301 course

AA301: Business Valuation and Analysis 2012-13 Semester 2

AA301BUSINESS ANALYSIS AND VALUATION

_________________________________________________________________________

Academic Year : 2012-2013 Semester : 2

Course Coordinator

: Dr. ZHANG Huai Other

Instructor(s):

Dr. Kevin KOHDr. KE BinMr. CHONG Eng Heng

Pre-requisites : AA201/AC2101 Accounting Recognition and Measurement

No. of AUs : 4

Course Description and Scope

This course provides students with the conceptual background and analytical skills that are necessary to identify, assess and apply information for the purposes of analysing and valuing business activities and entities. The course employs the agency framework within a capital market context to help students develop the necessary analysis and valuation skills.

Emphasis is placed on integrating the use of financial and non-financial information in business valuation and analysis, involving strategy analysis, accounting analysis, financial analysis, prospective analysis and valuation. The course allows students to understand the critical issue of determining the specific types of information that are relevant in ex ante valuation and ex post analysis of business entities and their activities. Students are also expected to be aware of the benefits and costs of acquiring and using such information.

Cases and projects are used to develop and integrate the business analysis and valuation concepts. Healthy scepticism is emphasized, as students are encouraged to challenge the assumptions and facts related to each issue.

Course Learning Objectives

After the completion of this course, students should understand and appreciate some of the rationales and characteristics that underlie business practices and financial reporting. Students should also appreciate the myriad interactions among the process of business analysis and valuation, the use of information sets (accounting and non-accounting), and the workings of the capital markets.

Students are expected to develop important knowledge, skills and attitudes in AA301. The main objectives are to develop students’ (1) social and interpersonal skills, (2) technical knowledge of specific accounting standards, (3) technical knowledge of business valuation, (4) creative and critical thinking, (5) tolerance for ambiguity in a dynamic environment, and (6) strategic thinking and leadership capabilities in a vibrant environment.

Learning & Teaching Methods

Seminars will be the main mode of instruction for this course. There will be two seminars of two hours per week. Please see the course outline and take note of announcements on the EdveNTUre website of this course. You will need to use computing facilities for some parts of this course. You and your team may use the Nanyang Business School computing labs or use your own computers. Most computing tasks will be required before or after classroom time. Classroom time will mainly be used for discussion purposes.

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Course Assessments

Components Marks Individual/Group

Class Participation 10% Individual

In-class Workshop 10% Individual

Take-Home Assignment 10% Individual

Written Assignment

Report 15% Group

Presentation 5% Individual

Final examination (open-book) 50% Individual

Total 100%

Assessment Plan

Course Learning Objective Assessment Method

Teamwork and Interpersonal Skills Class participation Written assignment report Written assignment presentation

Acquiring Knowledge

Class participation In-class workshop Take-home assignment Written assignment report Final examination

Problem Solving and Decision Making


Creative and Critical Thinking


Class Participation

Participation in seminars is essential in this course. Meaningful participation is possible only if each member has read the assigned reading and cases and carefully thought about the issues before each seminar. You are encouraged to approach each issue with an open mind and be prepared to challenge the assumptions, theories and facts related to each issue. You should always be ready to defend your opinions and ideas and be motivated to probe the views of others. Polite and meaningful exchange of ideas and opinions can add greatly to everyone’s learning. Professors may administer classroom exercises such as short presentations and write-ups to encourage participation and to monitor progress.

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In-Class Workshop

There will be an in-class closed-book workshop during the semester. The purpose of the in-class workshop is to reflect on knowledge acquired during the semester. The workshop is a vehicle for providing feedback on the understanding of concepts and rules and the ability to apply them to practical accounting problems. Absentees from the in-class workshop who do not have a valid reason will be given a zero mark and a fail grade. No exceptions will be made. Further details will be provided on the AA301 main website on EdveNTUre and in seminars when necessary.

Take-Home Assignment

Students are required to work on a take-home assignment relating to an accounting and disclosure issue. The take-home assignment is on an individual basis. Students are required to search for relevant materials such as news articles, academic papers and books (with proper referencing) to aid in writing up the take-home assignment. The purpose of the assignment is to enable students to articulate clearly and thoroughly their critiques on a selected accounting and disclosure issue. The requirement for the take-home assignment will be made known via the AA301 main website on EdveNTUre. The assignment is due on Tuesday, 12 March by 5.00 p.m. No late submission will be accepted.

Written Assignment and Presentation

The assignment involves the analysis and valuation of Singapore companies in a real world setting. It is a team assignment. The teams will select their companies early in the semester so that they can keep track of the development and news associated with their selected companies throughout the course. The information and the accompanying instructions will be made available on the AA301 main EdveNTUre website. The teams will formally present the results of the analysis towards the end of the semester. In addition to the hardcopy submitted to respective instructors for marking, each team should submit a softcopy to the instructor using Turnitin for plagiarism check. Further details will be provided on edveNTUre later.

Team Membership

Each team will have five students. Instructors may randomly assign students to the teams. Where classes are not clearly divisible into teams of five, the teams may comprise of six or four students. The teams must be formed by the second week of the semester.

Peer Evaluation Form

Since the instructors are not able to assess each participant’s input into the overall completion of the Written Assignment, each team member will be given the opportunity to assess the participation and contribution of the other team members. This will be done using the Peer Evaluation Form (see Appendix B of the instructions for the Written Assignment) to evaluate the contribution of fellow team members. Each team member must submit the Peer Evaluation with the report for the Written Assignment. Failure to submit the Peer Evaluation Form may result in a zero grade your Written Assignment.

Final Examination

This is a open book examination. The purpose of the final examination is to comprehensively test the students’ understanding and application of conceptual and technical knowledge acquired during the semester.

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Academic Integrity

Good academic work depends on honesty and ethical behaviour. The quality of your work as a student relies on adhering to the principles of academic integrity and to the NTU Honour Code, a set of values shared by the whole university community. Truth, Trust and Justice are at the core of NTU’s shared values.

As a student, it is important that you recognize your responsibilities in understanding and applying the principles of academic integrity in all the work you do at NTU. Not knowing what is involved in maintaining academic integrity does not excuse academic dishonesty. You need to actively equip yourself with strategies to avoid all forms of academic dishonesty, including plagiarism, academic fraud, collusion and cheating. If you are uncertain of the definitions of any of these terms, you should go to the academic integrity website http://academicintegrity.ntu.edu.sg for more information. Consult your instructor(s) if you are in doubt.

Each student will receive an email from your instructor about the Declaration of Academic Integrity in the week starting from 28 Jan 2013. You must follow the instructions stated and reply the email by 1700, Friday, 1 Feb 2013. Please note that ALL your assignments (i.e., the In-class Workshop, Take-home Assignment and Written Assignment) will NOT be accepted without this declaration.

Required Texts

1. Equity Valuation and Analysis: Readings for Business Valuation and Analysis The book is adapted from

a) LSLundolm & Sloan. Equity Valuation and Analysis with eVal. 3rd Edition

McGraw-Hill, 2013 (Call No: HG4028.V3L796 2013)

The eval software website: http://www.lundholmandsloan.com/software.html

b) TLTan & Lee, Advanced Financial Accounting: an IAS and IFRS approach. McGraw-Hill, 2009(Call No: HF5636.T161 2009)

2. Scott Financial Accounting Theory: Readings for Business Valuation and Analysis (customized Pearson Prentice Hall text)

This customized Pearson Prentice Hall text is adapted from:

Scott, Financial Accounting Theory. 6th Edition Pearson Prentice Hall, 2011 (Call No: HF5636.S36 2011)

References and Supplementary Texts

3. PHP Palepu, Healy & Peek, Business Analysis and Valuation: IFRS Edition, Text and Cases.

2nd Edition. Cengage Learning, 2010 . (Call No: HF5636.B979 2010). Companion Website: http://www.cengage.co.uk/palepu_peek2/

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http://www.lundholmandsloan.com/software.html

http://academicintegrity.ntu.edu.sg/


Course Instructors

InstructorOffice

LocationPhone Email

Mr. CHONG Eng Heng S3-B2C-89 6790-4650chong_eng_heng@

pmail.ntu.edu.sg

Dr. Kevin KOH S3-B2C-96 6790-4096kevkohwl@

pmail.ntu.edu.sg

Dr. KE Bin S3-01B-39 6790-4832 [email protected]

Dr. ZHANG Huai S3-01C-90 6790-4097 [email protected]

A note on the proposed schedule

The readings, activities and case studies stated below are tentative and are subject to change. We will be using EdveNTUre as the primary vehicle to provide updates, instructions, handouts, readings, and other materials. It is the responsibility of each student to check the EdveNTUre regularly. Note that you should check both the AA301 main EdveNTUre website as well as your own AA301 seminar group’s EdveNTUre website. Some of the textbooks have links to the publisher web page that contains additional information and notes that can be used to broaden your understanding of the assigned topics.

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mailto:[email protected]

mailto:[email protected]


Proposed Weekly Schedule

Week Topic Learning Objectives Resources Activity

(1)

Jan 14

Session 1

Seminar 1Course Introduction Objectives, requirements,

and expectations.

To appreciate the objectives, requirements, and instructors’ expectations of the course.

Scott: Ch 1

LS: Ch 1Ch 2

Course Administration:Form teams for written assignments and group presentation.

(1)

Jan 14

Session 2

Seminar 2Information Perspective on Accounting Information

Valuation under ideal and non-ideal conditions.

Efficient markets and implications for financial reporting.

To review the role of accounting information as a part of an information system useful for decision making.

To understand the concepts of efficient markets and information perspective on financial reporting.

To examine the Management Discussion and Analysis section of financial reports as an example of firms’ disclosure practices.

Scott:Ch 2 (p. 34-45 & p. 54-55)Ch 3 (p. 66-77 & p. 92-96)Ch 4 (p. 108-144)

ASC (Hyperlink ASC): Practice Statement on Management Commentary

Discussion:

Scott:

Q2-24 (p. 61-62)Q3-11 (p. 97)Q4-5 (p.145)Q4-6 (p.145)Q4-12 (p.147-148)

http://www.asc.gov.sg/



(2)

Jan 21

Session 1

Seminar 3Information Perspective on Accounting Information

The roles of accounting information in capital markets and other settings.

To appreciate empirical research supporting the information approach to decision usefulness of financial reporting.

Scott:Ch 5 (p. 152-175)

Hoogervorst (2012), “The imprecise world of accounting”, speech in the International Association for Accounting Education & Research (IAAER) conference in Amsterdam.

Discussion:

Scott:Q5-8 (p.176-177)Q5-9 (p.177-178)Q5-12 (p.179)Q5-17 (p.180)Q5-19 (p.180-181)

(2)

Jan 21

Session 2

Seminar 4Measurement Perspective on Accounting Information

Evidence against efficient markets.

Market inefficiency and its implications for financial reporting.

Measurement perspective on financial reporting.

To be aware of empirical evidence against market efficiency and the resulting implications for financial reporting.

Scott:

Ch 6 (p. 184-213 & p.221-224 & p.229-230)

Discussion

Scott:Q6-1 (p.230)Q6-2 (p.230)Q6-5 (p.230)Q6-7 (p.230)Q6-13 (p.232)

(3)

Jan 28

Seminar 5Measurement Perspective on Accounting Information

To appreciate the concepts, complexities and implications of fair value accounting.

Benston (2006).” Fair-value Accounting: A Cautionary Tale from Enron.” Journal of Accounting and Public Policy

Discussion

Read the assigned articles. Refer to EdveNTUre main course website for articles and discussion


Week Topic Learning Objectives Resources ActivitySession 1 Fair value accounting. Vol. 25 (4): 465-484

Ryan (2008). “Fair Value Accounting: Understanding the issues raised by the Credit Crunch” White Paper for Council of Institutional Investors

Kothari and Lester (2012). “The Role of Accounting in the Financial Crisis: Lessons for the Future.” Accounting Horizons Vol. 26(2): 335-351

questions.



(3)

Jan 28

Session 2

Seminar 6Introduction to Business Analysis and Valuation

Strategy Analysis

Industry analysis. Competitive strategy

analysis. Corporate strategy analysis.

To appreciate the different stages in business analysis and valuation.

To understand why strategy analysis is important in business analysis and valuation and the tools for implementing strategy analysis.

LS:Ch 1Ch 2 Ch 3

Case study: America Online, Inc. [HBS 9-196-130].

You can purchase the case from Undergraduate Program Office.

Refer to EdveNTUre main course website for discussion questions.

(4)

Feb 4

Session 1

Seminar 7Accounting Analysis

Overview of accounting analysis and factors affecting the quality of accounting information.

Institutional and economic factors influencing the regulation of accounting information.

Theories of accounting regulation.

Process of standard setting.

To appreciate the usefulness of accounting information in reflecting business reality.

To appreciate the role of analysing accounting information prior to its use in financial analysis and valuation.

To understand the economic and political underpinnings of accounting regulation and their influence on the preparation of accounting information.

To understand the standard setting process in Singapore.

Scott:Ch 12 (p.460-487)Ch 13 (p.497-522)

LS: Ch 4

Websites (Hyperlinked):ASCACRAIAS Plus

Discussion

Scott:

Q12-3 (p. 487)Q12-6 (p. 487)Q13-6 (p. 523-524)Q13-7 (p. 524)Q13-8 (p. 524)

http://www.iasplus.com/country/compare.htm

http://www.acra.gov.sg/About_ACRA/?indexar=1

http://www.asc.gov.sg/



(4)

Feb 4

Session 2


Contractual incentives to manage earnings.

Positive Accounting Theory Patterns of earnings

management.

To appreciate that accounting information are used in contracts and managers have contracting incentives to manage earnings.

To understand the various patterns of earnings management.

Scott:Ch 8 (p.293-311)Ch 11 (p.422-433)

LS: Ch 4

Discussion

Scott:

Q8-6 (p.320)Q8-10 (p.321-322)Q11-7 (p.450-451)Q11-13 (p. 455)

(5)

Feb 11

Session 1

No Seminar for Session 1

HAPPY LUNAR NEW YEAR!

(5)

Feb 11

Session 2


Capital markets incentives to manage earnings.

Two contrasting views of

To appreciate that managers have capital markets incentives to manage earnings.

To examine the type of actions mangers take to meet capital

Scott:Ch 8 (p.315-319)Ch 11 (p.434-448)

LS: Ch 4

Discussion

Scott:

Q8-5 (p.320)Q8-11 (p.322)


Week Topic Learning Objectives Resources Activityearnings management: Efficient and opportunistic.

market expectations, especially analysts’ expectations.

To understand the efficient and opportunistic views of earnings management.

Collingwood (2001). “The Earnings Game: Everyone Plays, Nobody Wins” Harvard Business Review Vol 79(6): 65-74

Q8-15 (p.324-325)Q11-12 (p. 455)

Additional Question:

Read the assigned article by Collingwood (2001). Refer to EdveNTUre main course website for the article.

Elaborate on how the earnings game is being played and explain why nobody wins in the earnings game.

(6)

Feb 18

Session 1


Accounting for bonds and compound financial instruments.

Accounting for operating and finance leases.

To briefly review - accounting for bonds and

compound financial instruments.

- accounting for leases.

FRS 39 (para43-47)(Updated on 6.1.06 and effective from 1.1.07. Latest amendment 23.4.2009)

FRS 32 (para 28-32)(Updated on 6.1.06 and effective from 1.1.07. Latest amendment 18.11.09)

FRS 17 (Updated on 6.1.06 and effective from 1.1.07)

IN-CLASS WORKSHOP

(6)

Feb 18

Session 2


Earnings per Share (EPS).

To examine and understand - the computation of basic

and diluted EPS.- the implications of

potential common shares on calculating diluted

TL:Ch 11


Discussion

TL: P11-2 (p.597)P11-3 (p.597)


Week Topic Learning Objectives Resources ActivityEPS.

To be aware of FRS 34: Interim Financial Reporting.


Refer to EdveNTUre main course website for additional discussion questions.

(7)

Feb 25

Session 1


Analysing assets and liabilities.

To identify and adjust for accounting distortions related to assets and liabilities.

LS: Ch 4

Case study: Depreciation at Delta Airlines and Singapore Airlines (A) and (B) [HBS 9-198-001 and 9-198-001].



(7)

Feb 25

Session 2


Analysing revenue and expense.

To identify and adjust for accounting distortions related to revenue and expense recognition.

LS: Ch 4

Case study: Microsoft’s Financial Reporting Strategy[HBS 9-100-027].





Recess

Week

Semester Break MARCH 4 to MARCH 8 TAKE-HOME ASSIGNMENT DUE AFTER RECESS

(8)

Mar 11

Session 1

Seminar 14Financial Analysis

Introduction and overview. Operating management. Investment management. Financial management. ROE decomposition and

analysis.

To acquire the tools of financial analysis in order to analyse and examine how well a firm manages its operating, investment and financing activities.

LS:Ch 5Ch 6 (p. 117-125) eVal software

Discussion


(8)

Mar 11

Session 2

Seminar 15Financial Analysis

Implementing financial analysis.

To use the financial analysis tools to examine how well a firm manages its operating, investment and financing activities in real world setting.

LS:Ch 5Ch 6 (p. 117-125)

eVal software

Case study:

Sears, Roebuck and Co. vs. Wal-Mart Stores Inc[HBS 9-101-011].

You can purchase the case from Undergraduate


Week Topic Learning Objectives Resources ActivityProgram Office.


(9)

Mar 18

Session 1

Seminar 16Prospective Analysis: Valuation Theory and Models

Valuation models. Valuation ratios.

To examine various valuation models and explore the use of accounting information in firm valuation.

To understand the drivers of valuation ratios.

To understand some complications arising from the valuation process.

Scott:Ch 6 (p. 209-213; p. 215-222)

LS:Ch 6 (p. 126-131) Ch 10Ch 11Ch 12

eVal software


(9)

Mar 18

Session 2

Seminar 17Prospective Analysis: Forecasting

Key value drivers. Forecasting horizons.

To consider the growth attributes of the firm when forecasting future firm outcomes by focusing on drivers of economic value.

To appreciate the key elements

LS:Ch 7Ch 8Ch 9

eVal software

Discussion



Week Topic Learning Objectives Resources Activity Terminal value. Cost of capital.

to be forecasted for firm valuation.

To appreciate how changes to forecasted elements can potentially affect the valuation outcomes derived from the valuation models and how these outcomes compare with stock prices in the equity market.

(10)

Mar 25

Session 1

Seminar 18Business Analysis and Valuation

Implementation of the BAV process.

To use the tools and methods of strategy analysis, financial analysis, prospective analysis and valuation.

To understand how the valuation outcomes derived from the valuation models compare against the stock prices in the equity market.

LS: Ch 5Ch 6 Ch 7Ch 8Ch 9Ch 10

eVal software

Case study: United Parcel Service’s IPO [HBS 99-103-015].

You can purchase the case from Undergraduate Program Office. Alternatively, this case is available in PHP (p.717-740).


(10)

Mar 25

Session 2

Seminar 19Corporate Communication and Corporate Governance

Communication through financial reporting.

Communication through

To introduce the role of corporate communication in mitigating information asymmetry.

To consider various corporate communication alternatives.

Scott: Revise Ch 12, especially p.475-478

LS: Ch 2

Discussion

Scott: Q 12-10 (p. 489)Q 12-11 (p. 489-490)Q 12-18 (p. 493-494)


Week Topic Learning Objectives Resources Activityalternative methods besides financial reporting.

Internal corporate governance mechanisms.

External corporate governance mechanisms.

(E-learning seminar)

To consider the role of board structure and other corporate governance mechanisms in affecting the quality of accounting information.

Investopedia Staff “Understanding Pro-forma Earnings”

Additional Question:Read the assigned article on “Understanding Pro-forma Earnings.” Refer to EdveNTUre main course website for the article.

Discuss whether pro-forma earnings are beneficial or detrimental to the overall corporate information environment.

(11)

April 1

Session 1

Seminar 20Corporate Communication and Corporate Governance

Communication through financial reporting.

Communication through alternative methods besides financial reporting.

To appreciate the roles and mechanisms of corporate communication, corporate governance, and investors relations in the business valuation process.

Scott: Ch 12 (p.460-487)

LS: Ch 2

PHP: Ch 12 (p.513-533)

Case study: Computer Associates International, Inc: Governance and Investor Communication Challenge [HBS 9-103-007].



(11)

April 1

Session 2

Seminar 21Corporate Social Responsibility

Corporate social responsibility and reporting.

Impact of corporate social performance in the business valuation process.

To appreciate the roles of corporate social responsibility and sustainability reporting in business.

To understand the impact of corporate social performance on the business valuation process.

BT-NBS Roundtable (2010) “CSR promotes sustainable development” Business Times, June 3, 2010.

Kang (2010) “Accounting for CSR” Singapore Accountant, Vol 26(3): 6-8.

In Depth, CPA Singapore

Read the assigned articles. Refer to EdveNTUre main course website for articles and discussion questions.


Week Topic Learning Objectives Resources Activity(2011) “Sustainable Development: A long-term investment” CPA Singapore January: 18-23

In Depth, CPA Singapore (2011) “Love the earth” CPA Singapore April: 17-22

(12)

Apr 8

Session 1

Seminar 22Written Assignment Presentations

(12)

Apr 8

Session 2


(13)

Apr 15

Session 1



Week Topic Learning Objectives Resources Activity(13)

Apr 15

Session 2


301 course

Documents

Transcript of 301 course