ACC 150: Valuation Concepts and Methods

Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Lesson title: Related Concepts in Business Valuation Materials:

Student Activity Sheet
Lesson Objectives:
At the end of this module, you should be able to: References:
1. Explain efficient market hypothesis. www.thebalance.com
2. Identify the stakeholder’s purposes in www.investopedia.com
performing business valuation. corporatefinanceinstitute.com
cdn.website-editor.net
www.mdpi.com

Productivity Tip:
Take regular breaks. Believe it or not, taking a break will actually increase your productivity. Our
brain can only handle so much new information before we begin to tire and lessen our retention.
Regular breaks will help combat stress and fatigue and maximize our productivity.

A. LESSON PREVIEW/REVIEW
1) Introduction
The Efficient Market Hypothesis, known as EMH in the investment community, is one of the
underlying reasons investors may choose a passive investing strategy. EMH helps to explain
the valid rationale of buying these passive mutual funds and exchange-traded funds (ETFs).

2) Activity 1: What I Know Chart, part 1

Try answering the questions below by writing your ideas under the first column What I Know.

What I Know Questions: What I Learned (Activity 4)

1. What is market efficiency?

2. What is efficient market

hypothesis?
3. What are the forms of efficient
market hypothesis?

B. MAIN LESSON
1) Activity 2: Content Notes

Lesson Objective 1
Market efficiency – refers to the degree to which market prices reflect all available, relevant
information. If markets are efficient, then all information is already incorporated into prices, and so there
is no way to "beat" the market because there are no undervalued or overvalued securities available.

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 ACC 150: Valuation Concepts and Methods
Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis (EMH) essentially says that all known information about
investment securities, such as stocks, is already factored into the prices of those securities . Therefore,
assuming this is true, no amount of analysis can give an investor an edge over other investors,
collectively known as "the market."
EMH does not require that investors be rational; it says that individual investors will act
randomly, but as a whole, the market is always "right." In simple terms, "efficient" implies "normal." For
example, an unusual reaction to unusual information is normal. If a crowd suddenly starts running in
one direction, it's normal for you to run in that direction as well, even if there isn't a rational reason for
doing so.

Defining the Forms of EMH

1. Weak Form EMH: Suggests that all past information is priced into securities. Fundamental analysis
of securities can provide an investor with information to produce returns above market averages in the
short term, but there are no "patterns" that exist. Therefore, fundamental analysis does not provide
long-term advantage and technical analysis will not work.

2. Semi-Strong Form EMH: Implies that neither fundamental analysis nor technical analysis can
provide an advantage for an investor and that new information is instantly priced in to securities.

3. Strong Form EMH. Says that all information, both public and private, is priced into stocks and that
no investor can gain advantage over the market as a whole. Strong Form EMH does not say some
investors or money managers are incapable of capturing abnormally high returns because that there
are always outliers included in the averages.

EMH does not say that no investors can outperform the market; it says that there are outliers
that can beat the market averages; however, there are also outliers that dramatically lose to the market.
The majority is closer to the median. Those who "win" are lucky and those who "lose" are unlucky.

Lesson Objective 2
Stakeholders
In business, a stakeholder is any individual, group, or party that has an interest in an organization and
the outcomes of its actions. Different stakeholders have different interests, and companies often face
trade-offs in trying to please all of them. The following will analyze the most common types of
stakeholders and look at the unique needs that each of them typically has:

1. Customers
Stake: Product/service quality and value
Many would argue that businesses exist to serve their customers. Customers are actually stakeholders
of a business; in that they are impacted by the quality of service/products and their value. For example,
passengers traveling on an airplane literally have their lives in the company’s hands when flying with
the airline.

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 ACC 150: Valuation Concepts and Methods
Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

2. Employees
Stake: Employment income and safety
Employees have a direct stake in the company in that they earn an income to support themselves,
along with other benefits (both monetary and non-monetary). Depending on the nature of the business,
employees may also have a health and safety interest (for example, in the industries of transportation,
mining, oil and gas, construction, etc.).

3. Investors
Stake: Financial returns
Investors include both shareholders and debtholders. Shareholders invest capital in the business and
expect to earn a certain rate of return on that invested capital. Investors are commonly concerned with
the concept of shareholder value. Lumped in with this group are all other providers of capital, such
as lenders and potential acquirers. All shareholders are inherently stakeholders, but stakeholders are
not inherently shareholders.

4. Suppliers and Vendors

Stake: Revenues and safety
Suppliers and vendors sell goods and/or services to a business and rely on it for revenue generation
and on-going income. In many industries, suppliers also have their health and safety on the line, as
they may be directly involved in the company’s operations.

5. Communities
Stake: Health, safety, economic development
Communities are major stakeholders in large businesses located in them. They are impacted by a wide
range of things, including job creation, economic development, health, and safety. When a big company
enters or exits a small community, there is an immediate and significant impact on employment,
incomes, and spending in the area. With some industries, there is a potential health impact, too, as
companies may alter the environment.

6. Governments
Stake: Taxes and GDP
Governments can also be considered a major stakeholder in a business, as they collect taxes from the
company (corporate income taxes), as well as from all the people it employs (payroll taxes) and from
other spending the company incurs (sales taxes). Governments benefit from the overall Gross
Domestic Product (GDP) that companies contribute to.

Priorities of Different Stakeholders in terms of Business Valuation

The priorities of different stakeholders in terms of business valuation need to be recognized under
three circumstances. They are:

1. Liquidation – measures the total worth of a company’s physical assets that could potentially be sold
if it were to be liquidated in the immediate future rather than run as a going concern.
Potential investors will assess the liquidation value of a company before investing. Investors

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 ACC 150: Valuation Concepts and Methods
Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

want to know how much of their funds would be returned in the event of bankruptcy.

2. Refinancing – the process of revising and replacing the terms of an existing credit agreement,
usually as it relates to a loan or mortgage. When a business or an individual decides to refinance a
credit obligation, they effectively seek to make favorable changes to their interest rate, payment
schedule, and/or other terms outlined in their contract. If approved, the borrower gets a new contract
that takes the place of the original agreement.
Refinancing debt is a common way to take advantage of improved financial conditions in the
market or the improved health of a corporation that allows a company to put itself in a stronger position,
both operationally and financially.

3. Mergers and Acquisitions – a general term used to describe the consolidation of companies or
assets through various types of financial transactions, including mergers, acquisitions, consolidations,
tender offers, purchase of assets, and management acquisitions.
The benefits of getting a current and accurate valuation of your business are many and include;
knowing what your business is worth, understanding where your business fits within your industry,
getting a pulse on your financial condition and being able to quickly take advantage of acquisitions,
sales, capital investment or mergers.

2) Activity 3: Skill-building Activities

Activity 1
Differentiate the forms of efficient market hypothesis.

Check your answers against the Key to Corrections found at the end of this SAS. Be sure to complete
each activity before looking. Write your score on your paper.

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 ACC 150: Valuation Concepts and Methods
Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

3) Activity 4: What I Know Chart, part 2

Let us see how your knowledge changed by reviewing the questions in the What I Know Chart
from Activity 1. Write your answers to the questions based on what you now know in the third
column of the chart.

4) Activity 5: Check for Understanding

Explain why stakeholders need valuation during:
a. Liquidation b. Refinancing c. Mergers and acquisitions

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning
Congratulations for finishing this module! Shade the number of this module that you just have finished.

What part of the topic did you find difficult? ______________________ ________________

_____________________________________________________________________________________________________________

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 ACC 150: Valuation Concepts and Methods
Student Activity Sheet #11

Name: _________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________ Date: ________________

What is your favorite part of the module? ________________________________________________________________

_____________________________________________________________________________________________________________

KEY TO CORRECTIONS
Skill Building Activity
Weak Form EMH suggests that all past information is priced into securities. Fundamental
analysis of securities can provide an investor with information to produce returns above market
averages in the short term, but there are no "patterns" that exist. Therefore, fundamental analysis does
not provide long-term advantage and technical analysis will not work.
Semi-Strong Form EMH implies that neither fundamental analysis nor technical analysis can
provide an advantage for an investor and that new information is instantly priced in to securities.
Strong Form EMH says that all information, both public and private, is priced into stocks and
that no investor can gain advantage over the market as a whole. Strong Form EMH does not say some
investors or money managers are incapable of capturing abnormally high returns because that there
are always outliers included in the averages.

Assignment
Read SAS #13 and try to answer the activities.

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