Relation between security prices and expected returns

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1. Explain how information contained in financial statements is useful in pricing securities. Are there some components of earnings that are more useful than others in this regard? What nonfinancial information might also be useful?

2. In general, what role do expectations play in pricing equity securities? What is the relation between security prices and expected returns (the discount rate, or WACC, in this case)?

3. Define the concept of residual operating income (ROPI). How is residual operating income used in pricing equity securities?

Reference no: EM132722628

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