Post Graduate Programme in Management
2014-15 TERM: IV
TITLE OF THE COURSE: FINANCIAL REPORTING, ANALYSIS AND VALUATION
CREDITS: 4COURSE: Elective Course No. of Section, if elective course: 1
Instructor Email: Tel. Number Faculty Block and Room No.
Dr. Ramesh Gupta
COURSE DESCRIPTION
This course is about the use of financial information in valuation. With a careful
assessment of accounting quality of published reports, financial analysis is used to
develop practical analytical tools for valuation and active investing. It integrates
accounting principles with finance concept through fundamental analysis. In discussing
valuation models, the latest academic research will be integrated with traditional
approaches, such as discounted cash flow models and earnings and book value multiples,
which are widely used.
COURSE OBJECTIVES
By the end of the course students should have answers to the following questions:
How are fundamental values (or intrinsic values) estimated?
How is value created for shareholders identified? What are the key drivers?
How does one analyze the financial statements to get at the relevant intimation for
valuing equities?
How does one analyze the quality of financial reports?
What is the relevance of cash-flows? Of dividends? Of earnings? Of book values?
How does profitability tie into valuation?
What is growth? How does one analyze growth? How does one value a growth firm?
What determines a firms P/E ratio?
What determines a firms market-to-book (P/B) ratio?
How does one evaluate an equity research report?
The course should be of interest to those contemplating careers in investment banking,
security analysis, consulting, and corporate finance. And it will also help with personal
investing.
PEDAGOGY/TEACHING METHOD
The participants are expected to go-through the readings and adequately prepare the
case assigned for the day. On some topics lectures would be used as a follow-up to cases
to more clearly lay out the conceptual issues raised in the case discussion
EVALUATION Weightage
Class Attendance/Participation 10%
Course Project 20%
Quizzers/mid - term 30%
Final Exam 40%
Total 100%
SCHEDULE OF SESSIONS
Module I Introduction to investing and valuation
Module Objective
Introduces the financial statements and the tools that are used in fundamental analysis.
Sessions and Objective
Session 1: A Framework for Financial Statement, Analysis & Valuation
Objective: Linking Business Analysis & Financial Strategy using financial statements.
Reading: SP Ch. 1
Assignment: E 1.5, E1.6
Case: M1.1 America Online Inc.
Session 2: Introduction to the Financial Statements
Objective: Reviewing Financial Statements and other published information
Reading:SP Chapter 2
Assignment:E 2.7, E.2.10, E.13 and Annual Report of ???
Case: ?
ModuleII Valuation Models
Module Objective
Understanding of different valuation models that use the features of financial
statements. Alternative models are discussed so as to appreciate the strength and
weaknesses of alternative approaches.
Sessions and Objective
Session 3:How financial statements are used in Valuation
Objective:Multiples, assets-based valuation, architecture of fundamental analysis
Reading:SP Chapter 3
Assignment:E 3.7, E 3.10
Cases: M 3.3 Weyerhouser Company
Session 4:Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation
Objective:Discounted Cash Flow Model, The Statement of Cash Flows, Cash flow
earnings and accrual accounting
Readings:SP Ch 4
Assignment:E 4.10, E 4.11
Cases: M 4.1 Coca Cola and Home Depot
Session 5:Estimating Terminal Values in Discounted cash flow Valuation
Objective: ?
Readings:?
Assignment:Rocky Mountain
Case:?
Session 6: Accrual Accounting and Valuation: Pricing Book Values
Objective: The concept behind the Price-to-Book Ratio, Residual Earnings Model
Reading: SP Ch 5 Note: Accounting Based Valuation- Ohlson
Assignment: E 5.3, E5.5, E5.6, E 5.10
Case: M5.1, Cisco system M5.2 Pepsi and Coca Cola
Session 7: Accrual Accounting and Valuation: Pricing Earnings
Objective: How to price earnings income statement and calculate intrinsic price-
earnings ratio
Reading: SP Ch 6
Assignment: E 6.3, E 6.4, E 6.11, E 6.12
Cases: M 6.2 Pepsi & Coca cola, M 6.3 Google
Module III The Analysis of Financial Statement
Module Objective
Learn financial statement analysis that identifies value generation in business and
provides information for forecasting.
Sessions and Objective
Session 8: Business Activities and Financial Statements
Objective: Reformulating statements accruals
Reading: SP Chapter 7
Assignment: E 7.6, 7.7 7.8
Case: ?
Session 9: Analyzing the Statement of Shareholders Equity
Objective: Reformulation highlights the concept of comprehensive income, clean and
dirty surplus
Reading: SP Chapter 8
Assignment: E 8.9, 8.12
Cases: M 8.1 Microsoft Corporations
Session 10: The Analysis the Balance Sheet and Income Statement
Objective: Reformulation of these statements and Comparative Analysis
Reading: SP Chapter 9
Assignment: E9.5, 9.9
Case: 9.1 P and G I
Session 11: Analyzing the Cash Flow Statement
Objective: Reformulates the cash flow to capture operating and financing activities
Reading: SP Chapter 10
Assignment: E10.3, 10.7, 10.11
Case: ???
Session 12: Analyzing Profitability
Objective: Analysis of profitability that is necessary for forecasting future profitability
and valuations.
Reading: SP Chapter 11 Note- Ratio Analysis and Valuation- Dorron Nissin
Assignment: E 11.4, 11.7, 11.10
Cases: M 11.1 P and G II
Session 13: Analyzing Growth and Sustainable Earnings
Objective: Analysis of Growth that is necessary to complete the evaluation of P/B and
P/E ratio
Reading: SP Chapter 12
Assignment: E 12.5
Cases: M 12.1 P&G III, M 12.2 Microsoft, M 12.3 IBM
ModuleIV Forecasting and Valuation Analysis
Module Objective
To find values, one needs to compute payoffs. This module shows how to forecast
payoffs within a financial statement framework thru proforma financial statement
analysis. The analysis then would show how to convert forecasts into valuation of firms
and their strategies.
Sessions and Objective
Session 14: Valuation of Operations
Objective: Learn to develop valuation based only on operations and how to calculate
intrinsic P/E and P/B ratios from operations
Reading: SP Ch. 13
Assignment: E 13.9, E 13.11, E13.18
Case: M 14.2 Cisco System
Session 15: Simple Forecasting and Simple Valuation
Objective: Develop simple valuation model based on forecast of operating profitability
and growth
Reading: SP Ch. 14
Assignment: E 14.5, E14.7, E14.10 E14.13
Case: M 14.2 Cisco System
Session 16: Full Information Forecasting and Valuation
Objective: How information outside the financial statements is utilized to improve
simple forecasts
Reading: SP Ch. 15
Assignment: E 15.4, E 15.6, E15.9
Case: P&G V, M15.3 Maytag
Module V Accounting Analysis and Valuation
Module Objective
Deals with accounting issues that arises with the use of accounting based valuation.
How to deal with variety of accounting practices and assess the quality of accounting
used.
Sessions and Objective
Session 17: Creating Accounting Value and Economic value
Objective: The effect of alternate accounting policies forecasts of profitability and
growth
Reading: SP Ch 16 Note- Diversity in Accounting Principles
Assignment: E16.3, 16.4, E 16.6
Case: M 16.1 E* Trade
Sessions 18 and 19: Analysis of the Quality of Financial Statements
Objective: Finding out quality of accounting and its affect on current earnings and
forecasted earnings
Reading:SP Ch 17 Note- Accounting Scams- Genesis by Ramesh Gupta
Assignment: E 17.7, E17.11, E. 17.12 E17.14
Case: M 17.1 Xerox
Session 20: Review and Catch-up
Additional Reading
1. Koller, T., Goedhart, M., and Wessels D., Valuation: Measuring and Managing the
Value of Companies, McKinsey & Company Inc., 5th Edition, 2010
2. Palepu K., Healy P. and Bernard, Business Analysis and Valuation: Using Financial
Statements, Text and Cases, South-Western, 5th Edition, 2010.
3. White G., Sondhi A., and Fried D., the Analysis and Use of Financial Statements,
Wiley, 3rd Edition, 2004
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