Professional Documents
Culture Documents
Autumn 2010
Corporate Valuation
Study Guide: Autumn 2010
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Lectures
Lectures are used to highlight theory and guide you through the difficulties of valuation theory.
This is a Masters level course and therefore lecturers do not directly explain what is in the
textbook. Instead the focus is on topics that are discussed in the text and try to put the text in a
perspective. The lecture is structured by the teacher, but we try to have open discussions. Before
the lecture make sure you have prepared yourself and if there are specific preparation questions
(written in this Study Guide) you can work with them as well.
Seminars
At the seminars it is the course participants who present their work. The teachers role is to
provide a structure which enables everyone to get the most benefit out of group discussions. The
first two seminars are practically oriented and build on each other. The third seminar concerns
some more advanced valuation topics. It is very important that all students come to the seminars
ready to participate in the discussions. This does not just mean that you present your own
material, but also that you ask questions to others. I deduction of the score received on the case
will be given to each individual not present (compare course syllabus)
Signing up for a seminar
A team consists of 4 students (sometimes 3, but never 5!) that work together in terms of making
an analysis and presenting it at the seminar. All students sign up for the seminar in the
beginning of the course. As long as you attend the lectures you will have plenty of opportunities to
find other students to work with. You sign up by writing down your name and e-mail address on
the seminar list which is available on the notice board at the D6 building and brought to the first
lectures by the teachers. We prefer if all seminar groups consist of at least one Swedish national
and one exchange student. The reason for this is that (1) this forces everyone to work in the
English language, and (2) it creates an integration of exchange students in the student body. If
you do not know whom to work with, just talk to one of the teachers and we will make sure that
you do find a group.
After you have found a few friends to work with, you have to decide what company to analyze. In
the end of this Study Guide you will find a list of companies. Two groups cannot analyze the same
company and they are allocated on a first come, first serve basis. The scheduled times for your
teams presentations can be found in the tentative schedule.
The first seminar deals with the historical analysis of your company. Your team is asked to write a
paper that describes the companys past performance. You do this in a reasonably structured
manner (remember that we do have a system making valuation analyses) but there is room for
you to highlight particularities in your company. You find all the details in Appendix B. At the
seminar all groups are given some time to present their company.
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The second seminar follows directly on the first seminar. The task is now to move the analysis
from the past to the future. The team will then use the information of the companys historical
performance relative to competitors, and discuss what the future is likely to be. You will then
come up with estimates of value drivers and use them to find the appropriate value of your
company. You find more information in Appendix C.
The third seminar is not directly linked to the previous seminars. Information on this seminar
will be handed out later during this course.
Make sure that the paper is handed in well before the deadline. Also make sure you e-mail the
presentation (it must be a PowerPoint file) prior to the seminar. Please put the name of the
company you analyze in the title of the e-mail.
Teachers:
Stefan Sjgren (Associate Professor ph.d. finance) earned his doctoral degree at the Department
of Business Studies, University of Gothenburg in 1996. He teaches a wide variety of courses in the
area of corporate finance and investments. In 2005 he co-edited a book on investment decisions,
relating theory to practice. Currently Stefans research interests involve corporate finance
decisions, and investment practices in particular.
Telephone: 031-786 1499.
E-mail: stefan.sjogren@handels.gu.se
Jan Marton (Assistant Professor). Teaches in the area of financial accounting, accounting theory,
financical statement analysis and group accounting. His research interests are 1) IFRS both from
a producer and a user perspective. 2) Voluntary disclosures in accounting, especially disclosures
about human resources and management control in the companies. 3) Accounting and trust,
which involves a comprehensive study of how the concept of trust has been used in the accounting
literature, and the result obtained to date in research on accounting and trust.
Ted Lindblom is a full professor specialized in industrial and financial management. He has long
experience of education and research in corporate finance related topics. His most recent research
concern capital budgeting and financial decision-making, incentive pay, the cost of trade credit,
and risk management in banks.
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E-mail: ted.lindblom@handels.gu.se
Hans Jeppsson is a PhD student in Finance at the University of Gothenburg, School of Business,
Economics and Law. His primary research interest lies within empirical corporate finance with an
application on biotech companies. In the first research paper, he is analyzing news
announcements of European biotech firms and stock market reactions. In the second research
paper, he examines how biotech firms source equity capital to finance investments in R&D and
how they are able to time these equity issues with respect to theories of market mispricing and
adverse selection costs.
E-mail: hans.jeppsson@handels.gu.se
Emmeli Runesson is a PhD student in Accounting. Her research is in the area of accounting and
capital market, with a main focus on the effects of international accounting standards (IFRS) on
the financial reporting. The research issue is how international standards affects the reporting
quality from an investors perspective and how professional investors take use of the financial
reporting.
E-mail: Emmeli.runesson@handels.gu.se
You can find all material that has been handed out as well as other useful information on the
course web site (GUL). The course coordinator is Stefan Sjgren.
Wiviann Hall takes care of most administrative matters.
telephone 031-786 1507, E-mail: wiviann.hall@handels.gu.se
For master students administration is handled by Tina Alderin (tina.alderin@handels.gu.se).
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This lecture provides an overview of different valuation perspectives. Valuation is useful from a wide range of tasks. Fund
managers and outside investors are valuing companies using public information. Valuation plays an important role also in
acquisition analysis. In the case of M&A the information available are often more detailed, and not only public. A third
role is to value a company from a managers point of view in order to take value enhancement decisions. Analysts use a
wide range of methods. We will introduce these methods briefly and discuss their pros and cons.
Things to think of
1.
2.
3.
Preparation
Read chapters 1 and 2 in Damodaran.
Things to think of
1.
2.
Do you know any good examples of when companies deliberately have fooled investors with the help of accounting
information?
3.
What conflicts can arise between different users of accounting information (e.g. investors and creditors)?
Preparation
Read chapters 1, 2 and 9 in Damodaran.
2.
3.
Should we use the WACC or the cost of equity in the valuation model?
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Preparation
Read chapters 4,6, 7 and 8 in Damodaran.
Content
At this lecture we focus on the companys resources (assets) as measured in the balance sheet, and its obligations
(liabilities). We look at different valuation techniques (e.g. historical cost and fair value), differences between different
kinds of assets and potential problems when comparing different companies.
Things to think of
1.
At the last lecture we discussed the measurement of the core operations performance. There are three
conceptually different ways of manipulating this performance. Assume you are the manager of a company, your
stock options will soon expire and you want to boost your companys operating profit margin. What can you do?
2.
A part of Electrolux corporate strategy is to acquire and integrate small local competitors. These integrations
(and the continuous moving of production to low-cost countries) give rise to restructuring costs. How should such
costs be handled in an analysis of past performance?
3.
Nokia receives about 80% of its sales revenue from the mobile phone division, and the rest from its network
system division (now a joint venture with Siemens and a direct competitor of Ericsson). What alternatives exist
for an analyst in terms of identifying its core business and judging performance?
Preparation
see chapters 2 and 9 in Damodaran.
What (if any) is the difference between correcting and adjusting accounting items?
2.
3.
Preparation
Read chapters 9 and 10 in Damodaran.
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If you are going to analyze a companys profitability which is the best measure to use: (1) the return on equity, (2)
the return on net operating assets, or (3) the return on total assets?
2.
What do you think is a normal return on financial assets and return on (net) operating assets? Why is there a
difference in these two returns?
3.
In corporate finance you have probably have learnt that in reality there is an optimal debt ratio (mainly because
of taxes and agency costs). But is it common that companies have a negative debt ratio (i.e., more financial assets
than interest bearing debt)? Give examples (besides Nokia) of such companies/industries and provide theoretical
arguments as to why they might keep such (negative) debt ratios.
Preparation
How do you create expectations concerning the growth rate? What alternatives exist?
2.
What is the terminal value of a firm? Do you think most value is created before or beyond the forecast horizon?
3.
Preparation
Read chapters 11-16 in Damodaran.
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Many companies have in recent years performed considerably better than their long-term historical average. Can
there be shifts over time in the overall level of performance (say for example the level of the sustainable
operating profit margin)? There are arguments both for and against so think carefully!
2.
What would you as an investor be most happy about: (1) a company that has a constant operating margin and
market share in a growing market, (2) a company that has a constant operating margin, but gains market shares
in a market that is not growing, or (3) a company that increases its operating margin in a market that is not
growing?
Preparation
This chapter is more of a summary of what we have done so far. It provides a link between the valuation chapters in
Damodaran (i.e., chapter 13-16) and the financial analysis in the compendium. Hand-out distributed at the lecture.
Things to think of
3.
Both P/E ratios and other key ratios, such as Ebitda/sales, are very common in describing a firms performance.
What are the drawbacks using key ratios for valuation purpose
4.
A ratio must be theoretically consistent. The P/E ratio measures the price for a share in relation to the earnings
you receive owning the share, the measure and the purpose of the valuation are therefore aligned as the
numerator and the denominator are both eqiuty value. This is not so if we look at the price to EBITDA ratios.
Preparation
Read chapters 17 and 18 in Damodaran
Content
This lecture examines M&A activities with special emphasis on the acquisition process and the various motives that
different parties concerned may have for initiating and carrying though an M&A. The importance and use of different
forms of payment for the target firm is also elaborated upon.
Things to think of
1.
What are the relevant cash flow effects to consider when evaluating the performance of an M&A?
2.
3.
Preparation
Read chapter 25 in Damodaran.
Literature
General comments
There are, quite obviously, a number of standard textbooks on the topic of valuation. We have
selected one of them; Investment Valuation by Aswath Damodaran. The strength of this book is
that the on-line support for student and researchers are very useful, and that the book cover a
wide area from a financial perspective. You can buy the book in paperback or hardback and we
certainly suggest that you get the paperback.
There are several alternatives that are worth mentioning. Stephen Penman has written a much
appreciated textbook that has a clear-cut accounting orientation. Its title is Financial Statement
Analysis and Security Valuation. Another book that is often used in valuation classes is
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Valuation: Measuring and managing the value of companies by Koller, Goedheart and Wessels.
It is now out in its fifth edition (2005) and focuses on free cash flow models.
Investment Valuation (Aswath Damodaran (2002). John Wiley & Sons, 2nd ed.)
The book by Damodaran is nearly 1000 pages long and contains 35 chapters. We require course
participants to read 16 chapters intensively and suggest that you read another 6 chapters
extensively. The following chapters are part of the required readings:
No
Title
2
3
4
7
8
9
10
11
12
13
14
15
16
17
18
25
31
32
Approaches to valuation
Understanding financial statements
The basics of risk
Riskless rates and risk premiums
Estimating risk parameters and cost of financing
Measuring earnings
From earnings to cash flows
Estimating growth
Closure in valuation: Estimating terminal value
Dividend discount models
Free cash flow to equity models
Firm valuation: Cost of capital and adjusted present value approaches
Estimating equity value per share
Fundamental principles of relative valuation
Earnings multiples
Acquisition and takeovers
Value enhancement: A discounted cash flow valuation framework
Value enhancement: EVA, CFROI and other tools
Extensive reading:
1
5
6
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Appendix A
All teams have to sign up for a company that they want to analyze (by writing your names next to
the company on the seminar list). The companies are allocated on a first come, first serve basis.
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Overall purpose
The overall purpose with seminar one is to get a good understanding of the companys current
financial position and its development over the last years. We focus primarily on the financial
analysis, but do not forget that when extrapolating past performance into the future (i.e., the task
for seminar two) one needs to understand the competitive environment of the past relative to the
future. This means doing a strategic analysis. We divide the task into three components.
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Debt ratio
Specify the definitions that you use. If you have problems with interpreting certain accounting
items this should be specified in notes.
* Have there been any changes over time (2005 to 2008)? -Comment on observable trends.
* Does your company state any financial goals in the annual report? -How does the company
perform in relation to these goals?
* Have there been any substantial gains/losses in the years you analyzed? -How have they affected
the measures?
* Decompose the RNOA into asset turnover and profit margin. -Which factor affects RNOA the
most?
* Try to find any financial analyses on the Internet of the industry your company is in. How does
your company perform in comparison to other companies?
Hand-in of material
The seminar paper shall be handed in (using e-mail) to Mattias Hamberg no later than 18.00 the
day before the presentation. It shall be in a Word-format or pdf-format. We do not want any
attached Excel-files (=create tables of the important information). All team members must
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participate in the work. The length of the paper shall be no longer than nine (9) well-written
pages (excluding the front page)! Because half of the teams have one day more to prepare for the
presentation it is not possible to make any changes to the paper after the due date. This is only to
ensure reasonable fairness between teams!
Presentation
A presentation of your company has to be prepared. This presentation has to be short however
and you do not have to present details of the financial situation. Maximum 15 minutes and 10
slides. After this we will continue to analyze the companies. Send a PowerPoint file with your
presentation no later than 18.00 the day before the presentation..
All seminar participants need their own copies of the annual reports. It is not good enough with a
pdf-file on the laptop.
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Presentation
The presentation shall be 20 minutes per group including 8 minutes seminar discussion. You are
asked to present the background for your analysis, assumptions and the actual results. After the
presentations there will be time to discuss the questions listed below. All students should have
considered these and be prepared to discuss them (you should not address them in your paper
though).
1. What are the main difficulties when creating pro forma statements for your company?
2. What portion of your companys current value is, according to your estimates, created during
the foreseeable future?
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Send a PowerPoint file with your presentation before 18.00 the day before the presentation.
Hand-in of material
The analysis has to be handed in to Stefan Sjgren before 18.00 the day before the presentation. It
shall be in a Word-format or pdf-format. We do not want any attached Excel-files (=make tables of
the important information). The length of the paper shall be no longer than nine (9) well-written
pages (excluding the front page)!
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