ADMS 4536
Security Valuation
Fall 2013
Instructor: Chris Robinson PhD CPA,CA CFP
TA Oana Alexandru MBA CFA
Class Hours: Tuesday 7-10 pm. First class: September 10th
Location: HNE 032
Office Hours: By appointment. Email to schedule a time to meet. Seven days a week, may be at York or at my other office, also called Second Cup, near Yonge and Lawrence
E-mail:
Course website:
Learning Outcomes
Students should learn to:
1. Understand the principles and practical application of the most commonly-used valuation models: discounted dividend, free cash flow and market-based comparable models.
2. Perform an industry and competitive analysis (also called strategic analysis) and write a report on it.
3. Apply basic financial statement analysis to equity valuation.
4. Apply the valuation models and their components to simple problems.
5. Apply the valuation models to a comprehensive valuation of the traded common shares of a Canadian company, using the company's public disclosures.
6. Present an oral investment recommendation for the company in #5.
7. Write a professional business valuation report.
For those students pursuing a CFA charter, this course tracks most of Study Sessions 10, 11 and 12 of the Level II Study Guide. Level I candidates will find that the material will give them a greater depth of some of the level I equity analysis examination material. However, this course is not limited to CFA candidates and is valuable for anyone aiming for a career in finance.
Textbook: Jerald Pinto, Elaine Henry, Thomas Robinson and John Stowe, Equity Asset Valuation 2nd ed., 2010 + Workbook. Wiley is the publisher, but copyright holder is the CFA Institute. Shrink-wrapped single package: ISBN 978-0-470-64223-8. You must have the text and the workbook. The ebook version of both the text and the workbook is available through the York University library website.
https://www.library.yorku.ca/find/Search/Results?lookfor=Equity+Asset+Valuation+&type=AllFields&submit=Go
OR
Equity: CFA Program Curriculum Volume 4. CFA Institute, 2010/2011. It matches the package almost completely, and I do not believe that any differences will be material. It also includes the Porter reading for week 2. The eBook version of the article is also available through the York University library website.
Evaluation: Industry Assignment 20%
Financial Ratios & Analysis Assignment 25
Oral Presentation 15
Valuation Report (take home) 40
100%
Prerequisites: ADMS 4501
You must bring the textbook, workbook and a time value calculator to every class.
Using the Textbook and Workbook
You must read the textbook chapters as assigned and do assigned problems and other readings. The text is very concise, and illustrates the valuation principles and practice with specific examples. We think it is an excellent text. We will not just repeat the material in a series of lectures. We will spend some of the class time working on examples, including a continuing case study of Shoppers Drug Mart. The Workbook provides an excellent summary of each chapter, repeats the problems, and provides somewhat terse solutions.
You will learn by doing the problems and cases in this course, not by memorising definitions and models. The main objectives are to learn how to value equity in practice, pitch an investment idea and write reports. Read each chapter and then work on the assigned problems. When you are doing the Valuation Assignment, you can find out how to do any particular sort of valuation by going through the problems and solutions.
Detailed instructions for each assignment will be provided separately. Please note that assignments submitted after the deadline will lose five percentage points.
Industry Assignment (Group, due Week 4 at start of class) - Due Oct. 1 at 7 pm
1 You will do this in a group of no more than three students.
2 The industry will be engineered wood products, or wooden building materials. We will let you decide how to define it precisely with Assignment 2 and 3 in mind. The company for Assignment 2 and 3 will be Ainsworth Lumber Co. Ltd. (http://www.ainsworthengineered.com/)
3 The format of the assignment should follow the model of industry analysis from the second week’s lecture and include a Porter five forces analysis. If you have Study Sessions 10 #38 and 39 from the CFA program, these are the basis for much of the lecture.
4 The maximum length of the assignment is 15 pages: a maximum of ten pages for the written part plus a maximum of five pages for appendices. The assignment must be typed using 12 point font, double spaced, with 1 inch margins. Papers and any research used must be properly cited and include a bibliography (using any consistent citation standard). Papers will be marked for proper spelling, punctuation and grammar (5%) and for the quality of the communication (10%). Employers tell us every day that writing and communication skills are essential.
Financial Ratios & Analysis Assignment (Group, due Week 8 at start of class)
Due Oct. 29 at 7 pm
5 You have already done an industry analysis on the assigned sector and should have a good understanding of key factors and forces driving industry profitability and growth.
6 Your final assignment will consist of a valuation report on a company within the assigned sector. The financial ratios and analysis assignment is your opportunity to get an early start on your analysis of the assigned company.
7 The assignment will consist of financial analysis component, a forecast of the company’s revenues, costs, capital expenditure, and working capital.
8 The majority of your work will be done in excel. However, you are also required to submit a summary of your financial analysis, and justifications for the forecasted items. An appendix should include the tables from excel.
9 Please ensure you give yourself sufficient time to analyze the calculated rations and historical performance before you forecast and write the summary pages.
Presentation (Solo, Week 10/11/12 random start order)
The presentation will include a brief industry review and a stock recommendation.
o Investment thesis and recommendation (Buy, Sell, or Hold)
o Industry overview and outlook
o Business description/financial position/strategy
o Valuation
o Conclusion – reiterate the investment thesis
You are required to attend the entire class in which your presentation occurs, but you do not have to attend the other two classes. You will present within a fixed time limit that we will announce when we have a count on how many presentations we will have. The time limit will be no more than 10 minutes, and may be as short as eight.
Valuation Assignment (Solo, due during final exams) Due date TBD
1 This assignment replaces the final exam and will be treated like a take-home exam. It will be due either on the scheduled exam date, or on another date during the exam period that we will tell you within a week of the publication of the exam schedule.
2 You will do it as a solo assignment. No consultation allowed.
3 The assignment will be a comprehensive valuation report of Ainsworth Lumber, using several valuation techniques. You will use a template we provide.
Course ScheduleWeek 1
Sept 10 / ·1 Introduction to valuation principles
·2 The importance of understanding the business
·3 Introduction to Shoppers Drug Mart, which will be the continuing case study for the course.
·4 Review of basic financial analysis for understanding Shoppers business and financial performance
·5 Discuss the group assignment.
Read:
1. Chapter 1, which we put on the website and which we expect you to read before this class, or SS 33
2. Financial ratios overview document
3. Shoppers Valuation Spreadsheet – Posted under week 1.
2
Sept 17 / Industry analysis, competition and strategy
·1 What business is Shoppers Drug Mart in?
·2 An industry and competition analysis of Shoppers
·3 Sales forecast for Shoppers
·4 Be prepared to discuss Q6, pg. 36, with concrete examples. The answer in the Workbook is inadequate.
Read:
1. Chapter 1, pg. 8 – 10.
2. Then read the basis for it, Michael Porter. 2008. “The Five Competitive Forces That Shape Strategy.” Harvard Business Review. Vol. 86, No. 1: 78 – 93 (We cannot copy it for you or even link to it under the stated copyright terms, but you can get it electronically from the York library eresources and make your own copy) or SS#37, 38.
3. I am going to spend the class time working through an analysis of Shoppers industry. I strongly advise you to find a way to get SS #38 to use as a reference in doing Assignment 1.
3
Sept 24 / Rate of Return Concepts
A lot of this should be familiar to you already, but the text goes into some very important aspects of return calculations that are not taught in most finance courses.
1. Do Q6, pg. 81
2. We will discuss Q7 – 12, pg. 81 – 82 in class.
3. What is Shoppers’ WACC? Calculate beta.
Read:
1. Chapter 2 or SS # 35
2. Shoppers Valuation Spreadsheet - Model tab, Revenue Schedule
4
Oct 1 / Discounted Dividend Valuation
This chapter goes far beyond the basic Gordon model you learned in 3530.
1. Do Q8 and 9, pg. 138.
2. We will discuss Q. 16 – 21 in class.
3. What is the value of Shoppers shares using the Gordon model?
4. Shoppers Capital expenditure (CAPEX) and Depreciation schedule
Read:
1. Chapter 3 or SS 40
2. Shoppers Valuation Spreadsheet - Model tab, Cost Schedule and Shoppers Cost of Capital
3. Shoppers Valuation Spreadsheet – Model, Depreciation schedule and DDM Valuation
Industry Assignment Due Week 4 at 7pm
5
Oct 8 / Financial Statement Analysis & Shoppers Complete Model Part I
·1 Overview of financial statements and usefulness of MD&A and the notes to the financial statements.
·2 Quality of earnings, profitability and ratios analysis and interpretation
·3 Complete remaining tables in the Model and the forecasted financial statements.
Please Bring a lap-top
6
Oct 15 / Financial Statement Analysis & Shoppers Complete Model Part I
Please Bring a lap-top
7
Oct 22 / Free Cash Flow Valuation Part I
·1 Read Q 14, pg. 203-4. We will do it in class to illustrate the process.
·2 Read Q 18 - 23, pg. 203-4. We will do them in class to illustrate the process.
Read:
1. Chapter 4 or SS 41
8
Oct 29 / Free Cash Flow Valuation Part II
·3 Forecast Shoppers’ balance sheet and income statement
·4 What is Shoppers’ value using FCFE and FCFF?
Read:
1. Chapter 4 or SS 41
2. Review Shoppers Valuation Spreadsheet (all the tabs up to “Relative Valuation” tabs)
Financial Ratios & Analysis Assignment due at 7pm
9
Nov 5 / Market-based Valuation: Multiples Part I
·1 Do Q 3, pg. 347.
·2 Be prepared to do Q 6, pg. 348-9 in class
·3 Do Q 16, pg. 351.
·4 Be prepared to do Q 15, pg. 351 in class
Read:
Chapter 6 or SS 42
Last day to drop the course without receiving a grade – Nov. 8.
10
Nov 12 / Market-based Valuation: Multiples Part II
·5 What are the comparable companies for valuing Shoppers and what are the good and bad aspects of each company for this purpose?
·6 Value Shoppers using all the multiples you are comfortable with.
Read:
1. Chapter 6 or SS 42
2. Review CVS, Walgreens and Jean Coutu’s annual reports to understand their business models (You are not required to read the entire reports, just enough to learn the differences and similarities between Shoppers and those comparable companies). You may also visit the company’s websites for more information.
3. Shoppers Valuation Spreadsheet - Relative Valuation tab
11
Nov 19 / Presentations
Presentation slides are due by 7pm on Nov. 17
(Even if scheduled to present on a later week)
12
Nov 26 / Presentations
Presentation slides are due by 7pm on Nov. 17
(Even if scheduled to present the following week)
13
Dec 3 / Presentations
Presentation slides are due by 7pm on Nov. 17
(Even if scheduled to present the following week)
Final Exams held from April 10 to April 26. Your final assignment will be due during that time. The due date will be provided to you closer to the end of the semester.