Please submit it on time and follow the rubric
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 good Good Fair Poor Case Study 1 5.0 4.0 2.5 1.0 0 Case Study 2 5.0 4.0 2.5 1.0 0 Case Study 3 5.0 4.0 2.5 1.0 0 Case Study 4 5.0 4.0 2.5 1.0 0 Case Study 5 5.0 4.0 2.5 1.0 0 Case Study 6 5.0 4.0 2.5 1.0 0 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 be 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 be 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 corrected 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, relative to their own market price or the prices of comparable securities Inferring (extracting) market expectations: market prices reflect 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 be 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 Forever Firm is in stable growth: Grows at constant rate forever 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 currency and in same terms (real or nominal as cash flows + Beta - Measures market risk X Risk Premium - Premium for average risk 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 arrived 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 business 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 2002 19 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 preferred 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 really 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 errors 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 bankruptcy in 2007? In your answer, use the framework for business analysis and valuation using financial statements discussed in textbook chapter 1.