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Q: MANAGEMENT ACCOUNTING ( Answered,   0 Comments )
Category: Business and Money > Accounting
Asked by: eco5912-ga
List Price: $25.00
Posted: 30 Jan 2005 22:31 PST
Expires: 01 Mar 2005 22:31 PST
Question ID: 466185
To some people, valuation is seen as a science. This means once we
input the needed data into some elegantly developed formula, then we
should get a firm price as a result. To others however, valuation is
seen as an art- meaning there is more to valuation than a mere
mechanical operation. Outline your thoughts in a paragraph or two.
Specifically state the reasons for your argument.
Answered By: omnivorous-ga on 31 Jan 2005 10:27 PST
Eco5912 ?

Valuation models are done in pretty standard ways.  They estimate free
cash flows of a company, assuming that at some point the money can be
returned to the shareholders in the form of dividends.  That may be
many years downstream ? but the cash flows allow the value of the firm
to grow, providing more assets and higher dividends.

?Security Analysis? (undated)

But valuation models are just that ? ?models? of what might happen. 
We use them to compare investments, judge the quality of the firm?s
activities, to test theories about what could change.  But they are
simplified representations of what goes on every day with a real firm.
 The firm itself may have thousands of employees taking hundreds of
thousands of actions each day to adjust to circumstances and things
can change quickly.

Unknown events can strike.  Prior to Sept. 11, 2001 the U.S. airline
fleet had never been grounded, not even during wartime.  But for 3
days that week, every flight in the U.S. was grounded.  Southwest
Airlines, one of the most-profitable carriers in the U.S., notes the
impact in its 2003 annual report:
?	9,000 flights cancelled
?	Reduced passenger flights after the terrorist attacks
?	January 2001 to August 2001, $707 million in operating income
?	September 2001: a loss of $113 million
?	Q4 2001 operating income of only $37 million

Even to achieve a profit again at the end of 2001, Southwest had to
take a large number of actions, from paring advertising, to delaying
hiring, to pushing out deliveries of new Boeing 737s in order to
conserve cash.   None of it could have been modeled but someone
familiar with the skill of Southwest management and their unity of
purpose would have predicted a quick return to profitability for the
airline.  That?s the art of evaluation.

?Southwest Airlines 10-K for 2003?

Best regards,

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