BUS440E Valuation with financial statement analysis
Whether and how accounting numbers relates to firm value are intriguing questions. On the one hand, accounting numbers help managers within the firm to identify investment opportunities and to make better investment decisions, which leads to enhancement in firm value. In the capital market, investors constantly gather information for their portfolio investment decisions. In particular, financial analysts play an important role. One of the useful information sources is financial statements. Insight into these statements helps investors to dig out value-relevant information, from the business strategy to the prospective performance. Therefore, analysis of financial statements could not only help firm allocate funds to different investment project but also provide clues to investors to direct their money in the capital market.
On the other hand, managers could exercise discretion over accounting choices. In other words, the strategic application of accounting standards might distort the usefulness of accounting numbers. There could also be distortions induced by the accounting standards themselves. Therefore, it is essential to understand the process of preparing accounting numbers to undo the bias and form reasonable belief of the firm performance.
Consequently, this course intends to equip the students with the skills of financial statement analysis, valuation and communication of the product of analysis in the form of an analyst report. Specifically, the course will first lay out the framework for business analysis and valuation and then focus on the driving force of firm strategy and operating performance. Subsequently it will cover the analysis of financial statements, including how to identify red flags in the financial statements. Based on the analysis, the course will illustrate how to forecast financial statements and estimate the cost of capital, which develops the foundation for implementing valuation techniques. The last part of course will introduce the preparation of analyst report and its best practice.
The course will cover the following topics.
- Framework of Business Analysis and Equity Valuation
- Business Strategy and Industry Analysis
- Analysis of Financial Statements
- Forecasting Financial Statements
- Cost of Capital and the Required Rate of Return
- Valuation Theory and Techniques (DCF and RIM, etc.)
- Analyze the Uncertainty in the Value Estimate
- Preparation of Analyst Report
- Best Practice of Financial Analysts
Knowledge - The student will by completing
- Have thorough knowledge of valuation models and return requirements
- Have in-depth knowledge of the normalization of an account of re-consolidation of a balance sheet for valuation purposes
- Understand trend analyzes, competitor comparison, measure strategic advantage and make good predictions
Skills - The student will by completing
- Explain the key valuation models for a company and a share
- Use the CAPM and WACC in practice and know the weaknesses of the models
- Make an analysis of the annual accounts and make adjustments to find the actual underlying earnings
- Analyze trends in historical earnings and understand where your business earns and loses money
- Make competitor comparisons and understand the company's strategic position and market trends
- Based on the above: be able to make one or more good forecasts for future earnings / cash flow
- Make a complete valuation of a business and test if the value seems reasonable
General competence - the student will by completing
- Communicate central subjects such as theories, issues and solutions, both written and oral
- Ask critical questions about the valuation; use of method, assumptions and calculated value
Lectures, cases, and group work
No prerequisites are necessary. Yet students with background knowledge in financial accounting and corporate finance will find it easier to follow the lectures.
Credit reduction due to overlap
The course cannot be combined with BUS440B or BUS440A.
BUS440A, BUS440B, BUS440E have different curriculum and the exam is not comparable.
BUS440E is a continuation of BUS457/MRR413E.
Requirements for course approval
Four hour written exam.
This course is a continuation of BUS457 and the total number of attempts applies to the course (not the course code).
Grading scale A - F.
Peek, E., K. G. Palepu, and P. Healy. 2013. Business Analysis & Valuation: Text and Cases. IFRS edition, 4th Edition. Cengage Learning.
Penman, S. Financial Statement Analysis and Security Valuation 5th Edition. McGraw-Hill Higher Education.
Valentine, J. J. 2011. Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts 1st Edition. McGraw-Hill.
Hooke, J.C. 2010. Security Analysis and Business Valuation on Wall Street: A Comprehensive Guide to Today's Valuation Methods, 2nd Edition. Wiley.
- ECTS Credits
- Teaching language
Spring. Currently not offered
Assistant Professor Wei Shi, Department of Accounting, Auditing and Law