BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani Pilani Campus Instruction Division

Transcription

1 FIRST SEMESTER Course handout (Part-II) Date: 1/07/2017 In addition to part-i (General Handout for all courses appended to the timetable) this portion gives further specific details regarding the course. Course No. Course Title : MBA G59/ ECON F55/BITS F9 : Business Analysis & Valuation Instructor-in-charge : Saurabh Chadha 1. Scope and Objectives of the Course: The process of measuring and managing the value of companies is a central aspect of financial management. In a nutshell, managers try and add value to their firms in two ways by enhancing the firm s productive capacity through internal (or organic) growth, and through prudent acquisitions that dovetail the corporation s key strengths. Therefore, not surprisingly, almost every important business decision is made by asking the question, What is it worth? The principal objective of this course is to provide you with the conceptual basis, intuitive reasoning, and analytical framework to make informed business valuation decisions. The focus of this course is on valuing equity (or ownership) in a firm and estimating the value of the overall enterprise. We will rely on discounted cash flow, relative valuation, and contingent valuation approaches for our analysis. Since financial statements serve as the basis for all types of valuation methods, the course begins by providing a brief framework on the principles governing financial statements, and adjustments that are often required to capture the underlying business reality.

2 The course presumes that you have an understanding of basic concepts in finance, accounting and statistics. Students who are either currently pursuing or would like to embark on a career in investment banking, corporate finance, venture capital, entrepreneurship, or business consulting will find the course material to be most useful. The course also carries a broader appeal to individuals who are interested in enhancing their understanding of financial analysis, and in learning how businesses create and measure value for their investors. 2. Format: By design, this is a fairly ambitious and rigorous course. Given that the course objectives are rooted in the practical application of theoretical concepts, we will rely on case study and problem-solving methods. Class time will be devoted to lectures and discussions. Lectures will provide analytical concepts that will integrate the readings and serve as a useful framework for a richer understanding of cases. My role as an instructor is to highlight the important points in each chapter, and to guide/moderate the class discussion. In order to succeed, it is extremely important that you remain current with all reading assignments and come fully prepared for class discussion. Please note that the objective of a valuation exercise is not about getting it right but, rather, about using a set of processes and logical steps that capture the complexities of the problem.. Text Books: T1. Palepu & Healy, Business Analysis & Valuation - Using Financial Statements, Text & Cases, Cengage Learning Publisher, rd Edition. T2. Damodaran, Valuation: Security Analysis for Investment and Corporate Finance, John Wiley, 2nd edition.. Reference Books/cases: (a) The Dark Side of Valuation: Valuing Young, Distressed and Complex Businesses, Second Edition, 2010, Pearson Education Inc. (b) Kaplan, R. S., & Norton, D. P. (200). Measuring the strategic readiness of intangible assets. Harvard business review, 82(2), 52-6.

3 (c) DePamphilis, D. (2009). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Academic Press. (d) Abrams, J. B. (2010). Quantitative business valuation: a mathematical approach for today's professionals. John Wiley & Sons. 5. Course Plan: Lecture Hours Learning Objectives Reference to Book Learning Outcome Basis and need for valuation Objective of firm Asymmetric information and role of financial statements Steps in business valuation Different approaches to valuation discounted cash flow (DCF), relative valuation, and contingent valuation Understand economics of a firm at a qualitative level 2 Identify profit drivers and key business risks Perform industry, competitive and strategy analysis Evaluate the firm s accounting reports Steps in accounting analysis Recast financial statements into a common format Undo accounting distortions that overstate/understate assets and liabilities Adjust equity distortions that arise from hybrid securities Examine firm s performance and financial condition given its strategy and goals Conduct ratio analysis Perform cash flow analysis Assess sustainable growth rate 2 Recognize limitation of accounting earnings T1. Chapter 1 T2. Chapter 1 T1. Chapter 2 T1. Chapters, company valuation and its different approaches. qualitative aspects of firm valuation. company analysis. T1. Chapter 5 analysis of firm s performance. T2. Chapter FCFF Vs FCFE

4 2 Adjust earnings for miscategorized items such as operating leases and R&D Define free cash flows to equity (FCFE) and free cash flows to firm (FCFF) Estimate component costs of capital equity, debt, preferred etc. Risk and return models Obtaining parameters for models Define beta and determinants Calculate WACC Estimate expected future cash flows Determine length of extraordinary growth period Estimate earnings and cash flow growth rates including fundamental growth Estimate stable growth rate and terminal value Value equity using DCF models dividends and FCFE Single-stage, two-stage, and multi-stage models Compare FCFE and DCF models Value entire firm using DCF approach Cost of capital model, adjusted present value (APV) model, excess return or economic value added (EVA) model Overview and applicability of relative valuation models Standardized values and multiples Steps to using multiples Analysis of equity multiples Analysis of value multiples Overview of the market for private equity Deal structuring Leverage buyout (LBO) Basic definitions and terminologies of financial options Determinants of option values Binomial and Black-Scholes option pricing models T2. Chapter 2 T2. Chapter T2. Chapter 5 T2. Chapter 5 T2. Chapters 7, 8, 9 T1. Chapter 10 T1. Chapter 10 WACC analysis. forecasted cash flows. equity valuation. Firm Valuation using DCF. relative valuation. Private equity. option pricing.

5 1 Real options Valuing intangibles Equity as a call option Overview of mergers and acquisitions (M&A s) M&A strategies Analysis of M&A transactions T2. Chapter 12 T1. Chapter 11 Intangible valuation. M&A transactions. 6. Evaluation Scheme: EC No. Evaluation Component (EC) Duration Weightage (%) Date & Time Nature of the Component 1 Mid-term 90 min 20% 12/10 11:00-12:0 PM Closed Book 2 Quiz/Assignments/Projects/Presentations 0% Open Book Comprehensive Examination Hours 0% 8/12 AN Closed Book Chamber Consultation Hour: To be announced in the class. Course Notices: All the notices concerning the course will be displayed on Management Department Notice Board. Instructor In- Charge MBA G59/ ECON F55/BITS F9