ACCT13017 Questions: Week 11 How to Predict the Future to Eternity

Question 1

“The quality of our financial statement analysis will be based on the extent to which we are better at predicting the future of a firm to eternity than other equity investors in the capital markets.” (see Section 7.1). Why is it part of financial statement analysis to predict a firm’s future to eternity? How is it possible to even attempt to do this? Is there not some way we can avoid having to do this? Discuss.

Question 2

What is the point of ‘guessing’ what lies beyond our forecast horizon? How can we possibly be better than average at guessing about what we do not know and cannot predict?

Question 3

Explain you understanding of what risk is. Finance theory provides us with tools for measuring risk. These are criticised in this Chapter. Do you agree with these criticisms? Why or why not?

Question 4

Explain the concept of a ‘margin of safety’. Are the risks we assume as an equity investor in a firm the same as the risks the firm assumes in its operations? Why or why not? Do all equity investors in a firm (with identical forms of equity investment) assume the same risks in their equity investments? Why or why not? &