Associate at AIMR.

Wanda Lauziere, C&E Associate at AIMR, served as project manager and guided the

book through production.

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