Class notes

Lecture notes and practice sessions: Financial statement analysis and valuation

18 purchases

Course
Financial Statement Analysis & Valuation (323059M6)

Institution
Tilburg University (UVT)

Book
Equity Valuation and Analysis

Lecture notes and some slides of the powerpoints as well as the practice sessions of which the last session is not included. It is quite a lot of pages, however, it does include additional notes from the professors surrounding certain topics and an overview of what was discussed in the lectures.

[Show more]

Preview 4 out of 66 pages

View example

Uploaded on March 24, 2021
Number of pages 66
Written in 2020/2021
Type Class notes
Professor(s) Hollander
Contains Lecture 1 up to 7 and practice session 1 up to 6

fsa
summary fsa
college fs
college fsa
notes fsa
lecture notes fsa
lecture notes financial statement analysis and valuation
notes financial statement analysis and valuation
summary financial statement

Book Title:Equity Valuation and Analysis

Author(s):Richard Sloan, Russell Lundholm

Edition:Unknown
ISBN:9781079983357
Edition:Unknown

Institution
Tilburg University (UVT)
Education
Master Finance
Course
Financial Statement Analysis & Valuation (323059M6)

marissameulendijks

Member since 4 year 123 documents sold

$5.94

Add to cart

Add to wishlist

100% satisfaction guarantee
Immediately available after payment
Both online and in PDF
No strings attached

Financial statement analysis and evaluation (FSAV)

Content
Lecture 1: Valuation drivers............................................................................................................................ 2
Cynk case ............................................................................................................................................................ 2
Gulf case ............................................................................................................................................................. 2

Practice session 1 – Value Drivers & Intel’s Earnings Torpedo ......................................................................... 6
Intel Earnings Announcement Torpedo .............................................................................................................. 6

Lecture 2: Business analysis ............................................................................................................................ 9
Example: Hudson’s Bay’s business.................................................................................................................... 11
Example: accounting to understand the business - Netflix ............................................................................... 14
Ecom example .................................................................................................................................................. 15

Practice session 2: Boston Case .................................................................................................................... 18

Lecture 3: Ratio Analysis .............................................................................................................................. 19
Paypal case ....................................................................................................................................................... 19
Lehman Brothers repo 105 ............................................................................................................................... 20

Practice session 3: Sirius Satellite Radio ....................................................................................................... 26

Lecture 4: Information collection.................................................................................................................. 28
Determinants: Facebook................................................................................................................................... 30
Zoomlion case ................................................................................................................................................... 32

Practice session 4: Disney case ..................................................................................................................... 34

Lecture 5: Forecasting .................................................................................................................................. 38

Practice session 5: Netflix ............................................................................................................................. 45

Lecture 6: Equity valuation ........................................................................................................................... 49

Practice session 6: Tesla case........................................................................................................................ 58

Financial statement analysis in PE practice ................................................................................................... 59

Lecture 7 – Capita selecta ............................................................................................................................. 60

1

,Lecture 1: Valuation drivers

Cynk case
Cynk Technology, Inc. offers you a social network. It started off as a penny stock (below $5 per
share). In July 2014, the firm’s market value exceeded 6 bn US dollars for 1 hour only. What
happened? Momentum traders put their trust in penny firm financial gossips.
o Cynk had no assets according to the financial statements. The company did not have any
revenues either. One of the worst things is 0 employees.
o The firm claimed that the firm was run from the headquarter the Matalon. They claimed it was
run from suite 400 (doesn’t exist). Actually, there is nothing à fake suite, no revenues, no
employees. How can a company than be worth under 6bn dollars? Pump and dump scheme
à you and your friends start investing to trigger real investors to get lured into the transaction.

Some things that need to be clear
o The purpose of FS is NOT to provide an estimation for equity value.
o Equity investing is not a game against nature, but against other investors (more information, or
betting).
o Investing should be more like watching paint dry or watching grass grow. Slow and
unexciting process.
o Little need to discover the “true” intrinsic value; rather understand how you think differently
from others.
o Intrinsic value is an “elusive concept”; inputs are uncertain.

What is firm value?
Economic value of the firm is the discounted sum of expected FCFs.
Is economic value equal to market value?
That is what we aim to find out with valuation.
What is accounting?
A language to measure and communicate firm performance.
What is financial statement analysis?
FSA is about analyzing a firm's accounting information to learn about its true performance.

Gulf case
Gulf Resources, Inc. is a chemical company listed on Nasdaq. It is an industrial salt producer. Bronte
(capital investment service) shorted Gulf Resources on behalf of its clients. The company looked
suspicious since it is a high inventory turnover rate.
o Inventory turnover rate = Sales/Average inventories
o 169.5x per year, they turned over their inventory stock. Such a high turnover rate indicates
that goods are sold really fast. If you’d compare it to a similar firm, the turnover rate was less
than 5. Therefore, the company looks suspicious, so they short on this firm.

Three steps of equity valuation:

2

,Understanding the past
Goal: understand a firm’s financials in the context of its business strategy and the industry and
economy it operates in.
o Understand the business
o Accounting analysis à check how the busines is mapped into the numbers. Do they reflect the
business well?
o Ratio analysis à understand key strengths and weaknesses of the firm’s strategy. Identify key
drivers of value and spot any irregularities.

Forcasting the future
Goal: forecast firm’s value creation in the future.
o Information collection to broaden your view and inform your predictions.
o Forecasting: Framing the forecasting problem using the same ratios as we used for
understanding the past.

NPV – Net Present Value
What is the max you are willing to pay for an investment that you expect to yield 100 for 3 years while
a comparable risky investment is expected to return 8% per year?

Value of an equity interest is based on the PV of expected future cash dividends to be received.

The dividend discount formula is rarely used directly:
• Dividends don’t directly reflect performance
• Dividends are to a large extent discretionary
• Many firms don’t pay high dividends right now, but promise pay later.
• Dividend irrelevance theorem à cum dividend payout is not affected. Need to
forecast things very far in the future.

Earnings-based valuation
CE= common shareholders’ equity.
- Based either on NI or DIV.
o All gains and losses go through the income statement.

Calculation of the price.

3

, - Price is a function of both past information and expectations regarding the future.

Core value drivers
1. Investment growth (g)
2. Risk ( r)
3. Profitability (RoE)

Structured approach to valuation
1. Understanding the past
2. Forecasting the future
3. Valuation

Profitability, RoE
- RoE is the RoI for equity investors
- RoI = Earnings for the period / Investment at the beginning of the period

-
- RoE is the rate of return that equity owners get.
- RoE must be higher than the opportunity cost (r ) in order to generate value.
- We call these opportunity cost (r ) “expected return” or “cost of equity capital”.

Investment growth, g
- Profitability is only part of the picture
- Amount of capital invested is crucial too
- Investment depreciates and becomes obsolete
o Investment needs to grow to expand the business
o Investment in new assets to not become obsolete and stay competitive

Risk, r

4

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller marissameulendijks. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $5.94. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

68175 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 15 years now

Start selling

Seller

Exam (elaborations) ·

Class notes

Lecture notes and practice sessions: Financial statement analysis and valuation

Document information

Subjects

Connected book

Written for