Introduction to Valuation
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This course introduces concepts and tools for valuing companies in a consistent manner. You should find it useful as a starting point and guide for analysing the performance of companies and industries of your interest.
The course should be useful for practitioners working in various market environments – from developed countries to emerging markets, from services to manufacturing industries, and from the viewpoints of managers to the desks of stock analysts.
The main part of this course takes a deterministic approach to valuing companies, in which the valuation assumes away most of the errors, randomness, and mis-measurement in the company’s financial information. While the course introduces several sensitivity and scenario analyses, you are reminded, where applicable, of the shortcomings of the basic models and the key limitations of the approaches taken. This course focuses on the baseline analysis so that you have an understanding of the tools and concepts necessary for pursuing further more advanced materials.
You will receive a looseleaf binder containing eight units. The units are carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the further assigned readings. The unit files are also available to download from the Virtual Learning Environment.
Koller T, M Goedhart & D Wessels (2010) Valuation: Measuring and Managing the Value of Companies, University Edition, McKinsey & Company.
You will receive a volume of Readings, which is a compilation of recently published articles or seminal writings which augment and illustrate the main text.
Virtual Learning Environment
You will have access to the VLE, which is a web-accessed learning environment. Via the VLE, you can communicate with your assigned academic tutor, administrators and other students on the module using discussion forums. The VLE also provides access to the module Study Guide and assignments, as well as a selection of electronic journals available on the University of London Online Library.
Objectives and learning outcomes of the course
When you have completed this module and its readings, you will be able to do the following:
- discuss the importance of value to the performance of companies and economies, and differentiate between activities that create value and those that do not
- explain how to calculate the Return On Invested Capital (ROIC), why a high ROIC can be sustained by a competitive advantage, and the role of pricing advantages and cost advantages in value creation
- provide a proper assessment and organisation of financial statements
- analyse ROIC and revenue growth and assess the financial health of a company with respect to its ability to take on short-term and long-term projects
- denote the properties of WACC, how to estimate it, and alternative ways to calculate its components, and its limitations
- provide a verification of valuation results and sensitivity analysis which helps confirm the value drivers of a company under a broad set of conditions
- identify the economic fundamentals of value – the return on invested capital and expected revenue growth
- explain what is meant by behavioural finance, distinguish between informed investors and noise traders and discuss the main managerial implications of market efficiency.
Scope and syllabus
Unit 1: Foundations of Value Creation
- 1.1 Introduction
- 1.2 Why Study ‘Value’?
- 1.3 Growth and Return on Invested Capital (ROIC)
- 1.4 The Conservation of Value
- 1.5 Risk and Value Creation
- 1.6 The Maths of Value Creation
- 1.7 Expectations and Why Shareholder Expectations Become a Treadmill
- 1.8 Decomposing TRS
- 1.9 Conclusion
Unit 2: Sources of Value Creation
- 2.1 Introduction
- 2.2 Drivers of Return on Invested Capital
- 2.3 Competitive Advantage
- 2.4 The Sustainability of ROIC
- 2.5 Drivers of Revenue Growth
- 2.6 Growth and Value Creation
- 2.7 The Difficulty of Sustaining Growth
- 2.8 Conclusion
Unit 3: Framework and Organisation of Valuation
- 3.1 Introduction
- 3.2 Discounted Cash Flow Model
- 3.3 Economic-Profit-Based Valuation Models
- 3.4 Adjusted Present Value Model
- 3.5 Reorganising the Accounting Statements
- 3.6 Conclusion
Unit 4: Performance Analysis
- 4.1 Introduction
- 4.2 Analysing ROIC
- 4.3 Analysing Growth
- 4.4 Credit Health and Capital Structure
- 4.5 Determining Length and Detail of the Forecast
- 4.6 Additional Issues regarding Forecasting
- 4.7 Formula for DCF Valuation
- 4.8 Formula for Economic-Profit Valuation
- 4.9 Common Pitfalls and Limitations of Forecasting
- 4.10 Conclusion
Unit 5: Cost of Capital and Value per Share
- 5.1 Introduction
- 5.2 Weighted Average Cost of Capital
- 5.3 Estimating the Cost of Equity
- 5.4 Estimating the After-Tax Cost of Debt
- 5.5 Using Target Weights to Determine the Cost of Capital
- 5.6 Valuing Non-Operating Assets
- 5.7 Valuing Debt and Debt Equivalents
- 5.8 Valuing Hybrid Securities and Minority Interests
- 5.9 Conclusion
Unit 6: Reporting Results
- 6.1 Introduction
- 6.2 Verifying Results
- 6.3 Sensitivity Analysis
- 6.4 Creating Scenarios
- 6.5 Valuation by Parts
- 6.6 Using the Multiples
- 6.7 Using the Peer Group
- 6.8 Alternative Multiples
- 6.9 Conclusion
Unit 7: Market Value
- 7.1 Introduction
- 7.2 The Role of Economic Fundamentals
- 7.3 Market Valuation Levels – Return on Invested Capital and Growth
- 7.4 Expectations and Returns to Shareholders
- 7.5 Do Earnings Matter over Cash Flows?
- 7.6 Accounting Standards, Technical Trading Factors and Stock Market Values
- 7.7 Conclusions
Unit 8: Agents and Efficient Markets
- 8.1 Introduction
- 8.2 Company Mispricing
- 8.3 Market Mispricing
- 8.4 The Role of Investors
- 8.5 Further Challenges of Behavioural Finance
- 8.6 Market Efficiency – Managerial Implications
- 8.7 Conclusions
Method of assessment
Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.
You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 5, and the second assignment at the end of the module, on the Tuesday after Week 8. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.
You will also sit a three-hour examination on a specified date in October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in April each year.