Subject description
The aim of this course is to demonstrate and apply a framework for business analysis and valuation using financial statement data. The emphasis of the course is on translating the tools of business analysis and valuation into practical situations. To achieve this, the course is relatively case intensive, with this method used to develop key skills as well as demonstrating their application. The course 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 learning objectives (SLOs)
Upon successful completion of this subject students should be able to:
1. apply the basic techniques of financial analysis and business valuation
2. explain the linkage between industry analysis, strategic business analysis, accounting analysis, financial analysis and prospective analysis
3. demonstrate an understanding of how to use various different valuation models
4. explain the benefits and limitations of various different valuation models
Course intended learning outcomes (CILOs)
This subject also contributes specifically to the following program learning objectives:
Critically analyse relevant concepts to understand practice in business and related professions in a global workplace
Demonstrate inter-relationships between differing business and related disciplines
Locate and critically evaluate relevant data and literature to address business problems through a research approach
Apply critical and creative thinking to address issues in business
Assessment
Assessment task 1: Assignment
Objective(s): This addresses subject learning objective(s):
Task: This assignment should be completed in groups of up to five people. Each group is required to select an Australian listed company from a company list provided on UTSOnline. It is required that groups should be finalised by the end of week 1 and a company is chosen by the end of week 2.
Perform macroeconomic analysis, industry analysis, business strategy analysis and accounting analysis based on the chosen company, and produce a professional group report as though you were a prospective management consultant. The analysis should be informed by various sources of publically available information such as the official website of the company and industry reports, and should be supported by ABS data or other statistical information. The report has a total mark of 20 and should cover:
Macroeconomic Analysis: Describe the company's economic environment and evaluate how this has impacted historic firm performance and is likely relevant to future performance.
What has been going on in the economy over the last 5 years? What is predicted to happen? How is it related your company?
Identify and analyse at least three most relevant economics factors that have significantly influenced your company's performance. These economic factors mayinclude but not limited to GDP, inflation, interest rate, foreign exchange rates, oil prices, population growth, consumer demands, etc.
Industry Analysis: Evaluate the level of competition in the industry or industries that your company operates in using Porter's Five Forces framework.
Form a conclusion for each force and for the industry overall. That is, the level of competition is high, moderate or low.
Business Strategy Analysis: Identify and discuss key success factors and key risks of the company's strategy. Also evaluate the sustainability of profits generated by the strategy in the future.
Accounting Analysis: Use the six-step accounting analysis framework to assess the degree to which the firm's accounting reflects the underlying business reality. Identify any accounting distortions if there is any and evaluate their impact on profits and the sustainability of profits.
Overall Report Quality: The report should be readily comprehensible, condensed and within the word limit. Information should be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information.
If the company operates in several economic regions, industries or has several business segments, only include material business operations in the analysis. It is material if it generates or will generate more than 10% of the company's total sales revenue.
Assessment task 2: Assignment
Based on the same company chosen in the group assignment, reformat the company's financial statements for the past five years in an excel spreadsheet. Produce an individual professional report where ratio and cash flow analysis is performed to evaluate the current and past performance of the company and its sustainability in the future. The report should discuss in details what happened and why the ratios/cash flows changed. Specifically, the report should include the following discussions:
Reformatting:
Present detailed past five years' reformatted financial statements as an appendix in the report.
Ratio analysis:
Calculate and discuss key ratios such as ROE, RNOA, PM, ATO, FLEV and NBC.
Break down and analyse PM and ATO ratios in further details. Identify and discuss three significant expense items that have caused major changes in profit margin. Identify and discuss three major assets or liabilities whose turnover ratios have contributed to the overall change in assets efficiency.
Briefly describe the ratios trend. The analysis should elaborate on the economic, industry and business factors that drive the changes in ratios. The discussion should consistently reflect the same firm fundamentals identified in the group report.
Cash flow analysis:
Calculate liquidity, solvency and cash flow ratios.
Analyse financial risk and cash flow management of the company based on ratios.
Overall Report Quality: The report should be readily comprehensible, condensed and within the word limit. Information should be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information.
Part B Prospective Analysis and Application
Based on the same company chosen for the group and first individual assignment, produce an individual professional report on the prospective analysis of the company. Forecast the future financial performance of your company for the next five years and beyond. Use four valuation models,
i.e. Dividend Discount Model, Residual Income Model, Residual Operating Income Model and Free Cash Flow Model, to produce an estimate of the firm's share value, and compare to its current stock price. Perform sensitivity analysis on key forecasting assumptions using only Residual Operating Income Model and discuss the results. Based on sensitivity analysis, identify and discuss possible opportunities for improvement and potential challenges for the firm as if you were a management consultant. Provide specific and reasonable remedies for these concerns. The report should cover:
Forecasting:
Prepare your forecasts in an excel spreadsheet following a 10-step forecasting template. The forecasting table should include your specific forecasts for the next five years as well as the
long-term forecast beyond the five-year forecast horizon. The forecasting table should be included as an appendix in the report.
Explain the reasons for your initial forecast assumptions, i.e. assumptions for sales growth, ATO, PM, net dividend payout ratio, cost of debt and cost of equity.
Valuation:
Provide the calculation and results of four valuation models in a table and include it as an appendix in the report.
Compare and discuss the estimates obtained from the four models. Compare the estimates with the actual share price to see whether the firm is currently overvalued or undervalued.
Sensitivity Analysis:
Adjust your initial forecast assumptions to reflect your optimistic and pessimistic outcomes for sales growth, ATO, PM, net dividend payout ratio, cost of debt and cost of equity and recalculate the estimated share value from the residual operating income model. Provide the sensitivity analysis results in a table.
Provide explanations of how the optimistic and pessimistic outcomes for forecasting assumptions are chosen.
Identify and discuss the key assumptions that the valuation is most sensitive to.
Management Consulting Advice:
Based on sensitivity analysis and the key factors that have significant impact on valuation, discuss potential opportunities and challenges for the firm to maintain or improve current profitability.
Provide creative advice on what business strategies and measures specific to your firm that can be adopted to improve value.
Overall Report Quality: The report should be readily comprehensible, condensed and within the word limit. Information should be collected from various reliable sources to inform analysis and references are properly cited. Tables and graphs should be used to effectively present information.
Length: Individual Assignment Part A: maximum 2000 words (exclusive of references and appendices).
Appendices are limited to a maximum of 5 pages. Please use a font size of 11, 2.5cm page margins and a line spacing of 1.5.
Individual Assignment Part B: maximum 4000 words (exclusive of references and appendices). Appendices are limited to a maximum of 10 pages. Please use a font size of 11, 2.5cm page margins and a line spacing of 1.5.
Attachment:- Examples.rar