Microsoft Word - Rubric for Presentation (Case Study Participation) - Revised.docx FIN80002 Business and Entity Valuations, Semester 2 2020 Rubric for Case Study Participation - GROUP Excellent Very...

Microsoft Word - Ru
ic for Presentation (Case Study Participation) - Revised.docx
FIN80002 Business and Entity Valuations, Semester 2 2020
Ru
ic for Case Study Participation - GROUP
Excellent Very good Good Fair Poor
Case Study XXXXXXXXXX
Case Study XXXXXXXXXX
Case Study XXXXXXXXXX
Case Study XXXXXXXXXX
Case Study XXXXXXXXXX
Case Study XXXXXXXXXX
Maximum possible marks:
(4 Best Score in Case Studies x 5 marks) = 20 marks
Grade
classification
Description
Excellent Clearly identifies problems/issues and several strategic alternative actions that can
e taken to address those problems/issues. A clear action plan is given in the end
(in light of end of case questions) as well as assumptions, caveats, and ongoing
considerations about recommendations are provided with proper reasoning.
Very good Clearly identifies problems/issues and several strategic alternative actions that can
e taken to address those problems/issues, however, the logic behind proposed
action plan in light of end of case questions is not clearly outlined. Assumptions
and caveats are stated, but some are not justified.
Good Identifies problems/issues and a few strategic alternative actions that can be taken
to address those problems/issues, however, the logic behind proposed action plan
(especially to address end of case questions) is not clearly outlined. Assumptions
and caveats are not adequately stated.
Fair Summarises the case study adequately; identifies a few loosely related
problems/issues. No focus on strategic alternative actions and also no clear action
plan is given in the end (mainly to address end of case questions). No assumptions
are stated.
Poor Does not participate in the discussion of case summary. Not able to identify
problems/issues and strategic alternative actions. No clear action plan is given in
the end (to address end of case questions). No assumptions are stated.
Overall grading in case studies includes submitting both:
i) a 1-page summary of the case study (2 mark), and
ii) a written response to case questions (maximum 2 pages) via Canvas by Tuesday 11PM Melbourne time
(that is within 24 hours of the release of the case) (3 marks).
Formatting guidelines: A4 sized page, normal margin, Times New Roman, font size12
This (Case Study Participation) will be assessed in designated weeks as specified in the semester’s Week by
Week Schedule (see Canvas unit site/Syllabus/Revised Weekly Schedule).
Note:
1) There will be no make up for missed case studies. Exceptions may apply in some very unusual circumstances,
such as prolonged illness. In such cases, students must notify the unit convener immediately.
2) Case Study discussion will take place during Collaborate Ultra sessions. Attendance is NOT graded.

Microsoft PowerPoint - Week 1 Lecture Part 1 (Damodaran_Ch 1 & 2).ppt [Compatibility Mode]
1
FIN80002
Business and Entity Valuation
Week 1
Introduction & Approaches to
Valuation
Acknowledgement to Dr V Thyil
Ch 1 & 2
(Damodaran) 1
Agenda
 What is valuation?
 Valuation template
 Basic valuation models
 Problem solving
2
What is Valuation:1
 Each investment instrument, be it a common
stock or real estate, has a firm anchor of
something called intrinsic value, which can be
determined by careful analysis of present
conditions and future prospects
 When market prices fall below this firm-
foundation of intrinsic value, a buying
opportunity arises, because the fluctuation
will eventually be co
ected according to the
market
Malkiel, 2003 3
What is valuation?-2
 Valuation is about finding the intrinsic value
as opposed to market value
 Intrinsic value: is the value of the asset given
a complete understanding of the asset’s
investment characteristics
 Any departure of market price from the
estimation of intrinsic value, is a perceived
misprising by the market (Stowe et al, 2002)
 It can be overvalued or undervalued
4
2
Why valuation?
 Selecting stocks: equity analysts attempt to identify
securities as fairly valued, overvalued or undervalued,
elative to their own market price or the prices of
comparable securities
 Infe
ing (extracting) market expectations: market prices
eflect the expectations of the investors about the future
prospects of a firm
 Evaluating corporate events: assess the impact of
mergers, acquisitions etc
 Rendering fairness opinions: the parties to a merger may
e required to seek an independent valuation from a
third-party
 Evaluating business strategies and models: firms need to
evaluate the impact of alternative strategies on share
value Stowe et al, 2002 5
The holistic valuation template
 View the template carefully
 Identify the variables
6
Cashflow to Firm
EBIT (1-t)
- (Cap Ex - Depr)
- Change in WC
= FCFF
Expected Growth
Reinvestment Rate
* Return on Capital
FCFF1 FCFF2 FCFF3 FCFF4 FCFF5
Foreve
Firm is in stable growth:
Grows at constant rate
foreve
Terminal Value= FCFF n+1/(r-gn)
FCFFn.........
Cost of Equity Cost of Debt
(Riskfree Rate
+ Default Spread) (1-t)
Weights
Based on Market Value
Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity))
Value of Operating Assets
+ Cash & Non-op Assets
= Value of Firm
- Value of Debt
= Value of Equity
Riskfree Rate :
- No default risk
- No reinvestment risk
- In same cu
ency and
in same terms (real or
nominal as cash flows
+
Beta
- Measures market risk X
Risk Premium
- Premium for average
isk investment
Type of
Business
Operating
Leverage
Financial
Leverage
Base Equity
Premium
Country Risk
Premium
VALUING A FIRM
7
Recent global events
 Discuss the valuation perspective
 What variables can you spot?
8
3
Sequential process
Company
analysis
Financial
Statement
analysis
Forecast
assumptionsIFRS /GAAP
Valuation
Valuation date
Forecast
periods
Historical
periods
Amended from
Soffer & Soffer
2003
Collect Data
on variables
9
The top down company analysis
Step 1. Country analysis
 Economists monitor a large number of
variables
 Most important is economic growth
 Two horizons to identify growth
 Over a business cycle
 Over a long-term (sustainable growth)
10
The top down company analysis
Step 2. Industry analysis
 Demand analysis
 Industry life cycle
 Competition structure
 Using the Business Model Canvas
 Competitive strategies – Economic Moats
 Read article on:
http:
www.valueinvestorconference.com/ppt/2
012/02%20VIC%2012%20Larson.pdf
11
The top down company
analysis
3. Analysis of the Firm
 Eg. Calculate basic ratios such as
 ROA
 ROE
 Compare each firm ratio with comparable
industry ratio
 Economic moats for the firm versus industry
 ROE = (NI/Sales) x (Sales/TA) x (TA/Equity)
12
4
Myths about valuation
 Valuation is quantitative therefore it is objective
 Well researched valuation is timeless
 Provides a precise estimate of value
 More quantitative, better the estimate
 Implicitly assumes markets are inefficient and the
analyst is right
 The process of valuation is not important – it’s the
product of valuation [value a
ived at] that is
important
13
Role of valuation
 Fundamental analysts
 Franchise buyers
 Acquisitions
 Chartists
 Information traders
 Market timers
 Efficient marketers
 Corporate finance
14
Valuation models
 Discounted Cash Flow model
 Relative valuation model
15
Basic DCF Valuation Model
 To estimate an asset’s value, one estimates the
cash flow for each period t (CFt), the life of the
asset (n), and the appropriate discount rate (k)
 Throughout the unit, we discuss how to estimate
the inputs.
5
Types of CFs used in DCF models
 Dividend Discount Model (DDM): Equity
valuation: value just the equity stake in the
usiness using Dividends
 EBIT, Free Cash Flow to Firm (FCFF): Firm
valuation: value the entire firm, which
includes besides equity, the other claim
holders
17
Calculation methods
18
Eg. Cash flow to Equity
 Suppose you expect General Motors
Corporation (NYSE:GM) to pay a $2
dividend next year and that you expect
the price of GM stock to be $58 in one
year. The required rate of return for GM
stock is 10%. What is your estimate of
GM stock?
Stowe et al XXXXXXXXXX
Eg. Cash flow to firm
 If FCFF for Welch corporation is $90.4 million,
WACC is 9.4%, and sustainable growth rate
of FCFF is 4%, what is the value of the firm?
 If Welch has $400 mn debt outstanding and
$100 mn in prefe
ed stock, what is the value
of equity?
 If the firm has 3 million shares outstanding
what is the value of Welch’s stock?
Stowe et al 2002
20
6
Matching cash flows with
appropriate discount rates
 Mistakes occur when:
 When CF to equity is discounted with
WACC
 When CF to firm is discounted with cost of
equity
 Illustration 2.1
21
Limitations of DCF valuation
 Relies on reliable information on CF and
discount rates
 What about the following special cases?
 Firms in trouble with negative earnings
 Cyclical firms
 Firms with unutilised assets
 Firms with patents or product options
 Firms in the process of restructuring
 Firms involved in acquisitions
 Private firms
22
Relative valuation
 Also called market-based valuation
 Uses price multiples such as P/E, E/P,
PEG, P/S, P/B, P/CF, EV/EBITDA
 Evaluates whether the stock is relatively
under-valued, over-valued or fairly-
valued, in comparison to the reference
stock/ industry
 Eg. Using P/S multiple
23
Pitfalls of relative valuation
 How do we value unique firms which
eally have no known comparables?
 Among the firms in the industry – which
ones to select/ do we go for the
average?
 Use of multiples builds on e
ors
 Illustration 2.2
24

Microsoft PowerPoint - Case Study 1 Question.pptx
Case Study 1
NEW CENTURY FINANCIAL CORPORATION
Question
What went wrong with the Company’s performance resulting in
ankruptcy in 2007? In your answer, use the framework for business
analysis and valuation using financial statements discussed in textbook
chapter 1.