Business Analysis & Valuation Using Financial

Transcript:Business Analysis & Valuation Using Financial:
Business Analysis & Valuation Using Financial Statements Lecture Notes Professor David M. Chen Graduate Institute of Finance Palepu, Krishna G., Paul M. Healy, and Victor L. Bernard 3rd edn, South-Western, Thomson, 2004 Content I. Framework II. Tools 2. Strategy Analysis 3 & 4. Overview of & Implementing Accounting Analysis 5. Financial Analysis 6. Prospective Analysis: Forecasting 7 & 8. Prospective Analysis: Valuation Theory & Concepts / Implementation III. Applications 9. Equity Security Analysis 10. Credit Analysis and Stress Prediction 11. Merger & Acquisitions 12. Corporate Financing Policies 13. Communication & Corporate Governance 5 Minutes to Accounting Balance Sheet Sources of fund: Owed or borrowed Trade credits Short-term borrowing Long-term borrowing Invested Common stock Paid-in capital Preferred stock Earned Retained earnings Adjustments Storage of fund: Current Cash & equivalents Marketable securities Receivables Inventory Prepaid items Long-term investments Land, plant & equipments Others Intangibles Goodwill Income Statement Statement of Cash Flows Revenue Cost of good sold Gross profit S&A expenses Operating profit +- Non-operating G/L EBT Income taxes Net income Net income + Non-cash expenses Non-cash revenue + Net interest expenses Operating cash flow +- Working capital +-  Long-term assets +-  Debt financing & interest expenses +-  Equity financing & dividend payouts  Cash Major Accounting Issues Off-balance-sheet liabilities Off-balance-sheet financing Derivatives (financial guarantees) Financing vs. sales Purchases vs. leases Concealed liabilities Contingent liabilities Environmental Employee relationships Pending lawsuits Distorted earnings Timing of revenue recognition Period-closing sales Timing of expense recognition Taking a big bath Dirty surplus Asset recognition and measurement Methods of measurement Fair value vs. historical cost (impairment) Depreciation and amortization Intangible assets Phantom assets Fraud II. Framework Questions Addressed Security analysis Actual vs. expected performance? Analyst own & consensus forecasts? Why different? Valuation given assessment of current & future performance? Credit analysis Credit risk involved in lending (trades)? Management of liquidity & solvency? Business risk & financial risk? Loan pricing? Management consulting Industry structure? Strategies pursued by various players? Relative performance of different firms? Corporate management Fair market valuation? Investor communication program adequate? Search for a potential takeover target Value could be added by M&A? M&A financing? Auditing Accounting policies & accrual estimates consistent with the business & its recent performance? Financial reports communicate current status & significant risks of the business*? Role of Financial Reporting Channeling savings into business investments Socialist (communist) model Through central planning and government agencies to pool national savings and to