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Chapter 1
A Framework for Business Analysis and Valuation
Using Financial Statements
Discussion Questions 1, 3 & 4
1. John, who has just completed his first finance course, is unsure
whether he should take a course in business analysis and valuation
using financial statements, since he believes that financial analysis adds
little value, given the efficiency of capital markets. Explain to John
when financial analysis can add value, even if capital markets are
generally seen as being efficient.
The efficient market hypothesis states that security prices reflect all
available information and implies that there is no further need for analysis
involving a search for mispriced securities.
However even in an extremely efficient market, where information is fully
impounded in prices within minutes of its revelation (i.e., where mispricing
