20 October 2009
Sir, I as we all know that there are all types of big to small list of formulas in MAFA for valuation of stock of a company, capital bdgeting,valuing investment opportunities, etc.
What I need to know is that how far do we actually use them in pratice? Do we actually calculate beta, weighted avg cost of capital, etc...what about the assumptions we take... kindly enlighten.
20 October 2009
As you are aware that the assumptions upon which these formulas are based are completely baseless, the use of these formulas is not really possible or worthwile. Some of the assumptions like perfect markets, non existent corporate taxes, no change in risks, stable cash flows etc are such that such a scenario cannot exist ever.
Eventually the prices of companys stock are decided by demand and supply forces.
Cash flow is the deciding factor for making decisions.
Many decisions are also based on strategies for branding, marketing etc, some decisions are based on some other factors as well. Decisions cannot be made only on the basis of financials.
Even if people use these formulas, i will say its crap, because ratios, valuations etc are done on the basis of financials, and after these scams which Auditors are involved in, assuming that they are true and fair is a big mistake even if they are audited by any firm in this world.
If you wish to do well, forget the forumlas after exams.
Some concepts like time value, discounting etc do make sense, so dont consider me to be an extremist. But most of the things that are taught in our MAFA at pe2 and final level are completely irrelevant, especially those based on assumptions discussed above.
If anyone has any valuable inputs which show practical relevance of the concepts and theories studied in CA financial management, please pm or scrap it in my profile.
CAclubindia
