ACC 540: Financial Statement Analysis & Equity Valuation
Contents
This course teaches financial statement analysis in the context of equity valuation. The first part covers common tools of financial statements analyses (accounting analysis, ratio analysis, analysis of narratives) and the derivation of inputs into valuation models. Applying this knowledge, techniques for a consistent identification of free cash flows and abnormal earnings from integrated pro-forma financial statements (financial modelling and business planning) as well as the estimation of required rates of returns from capital market-based data are discussed. In the second part, methods for equity and asset valuation, in particular the cash-flow based DCF-models and the earnings-based abnormal earnings (AE) and earnings growth (AEG) models are covered. Finally, in the third part the course focuses on applications of fundamental analysis and valuation methods for equity investments and in Mergers & Acquisitions (M&A, purchase price allocation and the valuation of intangible assets), and when incorporating ESG (Environmental, Social, and Governance) information.
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
Not taken ACC 532
Recommended prerequisites
Bachelor-level knowledge of financial accounting and finance
| Forms of teaching and learning | Contact hours | Independent study time |
|---|---|---|
| Lecture | 2 SWS | 9 SWS |
| Case Study Presentation | 2 SWS | 4 SWS |
| Exercise class | 2 SWS | 4 SWS |
| ECTS credits | 8 |
| Graded | yes |
| Workload | 240h |
| Language | English |
| Form of assessment | Case study presentation (25%) and written exam (90 min., 75%) |
| Restricted admission | no |
| Further information | – |
Examiner Performing lecturer |  | Prof. Dr. Holger Daske Prof. Dr. Holger Daske (Lecture) Dr. Steffen Wagner (Case Study) |
| Frequency of offering | Spring semester |
| Duration of module | 1 semester |
| Range of application | M.Sc. MMM, M.Sc. WiPäd, M.Sc. VWL, M.Sc. Wirt. Inf., LL.M., MAKUWI |
| Preliminary course work | – |
| Program-specific Competency Goals | CG 1, CG 2, CG 4 |
| Literature | Palepu, K., Healy, P. & Peek, E. (2019). Business Analysis and Valuation (Fifth edition, IFRS standards ed.). Andover. |
| Course outline | Framework 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 |