25743 spring 2014

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SUBJECT OUTLINE

25743 Corporate Financial Analysis

Subject coordinatorDr. Lorenzo Casavecchia

Room: CM05D.03.24C

Telephone (Office): 9514 7764

email: [email protected]

Consultation time: Wednesday 10:30am - 11:30am.

Teaching staffDr. Lorenzo Casavecchia ([email protected])

Mr. Rajesh Lucknauth, CFA ( [email protected])

Subject descriptionThis subject develops students' abilities to conduct corporate financial analysis both for lending and investment

purposes. Students perform industry analysis, identify participants' motivations and accounting deficiencies, forecast

financial statements and value companies.

Subject objectivesUpon successful completion of this subject students should be able to:

1. apply the latest developments in corporate financial analysis including management and industry analysis to

develop skills necessary to assess a variety of financial information for lending and investment purposes and for

predicting corporate failure

2. use accounting information including reconstructed cash flow statements from other financial statements to

assess the proficiency of the company's ability to manage liquidity as well as identify the companys prospects in

the corporate life cycle

3. question the true condition of the company as reported from accounting numbers and identify the motivations of

players as well as how to adjust accounts to address financial analysts concerns

4. examine appropriate ratios and techniques of analysis to use, and execute these procedures while also noting

their limitations

5. execute different valuation methodologies.

This subject also contributes specifically to the following program learning objectives:

Research and critically analyse complex information and concepts for business decisions and apply them in the

broader environmental context (1.1)

Apply innovative problem solving processes to address business issues and integrate the solutions in decision

making (2.1)

Use high quality written and oral communication skills to interact effectively with others in order to work towards a

common outcome (3.1)

Course area UTS: Business

Delivery Spring 2014; City

Credit points 6cp

Requisite(s) 25765Corporate Finance AND 25705Financial Modelling and Forecasting

These requisites may not apply to students in certain courses.

There are also course requisites for this subject. See access conditions.

Result type Grade and marks

16/07/2014 (Spring 2014) University of Technology, Sydney Page 1
mailto:[email protected]://handbook.uts.edu.au/subjects/25765.htmlhttp://handbook.uts.edu.au/subjects/25705.htmlhttp://datasearch.uts.edu.au/evop/access/search.cfm?subjectcode=25743http://datasearch.uts.edu.au/evop/access/search.cfm?subjectcode=25743http://handbook.uts.edu.au/subjects/25705.htmlhttp://handbook.uts.edu.au/subjects/25765.htmlmailto:[email protected]

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Demonstrate expert judgement of ethical sustainable and social responsibility and a high level of personal

autonomy and accountability in professional practice. (4.1)

Apply broad technical skills within specialised financial practice (5.1)

Contribution to the development of graduate attributesThis subject develops the students' abilities to conduct corporate financial analysis both for lending and investment

purposes. Students use a top down approach and management tools to examine the industry-wide profitability

potential and the company strategy. Accounting information is used to analyse company performance while noting

accounting deficiencies and identifying corrective action. Students will also be able to forecast future values and use

several different methods to value a company.

Teaching and learning strategiesThe subject will be taught using a combination of lectures and workshops. These classes will be supplemented with

both printed and electronic learning materials and resources. The UTS web-based communication tool (UTSOnline)

will be used to share information and encourage interaction between staff and students. Students will also use

appropriate computer software such as spreadsheets and word processors to complete assigned tasks.

Content1. Analysis of financial statements and information

2. Cross sectional and time series analysis of financial information, leading to the development of ratio analysis

3. Foundations of liquidity analysis - Analysis of the operating cash cycle, economic fundamentals for analysis of

liquidity, cash flow analysis, liquidity indicators, analysis of the management of liquidity statements4. Use of financial information in solvency analysis, leading to rating and distress prediction methods

5. Forecasting and valuation using financial statement information

Program

Week/Session Dates Description

1 28 Jul Identifying business analysis basics including industry, firms/competitors and

technological change

Common size financial statements

Identifying the company strategy

Porters five forces

Introduction to profitability analysis

Notes:

Readings for this week will be provided on UTS online in pdf format.

Webcast of Michael Porter on the "The Five Forces at Work in the Airline

Industry" available on UTS Online in Lecture 1 folder.

2 4 Aug Financial Reporting and Analysis

Analysis of corporate performance

Comparative ratio analysis

Cash flow analysis: An introduction

Operating, investing and financing activities

Income flows, cash flows, and life cycle relations

Notes:



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3 11 Aug Credit Judgment and Risk Analysis

Market for credit

Credit analysis process

Financial statement analysis and public debt

Prediction of distress and turnaround

Bankruptcy risk

Notes:


4 18 Aug Reliance on Accounting Numbers

Earnings management: Definition

Earnings management: Measurement

Earnings management: Impact on firm valuation

Market response to earnings management

EXAMPLES

Notes:


Webcast of Howard M. Schilit, CEO of Financial Shenanigans Detection Group

LLC,available on UTS Online in Lecture 4 folder.

5 25 Aug Advanced Issues in Estimating Discount Rates:

What risk-free rate to use?

Historical Beta

Fundamental Beta

Historical Risk Premium (HRP)

Implied Risk Premium (IRP)

Assumptions about the EMH and advantages of the IRP;

Estimation process using the DDM;

Comparison between HRP and IRP

Country Risk Premium and Emerging Markets

Cost of Equity

Cost of Debt

From Cost of Equity to Cost of Capital (WACC)

EXAMPLES

Notes:


A self-assessment Weekly Challengecontaining questions on the material

covered this week is available on UTS Online.


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6 1 Sept First assignment due this week - see assignment details on UTS online. No late

assignments will be accepted.

Valuation Techniques - Calculating Free Cash Flows (PART I)

Overview

FCFE versus FCFF

Correcting earnings misclassifications

Effect of capitalising operating leases and R&D expenses

Analysing firms with negative earnings

Computing net capital expenditures and changes in non-cash working capitalEstimating FCFE and FCFF when firm's capital structure is stable.

EXAMPLES

Notes:




7 8 Sept Valuation Techniques - Calculating Free Cash Flows (PART II)

Overview

FCFE versus FCFF

Correcting earnings misclassifications

Effect of capitalising operating leases and R&D expenses

Analysing firms with negative earnings

Computing net capital expenditures and changes in non-cash working capital

Computing FCFE and FCFF when firm's capital structure is stable.

EXAMPLES

Notes:


8 15 Sept Valuation Techniques - Forecasting Cash Flows

Detailed cash flow forecasts

Length of growth period: High Growth, Transition, Stable Phase

Estimating firm growth rates

Equity and Firm Reinvestment Rates (RR)

Return on Capital (ROC) and Return on Equity (ROE)

Notes:




9 22 Sept No classes this week.


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- 29 Sept Vice-chancellors week.

No classes this week.

10 6 Oct This week all classes for this subject onlyare cancelled due to Labour Day.

11 13 Oct Terminal Value:

Assumptions and InputsEstimating the Terminal Value: Growth rates, Capital Structure Changes, and cost

of capital

Estimating the Terminal Value: Analysis of Industry Peers

Putting all together:

Two-stage FCFF discounted model

Three-stage FCFF discounted model

Application of FCFF models to high growth firms which do not pay dividends

Notes:


12 20 Oct How to deal with uncertainty in corporate valuation:

Scenario Analysis

Sensitivity Analysis

Monte Carlo Simulations

Notes:


13 27 Oct Relative Equity Valuation Techniques:

P/E multiple,P/BV multiple, PEG multiple

Fundamental drivers of the company multiples

Relative valuation using multivariate regressions

Across Countries

Across Regions

Across Industries

From market-based relative valuation to company's intrinsic value

EXAMPLES

Notes:


Two Weekly Challengescontaining questions on the material covered this week

are available on UTS Online.


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14 3 Nov Second assignment due this week - see assignment details on UTS online. No

late assignments will be accepted.

Revision Class

AssessmentAssessment task 1: Assignment (Group)

Objective(s): This addresses subject learning objective(s):

1, 2, 3, 4 and 5

Weight: 30%

Due: Not applicable; see Further information

Task: The team assignment is designed to assess students' understanding of the material in Weeks 1 to

13. This assessment task is divided into two assignments:

Team Assignment 1 (Weight 10%): this assignment assesses students' understanding of topics 1 to

5.

Team Assignment 2 (Weight 20%): this assignment assesses students' understanding of topics 6 to

13.

Further

information:

Students may choose their own groups within their class. It is expected that you work with your group

during each of the break-out sessions during the lecture. There will be two required reports during

the semester. Discussions form an integral part of the purpose of the reports and all components of

the reports will be tested in exams.

Assessment task 2: Quizzes (Individual)


1, 2, 3, 4 and 5

Weight: 15%

Due: Not applicable; see Further information

Task: The quiz is designed to assess students' understanding of the theory and practice covered in the

subject. There will be 15 MCQs each worth 1 mark for a total of 15 marks (i.e., 15% of the overall

course assessment). It will be available electronically on UTS online on Saturday 25 October 2014

during the time window between 8:00pm and 10:00pm. This test will last a total of 30 minutes.

Be aware that:

1) You will be allowed only 1 attempt for this test, as such you are advised to carefully check your

internet connection before starting the test. If you miss the scheduled test you could receive 0 marks

for this assessment task;

2) The test will present one question at a time. You will not be able to change the answer to a

question that has already been submitted;

3) Once started, the quiz must be completed in one sitting;

4) Students will be able to see the timer option before they begin the quiz.


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Further

information:

Further information will be provided in class.

Assessment task 3: Final Exam (Individual)


1, 2, 3, 4 and 5

This addresses program learning objectives(s):

1.1, 2.1, 3.1, 4.1 and 5.1

Weight: 55%

Due: Formal Exam Period

Task: The final examination will be held during the formal examination period at the end of the semester.

Please notice that no formula sheet will be provided in the exam.The examination will cover all

topics considered in class during the semester. The final examination will count 55% towards the

overall course assessment and will be of three hours duration with 10 minutes of reading time.

Assessment feedbackStudents are encouraged to self-assess as well to improve their feedback.

Minimum requirementsStudents must achieve at least 50% of the subjects total marks.

Required textsAll textbook material will be provided on UTS online in pdf format.

Other resourcesLecture Overheads

Lecture overheads will be available on UTS online in a variety for formats.

Other References

Faculty of Business (2010), Guide to Writing Assignments(available through UTSOnline

or at http://www.business.uts.edu.au/resources/guide.html)

Academic liaison officerDr Maria Ossimitz, Accounting Discipline Group, telephone 9514 3069

Mr Harry Tse, Economics Discipline Group, telephone 9514 7786 / 9514 5456

Dr Otto Konstandatos, Finance Discipline Group, telephone 9514 7758

Dr Paul Wang, Marketing Discipline Group, telephone 9514 3692

Dr Katie Schlenker, Management Discipline Group and BBus (Kuring-gai), telephone 9514 5303 (until week 10)

Dr Daryl Adair, Management Discipline Group and BBus (Kuring-gai), telephone 9514 5498 (weeks 1114)

Dr Jonathan Pratt, Management Discipline Group, telephone 9514 8436Any arrangements should be negotiated within the first six weeks of semester.

SupportStudent Services Unit/Counselling: Student Services provides a range of free and confidential professional service

to support different aspects of your life and learning at UTS ( www.ssu.uts.edu.au). These services include counsellin

for personal and learning problems or issues. If you are experiencing difficulties with your overall study program, for

whatever reason, phone 9514 1177 (City campus) or 9514 5342 (Kuring-gai campus).

Students with disabilities or ongoing medical conditions: If you are a student who has a disability or ongoing

medical condition that requires support services you are encouraged to contact the disability support officers or

Special Needs Service (phone 9514 1177; www.ssu.uts.edu.au/sneeds/) for a confidential interview. Supporting

documentation regarding your disability or ongoing medical condition is required if you wish to apply for assessment

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adjustments, including alternative assessment conditions. Each faculty has appointed academic liaison officers (ALO

who are responsible for approving assessment adjustments. Meeting with the disability support officers or Special

Needs Service before seeking assessment adjustments from your ALO is required.

Improve your academic and English language skills: Marks for all assessment tasks such as assignments and

examinations are given not only for what you write but also for how you write. If you would like the opportunity to

improve your academic and English language skills, make an appointment with the HELPS (Higher Education

Language and Presentation Support) service in Student Services.

HELPS (Higher Education Language and Presentation Support) : HELPS provides assistance with English

language proficiency and academic language. Students who need to develop their written and/or spoken Englishshould make use of the free services offered by HELPS, including academic language workshops, vacation intensive

courses, drop-in consultations, individual appointments and Conversations@UTS (www.ssu.uts.edu.au/helps). HELP

is located in Student Services, on level 3 building 1 at City campus and via the Student Services area at Kuring-gai

(phone 9514 2327 or 9514 2361).

Study skills / learning support: If you are experiencing difficulty with your studies or need to develop the necessary

study skills you require for your course, there is a host of useful information and websites to help you on the UTS

Business School, Teaching And Learning website. Links on how to write better, study more effectively, available

support services/staff to help, how to complete assignments; as well as tips for successful study and online study ski

resources can all be accessed

( www.uts.edu.au/current-students/current-students-information-uts-business-school-0/study-and-assessment-resou

Careers Service: The UTS Careers Service aims to actively support the career development needs of all UTS

students (www.ssu.uts.edu.au/careers/).

Statement about assessment procedures and adviceAssessment of coursework subjects

All staff and students involved in the assessment of coursework subjects at UTS are subject to the Policy for the

Assessment of Coursework Subjects. The policy is applicable to the assessment of all coursework subjects. This

policy does not apply to thesis subjects that are taken by students enrolled in research degrees, but does apply to an

coursework subjects undertaken by research degree students. It does not describe policy that relates to academic

progression through a course of study.

The policy should be read in conjunction with the Procedures for the Assessment of Coursework Subjects. Both areavailable at: www.gsu.uts.edu.au/policies/assessment-coursework.html

Statement on copyrightAustralian copyright law allows you as a student or researcher to copy and use limited amounts of other people's

material in your study or research without their permission and free of charge.

This applies to any sort of published or unpublished work, and includes written material, tables and compilations,

designs, drawings (including maps and plans), paintings, photographs, sculpture, craft work, films (such as feature

films, television programs, commercials and computer video games), software (such as computer programs and

databases), sound recordings, performances and broadcasts (including podcasts and vodcasts of these) and text,

including books, journals, websites, emails and other electronic messages.

It is important to remember that you can only use a limited amount for your study or research purposesand thayou need to correctly acknowledge the author and reference their material when you use it in your work.

Incorrect or improper use of copyright protected material could result in breaking Australian copyright law, for which

significant penalties apply. Incorrect or improper use of copyright protected material at UTS would result in

consideration under the UTS Student Misconduct rules.

UTS Rules and the UTS Student Charter require that students familiarise themselves and comply with UTS student

policies and procedures. The copyright information advising what you can copy and how much you can use can be

seen at: www.uts.edu.au/about/utsweb-statements/copyright-statement

Statement on plagiarismPlagiarism is a broad term referring to the practice of appropriating someone else's ideas or work and presenting the

as your own without acknowledgment. Plagiarism is literary or intellectual theft. It can take a number of forms,

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including:

copying the work of another student, whether that student is in the same class, from an earlier year of the same

course, or from another tertiary institution altogether

copying any section, no matter how brief, from a book, journal, article or other written source, without duly

acknowledging it as a quotation

copying any map, diagram or table of figures without duly acknowledging the source

paraphrasing or otherwise using the ideas of another author without duly acknowledging the source.

Whatever the form, plagiarism is unacceptable both academically and professionally. By plagiarising you are both

stealing the work of another person and cheating by representing it as your own. Any instances of plagiarism can

therefore be expected to draw severe penalties and may be referred to the Faculty Student Conduct

Committee.

Cheating means to defraud or swindle. Students who seek to gain an advantage by unfair means such as copying

another student's work, or in any other way misleading a lecturer about their knowledge or ability or the amount of

work they have done, are guilty of cheating.

Students who condone plagiarism by allowing their work to be copied will also be subject to severe disciplinary action

Avoiding plagiarism is one of the main reasons why the UTS Business School is insistent on the thorough and

appropriate referencing of all written work.

Statement on UTS email accountEmail from the University to a student will only be sent to the student's UTS email address. Email sent from a student

to the University must be sent from the student's UTS email address. University staff will not respond to email from

any other email accounts for currently enrolled students.


25743 spring 2014

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