AA301 Business Analysis and Valuation

AA301: Business Valuation and Analysis 2012-13 Semester 2
AA301 BUSINESS ANALYSIS AND VALUATION _________________________________________________________________________
Academic Year Course Coordinator Pre-requisites No. of AUs
: : : :
2012-2013 Dr. ZHANG Huai
Semester Other Instructor(s)
Dr. Kevin KOH : Dr. KE Bin Mr. CHONG Eng Heng
AA201/AC2101 Accounting Recognition and Measurement 4
Course Description and Scope This course provides students with the conceptual background and analytical skills that are necessary to identify, assess and apply information for the purposes of analysing and valuing business activities and entities. The course employs the agency framework within a capital market context to help students develop the necessary analysis and valuation skills. Emphasis is placed on integrating the use of financial and non-financial information in business valuation and analysis, involving strategy analysis, accounting analysis, financial analysis, prospective analysis and valuation. The course allows students to understand the critical issue of determining the specific types of information that are relevant in ex ante valuation and ex post analysis of business entities and their activities. Students are also expected to be aware of the benefits and costs of acquiring and using such information. Cases and projects are used to develop and integrate the business analysis and valuation concepts. Healthy scepticism is emphasized, as students are encouraged to challenge the assumptions and facts related to each issue. Course Learning Objectives After the completion of this course, students should understand and appreciate some of the rationales and characteristics that underlie business practices and financial reporting. Students should also appreciate the myriad interactions among the process of business analysis and valuation, the use of information sets (accounting and non-accounting), and the workings of the capital markets. Students are expected to develop important knowledge, skills and attitudes in AA301. The main objectives are to develop students (1) social and interpersonal skills, (2) technical knowledge of specific accounting standards, (3) technical knowledge of business valuation, (4) creative and critical thinking, (5) tolerance for ambiguity in a dynamic environment, and (6) strategic thinking and leadership capabilities in a vibrant environment. Learning & Teaching Methods Seminars will be the main mode of instruction for this course. There will be two seminars of two hours per week. Please see the course outline and take note of announcements on the EdveNTUre website of this course. You will need to use computing facilities for some parts of this course. You and your team may use the Nanyang Business School computing labs or use your own computers. Most computing tasks will be required before or after classroom time. Classroom time will mainly be used for discussion purposes.
AA301: Business Valuation and Analysis 2012-13 Semester 2 Course Assessments Components Class Participation In-class Workshop Take-Home Assignment Written Assignment Report Presentation Final examination (open-book) Total Assessment Plan Course Learning Objective Assessment Method Class participation Written assignment report Written assignment presentation 15% 5% 50% 100% Group Individual Individual Marks 10% 10% 10% Individual/Group Individual Individual Individual
Teamwork and Interpersonal Skills
Acquiring Knowledge
Class participation In-class workshop Take-home assignment Written assignment report Final examination
Problem Solving and Decision Making
Creative and Critical Thinking
Class Participation Participation in seminars is essential in this course. Meaningful participation is possible only if each member has read the assigned reading and cases and carefully thought about the issues before each seminar. You are encouraged to approach each issue with an open mind and be prepared to challenge the assumptions, theories and facts related to each issue. You should always be ready to defend your opinions and ideas and be motivated to probe the views of others. Polite and meaningful exchange of ideas and opinions can add greatly to everyones learning. Professors may administer classroom exercises such as short presentations and write-ups to encourage participation and to monitor progress.
AA301: Business Valuation and Analysis 2012-13 Semester 2 In-Class Workshop There will be an in-class closed-book workshop during the semester. The purpose of the in-class workshop is to reflect on knowledge acquired during the semester. The workshop is a vehicle for providing feedback on the understanding of concepts and rules and the ability to apply them to practical accounting problems. Absentees from the in-class workshop who do not have a valid reason will be given a zero mark and a fail grade. No exceptions will be made. Further details will be provided on the AA301 main website on EdveNTUre and in seminars when necessary.
Take-Home Assignment Students are required to work on a take-home assignment relating to an accounting and disclosure issue. The take-home assignment is on an individual basis. Students are required to search for relevant materials such as news articles, academic papers and books (with proper referencing) to aid in writing up the take-home assignment. The purpose of the assignment is to enable students to articulate clearly and thoroughly their critiques on a selected accounting and disclosure issue. The requirement for the take-home assignment will be made known via the AA301 main website on EdveNTUre. The assignment is due on Tuesday, 12 March by 5.00 p.m. No late submission will be accepted.
Written Assignment and Presentation The assignment involves the analysis and valuation of Singapore companies in a real world setting. It is a team assignment. The teams will select their companies early in the semester so that they can keep track of the development and news associated with their selected companies throughout the course. The information and the accompanying instructions will be made available on the AA301 main EdveNTUre website. The teams will formally present the results of the analysis towards the end of the semester. In addition to the hardcopy submitted to respective instructors for marking, each team should submit a softcopy to the instructor using Turnitin for plagiarism check. Further details will be provided on edveNTUre later.
Team Membership Each team will have five students. Instructors may randomly assign students to the teams. Where classes are not clearly divisible into teams of five, the teams may comprise of six or four students. The teams must be formed by the second week of the semester.
Peer Evaluation Form Since the instructors are not able to assess each participants input into the overall completion of the Written Assignment, each team member will be given the opportunity to assess the participation and contribution of the other team members. This will be done using the Peer Evaluation Form (see Appendix B of the instructions for the Written Assignment) to evaluate the contribution of fellow team members. Each team member must submit the Peer Evaluation with the report for the Written Assignment. Failure to submit the Peer Evaluation Form may result in a zero grade your Written Assignment.
Final Examination This is a open book examination. The purpose of the final examination is to comprehensively test the students understanding and application of conceptual and technical knowledge acquired during the semester.
Academic Integrity Good academic work depends on honesty and ethical behaviour. The quality of your work as a student relies on adhering to the principles of academic integrity and to the NTU Honour Code, a set of values shared by the whole university community. Truth, Trust and Justice are at the core of NTUs shared values. As a student, it is important that you recognize your responsibilities in understanding and applying the principles of academic integrity in all the work you do at NTU. Not knowing what is involved in maintaining academic integrity does not excuse academic dishonesty. You need to actively equip yourself with strategies to avoid all forms of academic dishonesty, including plagiarism, academic fraud, collusion and cheating. If you are uncertain of the definitions of any of these terms, you should go to the academic integrity website http://academicintegrity.ntu.edu.sg for more information. Consult your instructor(s) if you are in doubt. Each student will receive an email from your instructor about the Declaration of Academic Integrity in the week starting from 28 Jan 2013. You must follow the instructions stated and reply the email by 1700, Friday, 1 Feb 2013. Please note that ALL your assignments (i.e., the In-class Workshop, Takehome Assignment and Written Assignment) will NOT be accepted without this declaration.
Required Texts 1. Equity Valuation and Analysis: Readings for Business Valuation and Analysis The book is adapted from a) LS Lundolm & Sloan. Equity Valuation and Analysis with eVal. 3rd Edition McGraw-Hill, 2013 (Call No: HG4028.V3L796 2013) The eval software website:
http://www.lundholmandsloan.com/software.html
b) TL Tan & Lee, Advanced Financial Accounting: an IAS and IFRS approach. McGraw-Hill, 2009 (Call No: HF5636.T161 2009)
2. Scott
Financial Accounting Theory: Readings for Business Valuation and Analysis (customized Pearson Prentice Hall text)
This customized Pearson Prentice Hall text is adapted from: Scott, Financial Accounting Theory. 6 Edition Pearson Prentice Hall, 2011 (Call No: HF5636.S36 2011)
th
References and Supplementary Texts 3. PHP Palepu, Healy & Peek, Business Analysis and Valuation: IFRS Edition, Text and Cases. nd 2 Edition. Cengage Learning, 2010 (Call No: HF5636.B979 2010). Companion Website: http://www.cengage.co.uk/palepu_peek2/
Course Instructors
Instructor Mr. CHONG Eng Heng Dr. Kevin KOH Dr. KE Bin Dr. ZHANG Huai
Office Location S3-B2C-89 S3-B2C-96 S3-01B-39 S3-01C-90
Phone 6790-4650 6790-4096 6790-4832 6790-4097
Email chong_eng_heng@ pmail.ntu.edu.sg kevkohwl@ pmail.ntu.edu.sg kebin@ntu.edu.sg huaizhang@ntu.edu.sg
A note on the proposed schedule The readings, activities and case studies stated below are tentative and are subject to change. We will be using EdveNTUre as the primary vehicle to provide updates, instructions, handouts, readings, and other materials. It is the responsibility of each student to check the EdveNTUre regularly. Note that you should check both the AA301 main EdveNTUre website as well as your own AA301 seminar groups EdveNTUre website. Some of the textbooks have links to the publisher web page that contains additional information and notes that can be used to broaden your understanding of the assigned topics.
AA301: Business Valuation and Analysis 2012-13 Semester 2 Proposed Weekly Schedule
Week (1) Jan 14 Session 1
Topic Seminar 1 Course Introduction Objectives, requirements, and expectations.
Learning Objectives
Resources
Activity
To appreciate the objectives, requirements, and instructors expectations of the course.
Scott: Ch 1 LS: Ch 1 Ch 2
Course Administration: Form teams for written assignments and group presentation.
(1) Jan 14 Session 2
Seminar 2 Information Perspective on Accounting Information Valuation under ideal and non-ideal conditions. Efficient markets and implications for financial reporting.
To review the role of accounting information as a part of an information system useful for decision making. To understand the concepts of efficient markets and information perspective on financial reporting. To examine the Management Discussion and Analysis section of financial reports as an example of firms disclosure practices.
Scott: Ch 2 (p. 34-45 & p. 54-55) Ch 3 (p. 66-77 & p. 92-96) Ch 4 (p. 108-144)
Discussion: Scott: Q2-24 (p. 61-62) Q3-11 (p. 97) Q4-5 (p.145) Q4-6 (p.145) Q4-12 (p.147-148)
ASC (Hyperlink ASC): Practice Statement on Management Commentary
Week (2) Jan 21 Session 1
Topic Seminar 3 Information Perspective on Accounting Information The roles of accounting information in capital markets and other settings.
Learning Objectives To appreciate empirical research supporting the information approach to decision usefulness of financial reporting.
Resources Scott: Ch 5 (p. 152-175) Hoogervorst (2012), The imprecise world of accounting, speech in the International Association for Accounting Education & Research (IAAER) conference in Amsterdam. Discussion: Scott: Q5-8 (p.176-177) Q5-9 (p.177-178) Q5-12 (p.179) Q5-17 (p.180) Q5-19 (p.180-181)
Activity
(2) Jan 21
Seminar 4 Measurement Perspective on Accounting Information Evidence against efficient markets. Market inefficiency and its implications for financial reporting. Measurement perspective on financial reporting.
Session 2
To be aware of empirical evidence against market efficiency and the resulting implications for financial reporting.
Scott: Ch 6 (p. 184-213 & p.221-224 & p.229-230)
Discussion Scott: Q6-1 (p.230) Q6-2 (p.230) Q6-5 (p.230) Q6-7 (p.230) Q6-13 (p.232)
Week (3) Jan 28
Topic Seminar 5 Measurement Perspective on Accounting Information Fair value accounting.
Learning Objectives To appreciate the concepts, complexities and implications of fair value accounting.
Resources Benston (2006). Fair-value Accounting: A Cautionary Tale from Enron. Journal of Accounting and Public Policy Vol. 25 (4): 465-484 Ryan (2008). Fair Value Accounting: Understanding the issues raised by the Credit Crunch White Paper for Council of Institutional Investors Discussion
Activity
Session 1
Read the assigned articles. Refer to EdveNTUre main course website for articles and discussion questions.
Kothari and Lester (2012). The Role of Accounting in the Financial Crisis: Lessons for the Future. Accounting Horizons Vol. 26(2): 335-351
Week
Topic Seminar 6 Introduction to Business Analysis and Valuation Strategy Analysis
Learning Objectives To appreciate the different stages in business analysis and valuation. To understand why strategy analysis is important in business analysis and valuation and the tools for implementing strategy analysis. LS: Ch 1 Ch 2 Ch 3
Resources
Activity Case study: America Online, Inc. [HBS 9-196-130]. You can purchase the case from Undergraduate Program Office. Refer to EdveNTUre main course website for discussion questions.
(3) Jan 28 Session 2
Industry analysis. Competitive strategy analysis. Corporate strategy analysis.
(4) Feb 4 Session 1
Seminar 7 Accounting Analysis Overview of accounting analysis and factors affecting the quality of accounting information. Institutional and economic factors influencing the regulation of accounting information. Theories of accounting regulation. Process of standard setting.
To appreciate the usefulness of accounting information in reflecting business reality. To appreciate the role of analysing accounting information prior to its use in financial analysis and valuation. To understand the economic and political underpinnings of accounting regulation and their influence on the preparation of accounting information. To understand the standard setting process in Singapore.
Scott: Ch 12 (p.460-487) Ch 13 (p.497-522) LS: Ch 4 Websites (Hyperlinked): ASC ACRA IAS Plus
Discussion Scott: Q12-3 Q12-6 Q13-6 Q13-7 Q13-8 (p. 487) (p. 487) (p. 523-524) (p. 524) (p. 524)
Week (4) Feb 4 Session 2
Topic Seminar 8 Accounting Analysis Contractual incentives to manage earnings. Positive Accounting Theory Patterns of earnings management.
Learning Objectives To appreciate that accounting information are used in contracts and managers have contracting incentives to manage earnings. To understand the various patterns of earnings management.
Resources Scott: Ch 8 (p.293-311) Ch 11 (p.422-433) Discussion Scott: Q8-6 (p.320) Q8-10 (p.321-322) Q11-7 (p.450-451) Q11-13 (p. 455)
Activity
LS: Ch 4
No Seminar for Session 1 (5) Feb 11 Session 1 HAPPY LUNAR NEW YEAR!
Topic Seminar 9 Accounting Analysis Capital markets incentives to manage earnings. Two contrasting views of earnings management: Efficient and opportunistic.
Learning Objectives To appreciate that managers have capital markets incentives to manage earnings. To examine the type of actions mangers take to meet capital market expectations, especially analysts expectations. To understand the efficient and opportunistic views of earnings management.
Resources Scott: Ch 8 (p.315-319) Ch 11 (p.434-448) LS: Ch 4 Collingwood (2001). The Earnings Game: Everyone Plays, Nobody Wins Harvard Business Review Vol 79(6): 6574 Discussion Scott: Q8-5 (p.320) Q8-11 (p.322) Q8-15 (p.324-325) Q11-12 (p. 455)
Activity
Additional Question: Read the assigned article by Collingwood (2001). Refer to EdveNTUre main course website for the article. Elaborate on how the earnings game is being played and explain why nobody wins in the earnings game.
(6) Feb 18 Session 1
Seminar 10 Accounting Analysis Accounting for bonds and compound financial instruments. Accounting for operating and finance leases.
To briefly review - accounting for bonds and compound financial instruments. - accounting for leases.
FRS 39 (para43-47) (Updated on 6.1.06 and effective from 1.1.07. Latest amendment 23.4.2009) FRS 32 (para 28-32) (Updated on 6.1.06 and effective from 1.1.07. Latest amendment 18.11.09) FRS 17 (Updated on 6.1.06 and effective from 1.1.07)
IN-CLASS WORKSHOP
Topic Seminar 11 Accounting Analysis Earnings per Share (EPS).
Learning Objectives To examine and understand - the computation of basic and diluted EPS. - the implications of potential common shares on calculating diluted EPS. To be aware of FRS 34: Interim Financial Reporting. TL: Ch 11
Resources Discussion TL: P11-2 (p.597) P11-3 (p.597)
Activity
FRS 33 (Updated on 22.2.07 and effective from 1.1.2009) FRS 34 (Updated on 22.2.07 and effective from 1.1.2009)
Refer to EdveNTUre main course website for additional discussion questions.
(7) Feb 25 Session 1
Seminar 12 Accounting Analysis Analysing assets and liabilities.
To identify and adjust for accounting distortions related to assets and liabilities.
LS: Ch 4
Case study: Depreciation at Delta Airlines and Singapore Airlines (A) and (B) [HBS 9-198-001 and 9198-001]. You can purchase the case from Undergraduate Program Office. Refer to EdveNTUre main course website for discussion questions.
Topic Seminar 13 Accounting Analysis Analysing revenue and expense.
Learning Objectives To identify and adjust for accounting distortions related to revenue and expense recognition. LS: Ch 4
Resources
Activity Case study: Microsofts Financial Reporting Strategy [HBS 9-100-027]. You can purchase the case from Undergraduate Program Office. Refer to EdveNTUre main course website for discussion questions.
Recess Week
Semester Break
MARCH 4 to MARCH 8
TAKE-HOME ASSIGNMENT DUE AFTER RECESS
(8) Mar 11
Seminar 14 Financial Analysis Introduction and overview. Operating management. Investment management. Financial management. ROE decomposition and analysis.
Session 1
To acquire the tools of financial analysis in order to analyse and examine how well a firm manages its operating, investment and financing activities.
LS: Ch 5 Ch 6 (p. 117-125) eVal software
Discussion Refer to EdveNTUre main course website for discussion questions.
Week (8) Mar 11 Session 2
Topic Seminar 15 Financial Analysis Implementing financial analysis.
Learning Objectives To use the financial analysis tools to examine how well a firm manages its operating, investment and financing activities in real world setting.
Resources LS: Ch 5 Ch 6 (p. 117-125) eVal software Case study:
Activity
Sears, Roebuck and Co. vs. Wal-Mart Stores Inc [HBS 9-101-011]. You can purchase the case from Undergraduate Program Office. Refer to EdveNTUre main course website for discussion questions.
(9) Mar 18 Session 1
Seminar 16 Prospective Analysis: Valuation Theory and Models Valuation models. Valuation ratios.
To examine various valuation models and explore the use of accounting information in firm valuation. To understand the drivers of valuation ratios. To understand some complications arising from the valuation process.
Scott: Ch 6 (p. 209-213; p. 215-222) LS: Ch 6 (p. 126-131) Ch 10 Ch 11 Ch 12 eVal software
Refer to EdveNTUre main course website for discussion questions.
Topic Seminar 17 Prospective Analysis: Forecasting Key value drivers. Forecasting horizons. Terminal value. Cost of capital.
Learning Objectives To consider the growth attributes of the firm when forecasting future firm outcomes by focusing on drivers of economic value. To appreciate the key elements to be forecasted for firm valuation. To appreciate how changes to forecasted elements can potentially affect the valuation outcomes derived from the valuation models and how these outcomes compare with stock prices in the equity market. LS: Ch 7 Ch 8 Ch 9
Resources Discussion
Activity
Refer to EdveNTUre main course website for discussion questions.
eVal software
(10) Mar 25
Seminar 18 Business Analysis and Valuation Implementation of the BAV process.
Session 1
To use the tools and methods of strategy analysis, financial analysis, prospective analysis and valuation. To understand how the valuation outcomes derived from the valuation models compare against the stock prices in the equity market.
LS: Ch 5 Ch 6 Ch 7 Ch 8 Ch 9 Ch 10 eVal software
Case study: United Parcel Services IPO [HBS 99-103-015]. You can purchase the case from Undergraduate Program Office. Alternatively, this case is available in PHP (p.717-740). Refer to EdveNTUre main course website for discussion questions.
Topic Seminar 19 Corporate Communication and Corporate Governance Communication through financial reporting. Communication through alternative methods besides financial reporting. Internal corporate governance mechanisms. External corporate governance mechanisms. (E-learning seminar)
Learning Objectives To introduce the role of corporate communication in mitigating information asymmetry. To consider various corporate communication alternatives. To consider the role of board structure and other corporate governance mechanisms in affecting the quality of accounting information.
Resources Scott: Revise Ch 12, especially p.475478 LS: Ch 2 Investopedia Staff Understanding Pro-forma Earnings Discussion
Activity
Scott: Q 12-10 (p. 489) Q 12-11 (p. 489-490) Q 12-18 (p. 493-494) Additional Question: Read the assigned article on Understanding Pro-forma Earnings. Refer to EdveNTUre main course website for the article. Discuss whether pro-forma earnings are beneficial or detrimental to the overall corporate information environment.
(11) April 1 Session 1
Seminar 20 Corporate Communication and Corporate Governance Communication through financial reporting. Communication through alternative methods besides financial reporting.
To appreciate the roles and mechanisms of corporate communication, corporate governance, and investors relations in the business valuation process.
Scott: Ch 12 (p.460-487) LS: Ch 2 PHP: Ch 12 (p.513-533)
Case study: Computer Associates International, Inc: Governance and Investor Communication Challenge [HBS 9-103-007]. You can purchase the case from Undergraduate Program Office. Refer to EdveNTUre main course website for discussion questions.
Week (11) April 1 Session 2
Topic Seminar 21 Corporate Social Responsibility Corporate social responsibility and reporting. Impact of corporate social performance in the business valuation process.
Learning Objectives To appreciate the roles of corporate social responsibility and sustainability reporting in business. To understand the impact of corporate social performance on the business valuation process.
Resources BT-NBS Roundtable (2010) CSR promotes sustainable development Business Times, June 3, 2010. Kang (2010) Accounting for CSR Singapore Accountant, Vol 26(3): 6-8. In Depth, CPA Singapore (2011) Sustainable Development: A long-term investment CPA Singapore January: 18-23 In Depth, CPA Singapore (2011) Love the earth CPA Singapore April: 17-22
Activity Read the assigned articles. Refer to EdveNTUre main course website for articles and discussion questions.
(12) Apr 8 Session 1
Seminar 22 Written Assignment Presentations
Week (12) Apr 8 Session 2
Topic Seminar 23 Written Assignment Presentations
Learning Objectives
Resources
Activity

AA301 Business Analysis and Valuation

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AA301: Business Valuation and Analysis 2012-13 Semester 2