Business Analysis and Valuation Using Financial Statements
Course Number 1306
Assistant Professor Ian D. Gow
Fall; Q1Q2; 3 credits
Spring; Q3Q4; 3 credits
This course is aimed at all MBAs who expect at some point in their careers to use financial statements to evaluate the performance, prospects, and value of a business. The primary emphasis will be on the analysis of public companies, but many tools and techniques utilized are relevant to private enterprise financial analysis as well. This course will be particularly valuable to students who are seeking a career in consulting, corporate finance, investment banking, hedge funds, or private equity.
The objective of the course is to provide hands-on experience in financial statement analysis. Students will be exposed to tools of financial analysis, theoretical concepts, and practical valuation issues. By the end of the course, students should become comfortable with using firms' financial statements to draw an understanding of their performance and provide a basis for making reasonable valuation estimates. The course builds on RC courses, in particular, Finance I, Finance II, and Financial Reporting and Control (FRC), to expand understanding of financial statements and their use in valuation.
Course Content and Organization
Students will be exposed to a comprehensive financial statement analysis and valuation framework that integrates strategy, financial reporting, financial analysis and valuation, application of this framework and tools to fundamental analysis, and the role of intermediaries that use these tools in capital markets. A valuation software specifically designed for this course will be used to provide hands-on experience. Over the semester several guest speakers, such as hedge fund managers and research analysts will share their experiences with the students.
The first half of the course develops an accounting-based valuation framework that integrates a firm's strategy, its financial performance, and its accounting credibility. Two main topics will be covered:
- Reporting strategy analysis: assessing a firm's value proposition and identifying key value drivers and risks; evaluating the degree to which a firm's accounting policies capture the underlying business reality; assessing a firm's earnings quality; making accounting adjustments to eliminate management biases
- Performance analysis and valuation evaluating current performance and its future sustainability, making forecasts of future profitability and risk, and valuing businesses using earnings and book value data.
While doing the above, the course will often take the perspective of equity analysts, short sellers, and hedge fund activist investors. Some of the cases will include class visits by case protagonists.
The second half of the course applies the above framework to a variety of business valuation contexts including equity-investment analysis, IPOs, spin-offs, mergers, short selling opportunities, and hedge fund activist investing strategies.
To deepen students' ability to apply the course skills in a practical context, they will work on a group project. The project will involve a complete financial statement analysis of a firm using the course framework. Groups will consist of students working individually on related companies, with a group effort to integrate the separate analyses. The last few sessions of the course will be devoted to the development and execution of these projects.