Business Valuation (FI-257)

Finance and Control Group

INDIAN INSTITUTE OF MANAGEMENT CALCUTTA
Joka Campus, Kolkata 700104
2017-18

Course: FI 257: BUSINESS VALUATION

TERM: TERM IV
Instructors: Ashok Banerjee (AB)
Course Coordinator: Ashok Banerjee

Reference Books

Basic Text: Damodaran: Damodarn on Valuation, Second Edition

Reference: Valuation: Measuring and Managing the Value of Companies, University Edition
(Wiley Finance) Paperback by McKinsey & Company Inc., Tim Koller, Marc Goedhart David
Wessels.

Course Description

This course deals with analysis of fundamental and market information for business valuation.
Students learn how to compute intrinsic, relative and contingent values of a firm. At the end
of this course, students should have a good understanding of (i) value relevant information
contained in financial statements (ii) techniques to estimate growth and cost of capital (iii)
efficacy of alternative valuation models (iv) operating and financing strategies that impact
firm value.

The course will be taught from the perspective of a security analyst although the material
covered will be relevant to the corporate financial analyst for evaluating acquisitions,
restructurings and other investments, and for calculating the value generated by strategy
scenarios. By the end of the course, the student should feel competent in writing a thorough,
convincing equity research report.

Topics include (i) cash flow and earnings based valuation models (ii) financial statement and
ratio analysis (iii) determination of discount and growth rates (iv) valuation of listed and
unlisted firms (v) valuation of special situations (vi) private equity.

Learning Objectives

By the end of the course students should have answers to the following questions:
How are fundamental values (or intrinsic values) estimated?
How are business strategies analyzed to assess the value they create?
What business activities determine value?
How is value created for shareholders identified?
What is the role of financial statements in calculating equity values?
How does one pull apart the financial statements to get at the relevant information for
valuing equities?
What is the relevance of cash-flows? Of dividends? Of earnings? Of book values?
 How does ratio analysis help in valuation?
How does profitability tie into valuation?
What is growth? How does one analyze growth? How does one value a growth firm?
How does one analyze the quality of financial reports?
How does one deal with the accounting methods used in financial statements?
How is financial analysis developed for strategy and planning?
What determines a firm's P/E ratio?
What determines a firm's market-to-book (P/B) ratio?
How does one value contingent assets and liabilities?
How does one evaluate risk? For equity? For debt?
How does one evaluate an equity research report?
How does one trade on fundamental information?

Additionally, an important objective of this course is to help students understand the

difference between the economic processes that generates the reported numbers from the
accounting process that can obscure them. It will highlight the assumptions and
approximations needed to analyze the reported financial numbers.

Teaching Methodology and Class Preparation

A combination of lecture, case discussions and problem-solving is used. Reading the

material before coming to class will help in understanding the materials better.

Course Requirements and Grading

The overall course grade is determined out of 100 points distributed as follows:
Two quizzes (10 each) 20
Case Presentation 10
Final exam 40
Group Project 30
Total 100

Please make sure you have satisfied the pre-requisites for this course and are able to
handle the material for this course. Also make sure you are able to commit the time
needed to understand the subject matter in order to solve the problems to do well in the
exams.

Instruction for project assignment preparation

1. The course project should be done in groups of around 10persons (10 groups for the
entire class). Students develop the project as we progress in class.
2. You are required to do a fundamental analysis of any one unlisted company of your
choice. The company can belong to any geography.
3. Since the company is unlisted, a key activity of the project will be gathering data on the
company from various sources.
4. You need to submit a powerpiont presentation as well as supporting worksheets showing
your calculations and assumptions.
5. It is advisable that you should spend more time on the interpretation of the numbers,
justification of the model choices and discussing the drivers for valuation rather than
develop the template for valuation.
6. The due date of the powerpoint presentation and the financial model will be
communicated in due course.

The format for the presentation and report is as below:

1. Data Sources: Secondary and Primary Research, validation and reconciliation of data,
financial and operating metrics, industry benchmarks
2. Economic and Industry analysis: Growth drivers, challenges, evolution, ecosystem, key
players, value chain analysis
3. Analysis of the Company using prevalent strategic and analytical models: Use of multiple
templates and/or frameworks is expected.
4. Financial statement analysis with clear linkages to the aforementioned industry and
company analysis.
5. Enterprise as well as equity valuation using one or more of the methods discussed in
class: DCF, SOTP, Multiples, VC method resulting in a football field. In case you have
used only one valuation method, you have to justify the choice: in case you have used
more than one, suggest which is more appropriate and justify. Also, show how you
arrived at the cost of capital you have used.
6. Sensitivity and Scenario Analysis: Provide a range of equity/enterprise values for the
companies based on variation in one or more of the valuation parameters.. Also, create
at least three scenarios: worst case, base case and best case. Discuss the results.
7. Assumptions given the limitation and volume of data and its quality.
8. Quality of Management: Separately discuss quality of management resulting in
execution risks and any concerns about the corporate governance of the company.
9. Investment Thesis: Given your analysis and valuation, prepare a company pitch book
with an investment thesis explaining why an investor should invest in the company.
10. Risks: Mention various business/investment risks, their classification, risk mitigants (if
any) and overall impact of risk analysis on valuation.

Other administrative details

Course materials, other than the text book and cases, will be posted on moodle. Graded
exams will be available at the PGP office for student review.
Students are expected to come to every class. Proxy attendance will not be
tolerated under any circumstances.
All students are expected to behave with honesty and integrity. Do not plagiarize and
cheat in either projects or exam.
Class Schedule

Session Topic Details Case/Exercise

Concept of Economic Value Capital
Return Policy: Any effect on value?
1 Introduction: Why value Value? Expectation treadmill Snapdeal (in-class materials)
Whose value? - Stakeholder vs.
Shareholder

Exxon and Reliance

2 Financial Projections Forecasting financial statements
Estimates (in-class materials)
 Walmart (906N09-PDF-ENG)
Dividend discount model
DDM Valuations of Exxon,
3 Intrinsic Valuation - 1 Reading: The Dividend Discount
HUL, Unilever, ONGC (in-
Model (UV2453-PDF-ENG)
class materials)
Asset Basis and Earnings Models
Free cash flow models
4 Intrinsic Valuation - 2
Reading: Note on Valuing Equity
cash flows (295085-PDF-ENG)
Cash Flow Models (Contd.)
Reading: Methods of Valuation for
5 Intrinsic Valuation - 3 Interco (291033-PDF-ENG)
Mergers and Acquisitions (UVA-F-
1274)
6 Intrinsic Valuation - 4 Issues in cost of capital EY Survey-2014
Guideline company valuation
Guideline transaction valuation
Rosetta Stone: Pricing the
7 Market Based Valuation Reading: Corporate Valuation and
2009 IPO (UV3930-PDF-ENG)
Market Multiples (266039-PDF-
ENG)
Real estate, retail, power,
8 Sector Specific Valuation pharmaceutical, mining, financial
services
Valuation of Control Premium and
9 M&A-Valuation Exercise (in-class materials)
Illiquidity Discount
Valuing Contingent Securities Real
Options
Real Options Exercises
10 Contingent Valuation Reading: Real Options: Valuing
(208045-PDF-ENG)
Managerial Flexibility (294109-
PDF-ENG)
Case: Microsofts acquisition
11 Valuing high growth companies Challenges, Use of multiples
of LinkedIn
Valuation of operating and
12 Deal Valuation - M&A Exercise (in-class materials)
financial synergies
Microsoft's Acquisition of
M&A Valuation: Case M&A valuation drivers, acquirer's
13 Skype, HBS Case #: IMD574-
Presentation and seller's perspectives
PDF-ENG
 Pre-money and post-money
valuation, Venture Capital
Valuation
Reading: A Note on Valuation in
14 Private Equity Valuation Private Equity Settings (HBS case
9-297-050)

Reading: A Note on Private Equity

Securities (HBS Case 9-200-027)

Global cost of capital, valuation

15 Cross-border Valuation
issues
Impact of changing capital
structure on valuation RJR Nabisco (289056-PDF-
16 Leveraged Buyouts
Reading: Note on Adjusted ENG)
Present Value (293092-PDF-ENG)
Sum-of-the-parts method of
valuation
17 Valuation of Conglomerates L&T
Reading: Note on Sum-of-the-
Parts Valuation (HBS 9-209-105)
18 Project Presentation First four teams
19 Project Presentation Next three teams
20 Project Presentation Remaining teams