Business Analysis and Valuation

Instructor: Prof. Pitabas Mohanty

Batch: BM (2017 – 19)
Email id: pitabasm@xlri.ac.in
Contact No: 3143 (O), 3043 (R)

Creating and maintaining shareholders' wealth is no longer an option. Simply being profitable is
not enough. The successful companies of the future - both in developed and the emerging
markets - must be skilled in creating and managing shareholders' value. Appropriate financial
decisions will, more than ever, be crucial in ensuring that corporate strategic and shareholders'
value objectives are achieved. It is important, therefore, to understand how value is measured
and what steps can be taken to create more value.

Objectives:

The course has got the following two broad objectives:

1. To help the participants understand the different techniques used in valuing companies;
and
2. To provide insights into how companies create, maintain, and (or) destroy value.

After the end of this course, the participants should be able to value any company, understand
the different factors that drive the value, and understand how to maximize it.

Pedagogy:

Since this course emphasizes on understanding the process of valuing a company, it will be
covered by giving real life examples. The students will be required to value real-life companies to
hone their valuation skills. The course will be covered with a mix of lectures, cases, and a project.

Targeted Audience:

This course is primarily designed for students who want to start a career in consulting. It will also
help participants with an interest in investment banking.

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Evaluation

The following table is self-explanatory.

Components % weight
Class tests (2) 30%
Project/Valuation Case 25%
Class Participation 10%
End Term 35%

The students have to value 2 companies in a group. The group size cannot exceed 5 nor can it be lower
than 5. Please form the group and identify the companies that your group will value in the first week itself.
Your group may be asked to make a brief presentation in the class on the progress made. The project
report has to be submitted before the deadline (Read the course outline). Your group will lose one grade
point for every week of delay in submitting the project.

Recommended Books for the Course:

1. Investment Valuation, by Aswath Damodaran (2012), Wiley

2. Valuation: Measuring and Managing the Value of Companies, McKinsey & Company (2005),
Wiley
3. Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions, Joshua
Rosenbaum, and Joshua Pearl (2009), Wiley
4. Valuation Methods and Shareholder Value Creation, by Pablo Fernandez (2002), Academic Press
5. Applied Mergers and Acquisitions, by Robert Bruner (2004), Wiley
6. Damodaran on Valuation, by Aswath Damodaran (2006), Wiley
7. Foundations of Economic Value Added, by James L Grant (2003), Wiley
8. Financial Shenanigans: How to detect accounting gimmicks& fraud in financial reports, by
Howard Schilit (2002), McGraw Hill

All of you will be provided with a copy of the text book “Business Valuation: Text and Cases” written by
me.

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 Course Outline

Module1: Introduction to Valuation (3 sessions)

1. Different Valuation Methods, Recap of Basics of Dividend Discounting Model and Modigliani and
Miller Theorem (1 session)
 Reading Materials: Chapters 1, 2 of the book
2. Sales, Profit, and Asset Based Multiples; Price-earnings and Price-Book Value Multiples: key
differences; Balance sheet and income statement based multiples: key differences (2 sessions)
a. Reading Materials: Chapter 9 of the book

Module 2: Understanding the Theory of Valuation (5 sessions)

3. Discussion of Case Kennecott Copper Corporation (1 session)

4. Understanding the basics of FCF, CCF, FCFE, and APV Valuation methods with zero growth and in
the presence of Growth, Valuation in the presence of dividend distribution tax (2 sessions)
 Reading Materials: Chapter 3 of the book (read the appendix to Chapter 3 as well)
5. Case Discussion on Sampa Video (1 session)
 Reading Materials: Read the case on Sampa Video thoroughly. Find the value of the
project using the FCF, CCF and FCFE method using a spreadsheet. Bring your laptop to
this class.
6. Valuation in the context of LBO and LCO (1 session)
 Reading Materials: Appendix to Chapter 3 of the book

Class Test 1 will be held after Module 2. Only conceptual knowledge will be tested in this class test.
The test will be largely numerical in nature.

Module 3: DCF Valuation in Practice (5 sessions)

7. Estimating Discount Rates: Practical issues we face while estimating the discount rate (2
sessions)
 Reading Materials: Chapter 4 of the book
8. Estimating Free cash flow: Practical issues we face while estimating and forecasting free cash
flows, Understanding the EVA method of valuation, Finding the terminal value correctly (2
sessions)
 Reading Materials: Chapter 5 of the book
9. Case Discussion on Laura Martin and the Cable Industry (1 session)
 Reading Materials: Read the case on Laura Martin carefully. In particular, look at the
different assumptions she is making to value Cox Communications and the way she
defends her assumptions.

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Class Test 2 will be held after Module 2. Questions from Module 2 only will come in this test. In addition
to conceptual knowledge, the quiz will also test your ability to apply the concepts learnt in various
practical situations.

The project report is due for submission within a week after Module 2 is over.

Module 4: Valuation in Special Cases (7 sessions)

10. Valuing in Mergers and Acquisitions: Estimating discount rate after merger, adjustments made
while computing the free cash flows, valuing synergy (1.5 session)
 Reading Materials: Chapter 8 of the book
11. Case Discussion on Cooper Industries Limited (1 session)
 Reading Materials: Read the case on Cooper Industries carefully.
12. Valuing private companies (1 session)
 Reading Materials: Chapter 10 of the book
13. Venture Capital Valuation methods, Examples of VC Valuation (1 session)
 Reading Material: Bring the Venture Capital Problem Set to the class.
14. Valuing Flexibility, Uses of Option Pricing models in asset valuation, uses and misuses of option
pricing theory in company valuation (1.5 sessions)
 Reading Materials: Chapter 10 of the book
15. Discussion of the Project Reports, Recap of the Course (1 session)