Department of FinanceBBA program

F-401: Financial Statement Analysis and Valuation _________________________________________________________Course Teacher: Taher Jamil, Assistant Professor

Class Hours: 2.15 PM – 3.35 PM (Section A) on Monday 12.30 PM – 1.50 PM (Section A) on Thursday

Office Hours: After Class &/or By Appointment

Course Objective: The course aims at providing a framework for business analysis and valuation using financial statement data. The course focuses on business analysis and valuation tools and explains how financial analysis can create value in well-functioning markets. In doing so, four key components of effective financial statement analysis are identified in the course: business strategy analysis, accounting analysis, financial analysis and prospective analysis.

Text: Financial Statement Analysis and Security valuation by S. H. Penman, Latest Edition

References: 1. Business Analysis and Valuation by Palepu, Healy and Bernard, 2nd Edition.2. Financial Statement Analysis by George Foster, 2nd edition. 3. CFA Level 1, Volume 3 & CFA Level 2, Volume 4

Course outline

1. Framework and Need for Financial Statement Analysis – Classes of Users, Demand for and Supply of Financial Statement Information — parties demanding financial information and conflicts among diverse parties, Factors affecting demand forces, Regulatory and market forces underlying the provision of financial statement information and disclosure–quality uncertainty and the market mechanism, Costs associated with Disclosure, Framework for Financial Statement Analysis, Theories regarding voluntary disclosure.

2. Analysis of Firm Past performance – Ratio analysis, Time series analysis, Cross-sectional analysis, Assumptions, Activity ratios, Liquidity ratios, Solvency ratios, Profitability ratios, Integrated financial ratios, Valuation ratios, Industry-Specific ratios, Research on ratios in equity analysis, Credit ratios, Segment ratios, DuPont analysis – three factor & five factor, Sensitivity of ROE, Caveats.

3. The analysis of the statement of shareholder’s equity – Reformulating the statement of owner’s equity, Dirty-surplus accounting, Hidden dirty surplus.

4. The analysis of the balance sheet and income statement – Reformulating the balance sheet, Reformulating the income statement.

5. The analysis of the cash flow statement – The calculation of free cash flow, GAAP statement of cash flows and reformulated cash flow statements, Cash flow from operations.

6. The analysis of profitability – Cutting to the core of the operations: the analysis of profitability, First-level breakdown: Distinguishing financing and operating activities and the effect of leverage, Second-level breakdown: drivers of operating profitability, Third-level breakdown.

7. The analysis of growth and sustainable earnings – What is growth? Introduction to growth analysis, The analysis of changes in profitability and sustainable earnings, The analysis of growth in shareholder’s equity, Growth, sustainable earnings and the evaluation of P/B ratios and P/E ratios.

8. Full-information forecasting, valuation and business strategy analysis – Financial statement analysis: focusing the lens on the business, Full-information forecasting and pro-forma analysis, Value generated in share transactions, Financial statement indicators and red flags, business strategy analysis and Pro forma analysis.

9. Analysis of the quality of financial statements – Defining accounting quality, Detecting income shifts, Detecting transaction manipulation, Justifiable manipulation, Disclosure quality

10. How financial statements are used in valuation – Multiple analysis, Asset-backed valuation, Fundamental analysis, The architecture of fundamental analysis.

11. Market–based valuation – Price and enterprise value multiples in valuation, Price multiples, Enterprise value multiples.

12. Cash accounting, accrual accounting and discounted cash flow valuation – The dividend discount model, The discounted cash flow model, Reverse engineering, Simple valuation models, The statement of cash flows. Cash flow, earnings and accrual accounting.

13. Accrual accounting and valuation: pricing book values – The concept behind the price-to-book ratio, Prototype valuations. A model for anchoring value on book value, Applying the model to equities, Applying the model to projects and strategies, Features of the residual earning model, Reverse engineering – the model for active investing, The building blocks of a residual earning valuation, Choices in valuation models.

Structure: Three core aspects regarding Financial Statement Analysis are going to be addressed throughout the course – the theological background behind Financial Statement Analysis (understanding the framework for FSA), analysis of Financial Statement Contents (reporting challenges and time-series and cross-sectional study of Financial statement numbers), Valuation issues (prospective analysis).

The "Course Projects" component of your grade will consist of one listed company valuation – both relative and absolute (will require you to work in a group of five people) and a project (term paper - individual) that will be spread throughout the semester. The project will allow you to explore several different aspects of accounting analysis, reformulation of financial statements and analysis of profitability and growth of a listed company.

Grades: Your performance in this course will be evaluated in the following manner:

1st Mid-term Exam (comprising Short questions & Analytical questions) 15%2nd Mid-term Exam (comprising Short questions & Analytical questions) 15%Term Paper (Individual) and Presentation (Individual) 10%Term-final Exam 60%

Grading Policy: Grading System of University of Dhaka

N.B.: If any one misses to sit for the examination, he/she will not be allowed to any supplementary examination for that unless he/she is absent for medical reason.