Business Valuation (AIM 6345)

Department of Accounting and Information Management

School of Management
The University of Texas at Dallas
Spring 2006
I. Instructor
Surya N. Janakiraman
Office: SOM 4.806
Phone: 972 883 6370
Fax: 972 883 6811
E-mail: Use WebCT mail
Office hours: Wednesdays 5:30 PM – 6:30 PM. Other times by appointment.

II. Course objectives and description

The objective of this course is to provide a framework for business valuation using financial and
accounting information. To attain our objective, we will rely on ‘fundamental analysis’, which implies the
use of financial reports and other relevant information to produce pro-forma financial statements and then
use them to estimate a value for the business.

This course is intended for students with little or no background in security analysis. If you have
had extensive previous experience in valuation (for example, in consulting or investment banking), then
this is probably not the course for you. This course is the right course for you if you want to find answers
to the following questions:
1. What is the ‘intrinsic value’ of a firm? How can it be calculated?
2. What are the drivers of firm value?
3. How can one get the necessary information on the drivers of firm value
from the financial statements?
4. What is the role of cash flow and accounting earnings in valuation of firms?
5. What role do ‘risk’ and ‘growth’ play in firm valuation?
6. Are the simple valuation rules like P/B or P/E ratios valid?
7. What is residual income valuation model and how is it connected to EVA?
8. What is residual operating income model?

This course should be of use to you if you are contemplating a career in investment banking,
equity research and security analysis, management consulting, public accounting, corporate finance or
venture capital.

III. Course administration

The course will have 14 meetings – on every Wednesday from 7:00 – 9:45 PM in SOM 2.903.
The course content will be delivered to you primarily in the form of lectures and class discussions. All
students are expected to actively take part in class discussions. Grades are based on 3 individual
assignments, a mid-term exam and a group project. There is no final exam for this course.

Individual assignments will be based on the class lectures and class discussions. These will be in
the form of exercises, problems and mini cases. Even though, you can discuss the assignments with other
students, you should submit only your own work. The assignments are due in class, on the day indicated
in the course schedule. The assignments will be posted in the course website in due course of time, usually
about 5 to 7 days in advance. I will not accept late assignments. If you will not be attending the class on
the day an assignment is due (for example, you are out of town in connection with your job), it is your
responsibility to make sure that I receive your completed assignment before the due date. You can send it
do not use email submission as the “regular” mode of submission of assignments. In case you are forced to
email your assignment, make sure that you have properly formatted the assignment for printing (especially
if it is excel file). Your assignments will be graded and returned to you, usually, within a week. If you
disagree with the grading of an assignment, state the problem in writing and submit the assignment for re-
grading. You need to turn in only two out of the three assignments. In case you turn in all the three
assignments, then I will consider the two best assignments out of the three assignments for grading
purposes. Assignments account for 20% of the final grade.

Each of you should form a group of no more than four students and select a unique firm to analyze
for your final project. You should communicate to me the composition of your group by 1st of February. I
will assign a company for each group to analyze on or about 22nd of February. Your project work should
reflect your understanding of the principal concepts in the detailed analysis of financial data and the tools
and concepts developed in the course. More details about the project will be supplied later. Final project
will be worth 40% of your final grade and is due on 24th of April at 5:00 PM.

There is no final exam for this course. We will have one mid-term exam. The exam will cover
essentially what we discuss in the class. The exam will account for 40% of your final grade.

IV. Text book and other readings

The second edition of Stephen Penman’s Financial statement analysis and security valuation
(McGraw-Hill Irwin) will be used as the textbook for the course. Some of the problems and exercises from
this textbook will be included in your individual assignments. Make sure that you are purchasing the
second edition and not the first edition of this book.

I will make my lecture notes and other handouts available to you through the WebCT course home
page To access the course materials visit
http://webct.utdallas.edu/webct/public/home.pl?action=print_home

Please print out a copy of lecture notes and any other relevant materials (like financial statements or
annual reports of assigned companies) and bring them to class.

V. Communicating with the instructor

Please check the WebCT frequently and use the WebCT email to communicate to me. I check the
WebCT mail on a daily basis and you can expect me to reply within 48 hours.
Tentative schedule

Date Topic Remarks

January 11th Introduction to the course. Chapters 1 and 2

Understanding financial statements: Balance sheet, Income
statement and cash flow statement
January 18th Relative valuation methods Chapter 2

January 25th Dividend discount model Chapter 3

Assignment 1 due

February 1st Discounted cash flow model Chapter 4

February 8th Building a cash flow forecast model for valuation Chapter 4

February 15th Introduction to data sources Chapter 3

Assignment 2 due
Discount rates in valuation

February 22nd Residual income valuation model Chapter 5

March 1st A model for anchoring value on earnings Chapter 6

March 15th Linking business activities to financial statements Chapters 7 and 8

Assignment 3 due
March 22nd Mid-term exam
March 29th Reformulation of financial statements for valuation Chapters 9 and 10
Residual operating income model

April 5th Analysis of profitability and growth Chapters 11 and 12

April 12th Analysis of profitability and growth Chapters 11 and 12

April 19th The value of operations and the evaluation of enterprise PB Chapter 13
and PE ratios

Chapter numbers refer to the chapter numbers of your text book.