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ACC 540: Financial Statement Analysis & Equity Valuation

Contents
This course teaches financial statement analysis in the context of equity valuation. The first part covers sources of information and common tools of financial statements analyses (accounting analysis, ratio analysis, cash flow analysis, analysis of narratives). In the second part, methods for equity and asset valuation, the cash-flow based DCF-models and the earnings-based abnormal earnings (AE) and earnings growth (AEG) models, are covered. The coverage includes the derivation and numerical calculation of the required rate of returns and structured forecasts necessary to reach a valuation. Finally, the course covers how ESG information is incorporated in firm analysis and valuation.

Learning outcomes
The students should get an in-depth understanding of the approaches and methods available for analyzing financial statements, preparing pro-forma financial statements in financial modelling and their application for valuing equity, firms and assets. They should on the one hand understand both the theoretical constructs, assumptions, and limitations behind those concepts, but should, on the other hand, also be capable to implement them (computer-based) in practice. The student’s learning will be supplemented by the presentation of case-studies from valuation practice.

Necessary prerequisites

Recommended prerequisites
Bachelor-level knowledge of financial accounting and finance

Forms of teaching and learningContact hoursIndependent study time
Lecture2 SWS9 SWS
Case Study Presentation2 SWS4 SWS
Exercise class2 SWS4 SWS
ECTS credits8
Graded yes
Workload240h
LanguageEnglish
Form of assessmentCase study (25%) and written exam (90 min, 75%)
Restricted admissionno
Further information
Examiner
Performing lecturer
Portrait
Prof. Dr. Holger Daske
Prof. Dr. Holger Daske (Lecture)
Dr. Steffen Wagner (Case Study)
Frequency of offeringSpring semester
Duration of module 1 semester
Range of applicationM.Sc. MMM, M.Sc. Bus. Edu., M.Sc. Econ., M.Sc. Bus. Inf., LL.M., MAKUWI
Preliminary course work
Program-specific Competency GoalsCG 1, CG 2, CG 4
LiteraturePalepu, K., Healy, P. & Peek, E. (2022, 6th edition). Business Analysis and Valuation (Sixth edition, IFRS standards ed.). Andover.
Course outlineFramework and Information Collection
Role of Financial Statements in Capital Markets
Framework of Financial Statement Analysis
Information-basis for Financial Statement Analysis
Information Collection
Accounting Analysis: The Basics
Strengths and Weaknesses of Financial Statement Information
Motivations for Accounting Analysis
Earnings Management
Accounting Analysis: Accounting Adjustments
Steps in Accounting Analysis
Identify Principal Accounting Policies
Assess Accounting Flexibility
Assess Accounting Strategy
Evaluate the Quality of Disclosure
Identify potential red flags
Recasting financial statements
Adjustments for Accounting Distortions
Ratio Analysis
Importance of Financial Ratios
Comparative Measures
Key Value Drivers
Profitability
Assessing Operating Management
Evaluating Investment Management
Evaluating Financial Management
Sustainable Growth Rate
Use of Financial Databases
The Statement of Cash Flows & Cash Flow Analysis
Importance of Cash Flows
Statement of Cash Flows
Cash Flow Analysis
Analyzing Corporate Narratives
The Idea of Textual Analysis
The Method of Textual Analysis
Analyzing corporate narratives
Application in Practice
Prospective Analysis – Forecasting
Forecasting – Framework
Detailed Line Item Forecasting
Forecasting Assumptions in Practice
Valuation Theory & Concepts
Conceptual Thoughts on Valuation Theory
Discounted Dividend Models
Discounted Cash Flow Models
Abnormal Profit Models
Price Multiples
Comparing Valuation Methods
Valuation Implementation
Key Issues in Valuation Implementation
Estimating the Cost of Capital
Forecasting
Computing Estimated Values
Some Practical Issues in Valuation
Equity Security Analysis
Equity Security Analysis
Fundamental Signals and Stock Returns
Analyst Forecasts and Stock Returns
Applicability in Investment Practice
Mergers and Acquisitions
Evaluating M&A
Reporting on M&A: Purchase Price Allocation
Purchase Price Allocation: Example
Goodwill Impairment