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This subject examines the use of financial statements for the fundamental valuation of listed and non-listed entities. Fundamental analysis will be examined in detail and applied to valuation projects involving local and multinational companies. This subject is built around the use of residual earnings as a means of determining the intrinsic value of an entity using only accounting data. It explores the relation between the residual income valuation model, discounted cash flow valuation methods and dividend discount model. It also refers to EVA as a parallel valuation methodology. The subject will also consider forecasting firms' future performance and how it determines the firm’s price/earnings and market to book ratios.
Intended learning outcomes
On successful completion of this subject, students should be able to:
- Describe how 'intrinsic values' are calculated;
- Identify the relevant firm attributes that determine value;
- Explain the role of financial statements in determining intrinsic values;
- Analyse whether some aspects of the financial statements are more important than others and explain the role of 'bottom line' earnings (net income) and book value;
- Analyse financial statements in order to extract the relevant information;
- Describe how traditional ratio analysis aids valuation;
- Evaluate the relevance of cash-flow information and of the accruals in accounting;
- Explain how accounting methods are applied to financial statements;
- Explain what determines a firm's P/E ratio and a firm's market-to-book (P/B) ratio;
- Describe how the P/E and P/B ratios are articulated;
- Explain how analysis differs across countries and how P/E ratios can consequently be compared across countries;
- Describe how risk is evaluated, particularly in relation to equity and debt;
- Identify what EVA is and explain how it is used in performance evaluation.
On successful completion of this subject, students should have improved the following generic skills:
- Develop an argument logically and coherently;
- Synthesis of information;
- Application of current technologies to practice;
- Accessing data and other information from various sources;
- Using computer programs, particularly in relation to the processing of data;
- Problem solving;
- Statistical reasoning;
- Critical thinking;
- Oral and written communication.
Last updated: 16 March 2020