Last sentence of LOS 27.b in Schweser FRA, pg. 175, states:
"...If an investor fails to assign a lower weighting to the accrual component of the earnings, securities become mispriced."
What exactly is the weighting in this case? Conceptually, cash flows are better indicator of a firm's state of health - and therefore minimizes mispricing during valuation. But let's say if an analyst uses relative valuation, i.e. P/E then s/he is forced to use the accrual part of NI - what does weightage has to do with the valuation?作者: BelalM 时间: 2011-7-11 19:27
Well, the analyst could use adjusted P/E ratios if he/she so desired, I guess. You can't adjust the financial statements for one firm and compare it against unadjusted firms.作者: spreads 时间: 2011-7-11 19:27
I agree that it sounds better when 'lower weighting' = adjustment:
If we restate the sentence to "...If an investor fails to adjust accrual component of the earnings, securities become mispriced."
But is that what they really mean - not sure whether the implication of the two phrases is similar.作者: bingbingliang 时间: 2011-7-11 19:27
good call. Simple concept here bad wording on their part
