Business Valuation and Financial Analysis
Company : Blackmore
Subject description
The aim of this subject is to demonstrate and apply a framework for business analysis and valuation using financial statement data. The emphasis is on translating the tools of business analysis and valuation into practical situations. To achieve this, the subject is relatively case intensive, with this method used to develop key skills as well as demonstrating their application. The subject is intended for students interested in business consulting, investment banking, business analysis and corporate lending. Given the increasing trend towards a business analysis-based approach to auditing and assurance services, it is also relevant to those interested in public accounting.
Subject objectives
Upon successful completion of this subject students should be able to:
1. Understand the basic techniques of financial analysis and business valuation
2. Appreciate the linkage between industry analysis, strategic business analysis, accounting analysis, financial analysis and prospective analysis
3. Understand how to use various different valuation models, as well as the benefits and limitations of those models
This subject also contributes specifically to the following program learning objectives:
Critically analyse, question and evaluate implications of alternative accounting models and strategies for relevant business situations
Apply high level technical skills necessary to operate effectively in professional accounting practice
Execute a substantial research-based or professionally focused projectAcronyms used throughout the subject
AE: Abnormal Earnings
AOI: Abnormal Operating Income ATO: Asset turnover
avg.: Average
C: Cash from Operations
CAPM: Capital Asset Pricing Model CSE: Common Share Equity
d: Dividends (the net cash flow to share-holders) F: Cash flow to & from Debt-holders
FCF: Free Cash Flow FLEV: Financial Leverage I: Cash Investment
NBC: Net Borrowing cost
NFEat: Net Financial Expense after tax NFO: Net Financial Obligations
NOA: Net Operating Assets
NOPAT: Net Operating Profit after Tax PM: Profit Margin
RNOA: Return on Net Operating Assets ROE: Return on Equity
Spread: Difference between lending & borrowing rates WACC: Weighted average cost of capital
Δ: Change
Formulas you need to remember for the Exam
ROE = CSP / avg. CSE
ROE = RNOA + (FLEV * SPREAD)
ROE = (PM * ATO) + (FLEV*(RNOA - NBC)) RNOA = NOPAT / avg. NOA
RNOA = (PM * ATO)
PM = NOPAT / Sales ATO = Sales / avg. NOA
FLEV = avg. NFO / avg. CSE SPREAD = RNOA - NBC
NBC = NFEat / avg. NFO FCF = C - I
FCF = NOPAT - ΔNOA FCF = NFE - ΔNFO + d FCF = d + F
C - I = FCF = F + d
AOI = NOPAT - (NOA[t-1] * WACC) AE = CSP - (CSE[t-1] * CAPM)
WACC= {[(Market value of Debt/ Market value of Assets)(NBC)] + [(Market value of Equity/ Market value of Assets)(CAPM)]}
CAPM = Risk-free rate + (Company Beta * Risk premium) Risk Premium = Market return - Risk-free rate
Forecasting Template
1. Forecast sales:
2. Forecast asset turnover (ATO):
calculate ‘net operating assets' (NOA)
{NOA[t]=sales[t]/ATO}
3. Forecast profit margin (PM):
calculate ‘net operating profit after tax' (NOPAT)
{NOPAT[t] = Sales[t] x PM}
4. Calculate free cash flow (FCF)
{FCF[t] = NOPAT[t] - ΔNOA}
5. Forecast net dividend payout ratio: calculate ‘dividends' (d)
{d[t] = NOPAT[t] x payout ratio}
6. Calculate ‘net payments to debt holders' (F)
{F[t] = FCF[t] - d[t]}
7. Forecast net after tax cost of debt: calculate net financial expenses (NFEat)
{NFEat[t] = NFO[t-1] x net after tax cost of debt} calculate closing net debt (NFO[t])
{NFO[t] = NFO[t-1] + NFEatt -F[t]}
8. Calculate ‘clean surplus profit' (CSP)
{CSP[t] = NOPAT[t] - NFEat[t]}
9. Calculate equity (CSE) and check you get the same answer both ways!
{CSE[t] = NOA[t] - NFO[t]}
{CSE[t] = CSE[t-1] + CSP[t] - d[t]}
Assessment
Assessment task 1: Assignment
Intent: This assignment assesses the students' understanding of the concepts of business valuation and their ability to consider the practical applications. It will also allow students to demonstrate that they can use both spreadsheets and word processing packages to tackle practical valuation problems.
Objective(s): This addresses subject learning objective(s):
Task: The group (up to five members) project completed in two parts requires you to conduct an analysis of a business. A key feature of the project is that it requires you to identify and obtain the relevant information. Thus, in addition to being evaluated on your ability to apply the tools of analysis described in the course, you will also be evaluated on your ability to identify and obtain the relevant information. Your assignment should use only publicly available information, and you should provide a reference list of the information you use. Do not use inside information obtained from personal company contacts etc. Choice of company: You will choose one company from the list on UTSOnline. Valuation and assessment: Your group will evaluate and report (in two parts) on your chosen company as though you were a prospective management consultant.
Part One
The first part of your report will contain the following:
1. Macro economic Analysis
Describe the firms economic environment and evaluate how this has impacted historic firm performance and is likely relevant to future performance.
2. Industry Analysis
Perform an industry analysis and evaluate the level of competition in the industry or industries that your firm operates in.
Assignment - Part Two
The second part of your report will contain the following:
1. Business Strategy Analysis
Identify the key success factors and the key risks of the firm's strategy. Discuss the sustainability of profits generated by the strategy
2. Accounting Analysis
Assess the degree to which the firm's accounting reflects the underlying business reality. Identify any accounting distortions and evaluate their impact on profits and the sustainability of profits.
Part Two - Write-up limited to 5 pages of text with 5 pages of supporting tables Further requirements
For parts one and two the project write-up should be a readily comprehensible and condensed report on your work (i.e., not a detailed compilation of all the information you collected). Please use a minimum font size of 12 and 2.5cm margins. ( Note: If you choose to use double spacing for text, then the write-up extends to ten pages).
You must provide a hard copy (to be handed in during class) as well as a soft copy (submitted via UTS Online). UTS reserves the right to run student assignments through plagiarism detection software. If you do not submit both copies (soft copy and hard copy) the assignment will be deemed as not submitted and you will receive a fail grade. For each day (or part day) that your assignment is late, you will lose 10% of the raw assignment mark.
Assessment task 2: Assignment (Individual)
Intent: This assignment evaluates the students' understanding of the concepts of business valuation and their ability to consider the practical applications.
Task: Individual Assignment (40 Marks) Due: Beginning of Seminar 11
Using the company and analysis from your group assignment, provide the following:
1. Reformatted Financial Statements and Financial Analysis
Reformat at least the last 5 years of your company's financial statements. Use ratio analysis and cash flow analysis to evaluate the current and past performance of the business and assess its sustainability.
2. Prospective Analysis
Forecast future financial performance. Use the four valuation models outlined in class to produce an estimate of firm value, and compare to stock price. Perform sensitivity analysis and discuss the results.
2. Application
Using your sensitivity analysis, and as a potential management consultant to your chosen firm, provide a discussion as to the possible opportunities for improvement, and potential challenges for your firm. Provide remedies for these concerns. You should be quite specific in any recommendations you make.
Length: The project write-up should be a readily comprehensible and condensed report on your work (i.e., not a detailed compilation of all the various valuation scenarios you considered, and all the information you collected). Your write-up is limited to 10 pages of text and 10 pages of supporting material.
Please use a minimum font size of 12 and 2.5cm margins. ( Note: If you choose to use double spacing for text, then the write-up extends to eight pages).
Assessment task 3: Final Exam
Intent: This exam, consisting of practical and theory questions, will test students understanding of the theory and ability to apply the theory to business valuation and financial analysis.
The exam will be similar in spirit to the problems and cases assigned during the semester.
Objective(s): This addresses subject learning objective(s):
Attachment:- part.rar