BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, Pilani

Pilani Campus
Instruction Division

FIRST SEMESTER 2019-2020

Course handout (Part-II)

Date: 31/07/2019

In addition to part-I (General Handout for all courses appended to the timetable) this portion gives
further specific details regarding the course.

Course No. : MBA G593/ ECON F355/BITS F493

Course Title : Business Analysis & Valuation

Instructor-in-charge : Saurabh Chadha

1. Scope and Objectives of the Course:

The process of measuring and managing the value of companies is a central aspect of financial
management. In a nutshell, managers try and add value to their firms in two ways – by
enhancing the firm’s productive capacity through internal (or organic) growth, and through
prudent acquisitions that dovetail the corporation’s key strengths. Therefore, not surprisingly,
almost every important business decision is made by asking the question, “What is it worth?”
The principal objective of this course is to provide you with the conceptual basis, intuitive
reasoning, and analytical framework to make informed business valuation decisions.

The focus of this course is on valuing equity (or ownership) in a firm and estimating the value
of the overall enterprise. We will rely on discounted cash flow, relative valuation, and
contingent valuation approaches for our analysis. Since financial statements serve as the basis
for all types of valuation methods, the course begins by providing a brief framework on the
principles governing financial statements, and adjustments that are often required to capture
the underlying business reality.

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Pilani Campus
Instruction Division

The course presumes that you have an understanding of basic concepts in finance, accounting
and statistics. Students who are either currently pursuing or would like to embark on a career
in investment banking, corporate finance, venture capital, entrepreneurship, or business
consulting will find the course material to be most useful. The course also carries a broader
appeal to individuals who are interested in enhancing their understanding of financial analysis,
and in learning how businesses create and measure value for their investors.

2. Format:

By design, this is a fairly ambitious and rigorous course. Given that the course objectives are
rooted in the practical application of theoretical concepts, we will rely on case study and
problem-solving methods. Class time will be devoted to lectures and discussions. Lectures will
provide analytical concepts that will integrate the readings and serve as a useful framework for
a richer understanding of cases. My role as an instructor is to highlight the important points in
each chapter, and to guide/moderate the class discussion. In order to succeed, it is extremely
important that you remain current with all reading assignments and come fully prepared for
class discussion. Please note that the objective of a valuation exercise is not about getting it
“right” but, rather, about using a set of processes and logical steps that capture the
complexities of the problem.

3. Text Books:

T1. Palepu & Healy, “Business Analysis & Valuation - Using Financial Statements, Text & Cases,”
Cengage Learning Publisher, 3rd Edition.

T2. Damodaran, “Valuation: Security Analysis for Investment and Corporate Finance,” John
Wiley, 2nd edition.

4. Reference Books/cases:

(a) The Dark Side of Valuation: Valuing Young, Distressed and Complex Businesses, Second
Edition, 2010, Pearson Education Inc.
(b) Kaplan, R. S., & Norton, D. P. (2004). Measuring the strategic readiness of intangible
assets. Harvard business review, 82(2), 52-63.

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Pilani Campus
Instruction Division

(c) DePamphilis, D. (2009). Mergers, acquisitions, and other restructuring activities: An

integrated approach to process, tools, cases, and solutions. Academic Press.
(d) Abrams, J. B. (2010). Quantitative business valuation: a mathematical approach for
today's professionals. John Wiley & Sons.
5. Course Plan:

Lecture
Learning Objectives Reference to Book
Learning Outcome
Hours

 Basis and need for valuation T1. Chapter 1

 Objective of firm
Understanding the
 Asymmetric information and role of
company
3 financial statements
valuation and its
 Steps in business valuation T2. Chapter 1
different
 Different approaches to valuation –
approaches.
discounted cash flow (DCF), relative
valuation, and contingent valuation
 Understand economics of a firm at a
qualitative level Understanding the
2  Identify profit drivers and key business T1. Chapter 2 qualitative aspects
risks of firm valuation.
 Perform industry, competitive and
strategy analysis
 Evaluate the firm’s accounting reports
 Steps in accounting analysis
 Recast financial statements into a
common format Understanding the
4 T1. Chapters 3, 4
 Undo accounting distortions that company analysis.
overstate/understate assets and
liabilities
 Adjust equity distortions that arise from
hybrid securities
 Examine firm’s performance and
financial condition given its strategy and T1. Chapter 5 Understanding the
3 goals analysis of firm’s
 Conduct ratio analysis performance.
 Perform cash flow analysis
 Assess sustainable growth rate
2  Recognize limitation of accounting T2. Chapter 3 FCFF Vs FCFE
earnings
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Instruction Division

 Adjust earnings for miscategorized

items such as operating leases and R&D
 Define free cash flows to equity (FCFE)
and free cash flows to firm (FCFF)
 Estimate component costs of capital –
equity, debt, preferred etc.
Understanding the
3  Risk and return models T2. Chapter 2
 Obtaining parameters for models WACC analysis.
 Define beta and determinants
 Calculate WACC
 Estimate expected future cash flows
 Determine length of extraordinary
Understanding the
growth period
3 T2. Chapter 4 forecasted cash
 Estimate earnings and cash flow growth
rates including fundamental growth flows.
 Estimate stable growth rate and
terminal value
 Value equity using DCF models –
dividends and FCFE Understanding the
4
 Single-stage, two-stage, and multi-stage T2. Chapter 5 equity valuation.
models
 Compare FCFE and DCF models
 Value entire firm using DCF approach
Firm Valuation
4  Cost of capital model, adjusted present T2. Chapter 5
value (APV) model, excess return or using DCF.
economic value added (EVA) model
 Overview and applicability of relative
valuation models
Understanding the
3  Standardized values and multiples T2. Chapters 7, 8, 9
 Steps to using multiples relative valuation.
 Analysis of equity multiples
 Analysis of value multiples
 Overview of the market for private
Understanding the
2 equity T1. Chapter 10
 Deal structuring Private equity.
 Leverage buyout (LBO)
 Basic definitions and terminologies of
financial options Understanding the
3 T1. Chapter 10
 Determinants of option values option pricing.
 Binomial and Black-Scholes option
pricing models
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Instruction Division

 Real options Intangible

3 T2. Chapter 12
 Valuing intangibles valuation.
 Equity as a call option
 Overview of mergers and acquisitions
Understanding the
1 (M&A’s) T1. Chapter 11
 M&A strategies M&A transactions.
 Analysis of M&A transactions

6. Evaluation Scheme:

EC No. Evaluation Component (EC) Duration Weightage (%) Date & Time Nature of
the

Component

1 Mid-term 90 min 20% NA Closed Book

2 Quizzes and Project 40% Open Book

3 Comprehensive Examination 3 Hours 40% 03/12 FN Closed Book

Chamber Consultation Hour: To be announced in the class.

Course Notices: All the notices concerning the course will be displayed on Management
Department Notice Board.

Instructor In- Charge

MBA G593/ ECON F355/BITS F493

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