ACC 540: Financial Statement Analysis & Equity Valuation

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 learningContact hoursIndependent study time
Lecture2 SWS9 SWS
Case Study Presentation2 SWS4 SWS
Exercise class2 SWS4 SWS
ECTS Credits8
Form of assessmentCase study presentation (25%) and written exam (90 min., 75%)
Restricted Admissionno
Further information
Performing lecturer
Prof. Dr. Holger Daske
Prof. Dr. Holger Daske (Lecture)
Dr. Steffen Wagner (Case Study)
OfferingSpring semester
Duration of module 1 semester
Range of applicationM.Sc. MMM, M.Sc. WiPäd, M.Sc. VWL, M.Sc. Wirt. Inf., LL.M., MAKUWI
Preliminary course work
Program-specific Competency GoalsCG 1, CG 2, CG 4
Graded yes
LiteraturePalepu, K., Healy, P. & Peek, E. (2019). Business Analysis and Valuation (Fifth 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
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
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