Finance – Fundamental Problems and Solutions by Zhiqiang Zhang (auth.)

By Zhiqiang Zhang (auth.)

As indicated by means of the name, this e-book specializes in basic difficulties in finance: a logical obstacle in valuation, inventory valuation methods/models, hazard valuation, and optimum capital constitution. It offers an cutting edge method of good judgment and quantitative reasoning (without complex arithmetic) that gives you important effects ---- convincing recommendations to those difficulties. Readers in finance will certainly have an interest in those options in addition to the tools. actually, those basic difficulties are crucial within the box of finance, and so they have remained unsolved (or in part unsolved) for many years. The strategies provided during this booklet are all sound in idea and possible in perform, and should confidently gain either theoretic al examine and sensible decision-making.

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18 as ZZ P/B model. 19) P = (1 + g)n −1 (1 + g) Br/g Obviously, the theoretical P/B is the theoretical P/E multiplied by the return on equity. Similar to the ZZ P/E model, the data of independent variables in the ZZ P/B model are not difficult to estimate. It is worthy to mention that the return to equity r should be positive in valuation of a healthy firm or stock. In other words, it is the average return of the equity investment in normal situation in the future. Comparing with the ZZ P/E model, the ZZ P/B model needs one more independent variable, r.

1 ZZ P/E Model While P/E ratio is usually the ordinary P/E ratio defined as the current share price divided by earnings per share in most recent financial year, there are a number of variants on the basic P/E ratio in use, based upon how the price and the earnings are defined. One important variant is the forward P/E ratio, defined as the current share price divided by forecasted earnings per share next year. The P/E ratio in this chapter is referred to the ordinary P/E ratio unless indicated intentionally.

825 respectively. 56 %. 5 Some of the Applications of ZZ Growth Model and ZZ Ratio Models 47 Therefore, when the theoretical P/E is known, the extent of the market bubble is easy to measure effectively and timely, which is the key to monitor and protect against financial crises. Thus, the model of the ZZ growth model and the ZZ ratio models solve two issues simultaneously: the valuation of stock and the measurement of market bubbles. As such, the appropriate applications of these models hopefully will enhance our ability greatly to guard against financial crises and stock market disasters.

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