[SOLVED] CS代考计算机代写 finance ACCT6101 – Session #1: Introduction to Valuation

ACCT6101 – Session #1: Introduction to Valuation

PART 1 – Background

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ACCT7106 – Session #6: Reformulating the Financial Statements
overarching objective:
to conduct fundamental value for the purpose of estimating the ‘intrinsic value’ of a firm’s common shares
requires an understanding of the firm’s ‘value drivers’
need to accumulate a ‘tool kit’ as the basis for developing the pro forma Financial Statements

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2

projected over the forecast horizon

core inputs into the valuation modelxg

Balance Sheet (B/S)
Income Statement (I/S)
Statement of Cash Flows (SCF)

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3

STEP 1
Understanding the past

Information collection
Understanding the business
Accounting analysis
Financial ratio analysis
Cash flow analysis


STEP 2
Forecasting the future

Structured forecasting
Income Statement forecasts
Balance sheet forecasts
Cash flow forecasts


STEP 3
Valuation

Cost of capital
Valuation models – AE, FCF, D
Valuation ratios
Complications
Negative values
Value creation and destruction

Figure 1.1Lundholm & Sloan, Framework for Equity Valuation

Sessions #3  #9

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Stage 1 – Understanding the Business
‘Strategy Analysis’
product market
competition
regulatory constraints
business strategies
technology
Stage 2 – Analysing Information
Accounting Analysis & Financial Analysis
quality of accounting information
reformulating the F/S to uncover business activities
ratio and cash flow analysis
Stages of the Analysis
Stage 3 – Prospective Analysis: Forecasting
 pro-forma – Income Statement
– Balance Sheet
– Statement of Cash Flows

Stage 4 – Prospective Analysis: Valuation
Abnormal Earnings Model
Alternative Valuation Models
Statement of Cash Flows
Stage 5 – Prospective Analysis: Application
investment decision

investor – decision to buy, hold, sell
manager – decision to adopt strategy or not

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external environment
economic prospects
macroeconomic factors
socio-cultural forces
political / regulatory

Industry dynamics
 Porter’s five forces
(suppliers, buyers, new entrants, substitutes, rivalry)

Analysis of Financial Statements
understanding current F/S
re-formulating the F/S
accounting quality

analysts’ reports
management forecasts
financial press
???

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Financial Statements – AASB 101:
Balance Sheet
Income Statement and/or Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes to the financial statements
building blocks  definitions specific to accounting
accounting principles  AASB / IFRS rules to guide accounting decisions/choices
recognition (item to F/S) versus disclosure (notes)

‘articulation’Financial Statements constitute an ‘integrated system’

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beginning stock
Beginning Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt-1)
Statement of Changes in S/E
 Cash from operations
+ Net Income & OCI
= Net Change in S/E
Cash Flow Statement
Cash from operations
 Cash from investing
 Cash from financing
= Net change in cash
Income Statement
Revenue
– Expenses
= Net Income (NPAT)
Ending Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt)

flows
ending stock

pro forma Income Statement
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caution – for ‘clean surplus’ and consistent estimates, the accounting system must reconcile
‘articulation’: must concurrently develop the pro forma B/S and SCF
201920202021E2022E2023E
Sales38,17637,408 ? ? ?
Other operating revenue288376
Cost of sales(29,253)(28,043) ? ? ?
Other income428108
Administrative expenses(8,031)(8,081) ? ? ?
Other expenses(146)—
Share – equity investments5(6)
Financing costs(42)(443) ? ? ?
Income tax expense(347)(341) ? ? ?

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Objectives:
separate operating activities from financing activities
fix-up some accounting classifications (relatively few)
for the Income Statement, separate revenues and expenses based on their driver (sales volume or other), and whether they are recurring or non-recurring
PART 2 – Reformulation Preliminaries

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separation of a company’s operations from how those operations are financed
Operations: buying and selling goods and services
Financing: the company’s use of debt and equity to finance its operations, as well as the company’s investment in financial assets

Why separate the two?
industrial companies generate value from their operations, not from their financial activities
financial activities can hide a company’s true operating performance

notion of ‘levered’ versus ‘unlevered’

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Leveredmeasured after the effects of financial activities
reflect the company’s operations and the effects of financial activities
levered metrics capture the shareholders’ perspective

Unleveredmeasured before the effects of financial activities
reflect purely the company’s operations
unlevered metrics capture the combined debtholder/shareholder perspective

In general:Unlevered metrics=Levered metrics+Effects of financing

note – this disaggregation can be applied at the overall firm level, as well as individually with the B/S, I/S, and SCF

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unlevered *
firm before financing charges
 to debt + equity

levered *
firm after financing charges
 to only common shareholders

* need to adjust both for tax

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‘market value of NOA’ is often called the market enterprise value (EV)
the market value of the company’s operations
‘unlevered’ because it measures the value of the equity and net debt together

‘market value of equity’ is also called the market capitalisation (market cap)
‘levered’ because it measures the value of the company after removing the value of net debt (financing activities)

‘market value of NFO’ represents the company’s financing activities
market value of equity
market value of net financial obligations
market value of net operating assets
=
+
market value of equity
applied to valuation
=
market value of net operating assets
–
market value of net financial obligations


NOA
NFO/NFA
CSE

Operating activities

Debt financing
Balance Sheet
(Book Value)
Income Statement
OI
(after-tax)
NFE
(after-tax)
CI
Our Valuation
VF
VD
VE
NOA = CSE + NFO
CSE = NOA – NFO
OI = CI + NFE
CI = OI – NFE
VF= VE + VD
VE = VF – VD
Mark Wallis, UQ

Equity financing
Market Valuation
MVF
MVD
MVE
MVF = MVE + MVD
MVE = MVF – MVD
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PART 3 – Balance Sheet Reformulation
Assets
=
Liabilities
+
Shareholders’ Equity
Operating Assets (OA)
Financial Assets (FA)
Operating Liabilities (OL)
Financial Obligations (FL)
accounting equation

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Shareholders’ Equity
S/E
net financial obligations
(FO–FA)
net operating assets
(OA–OL)
=
+
Assets (A)=Liabilities (L)+Shareholders’ Equity (S/E)

[OA+FA]=[OL+FO]+S/E

(OA–OL)=(FO–FA)+S/E

reformulating

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AASB / IFRS Balance Sheet
AssetsLiabilities & Equity
Operating AssetsOA Operating LiabilitiesOL
Financial AssetsFA Financial ObligationsFO
Shareholders’ EquityS/E
Total AssetsOA + FATotal ClaimsOL + FO + S/E

Reformulated Balance Sheet
Net Operating AssetsFinancial Obligations & Shareholder’s Equity
Operating AssetsOA Financial ObligationsFO
Operating LiabilitiesOL Financial Assets(FA)
Net Financial ObligationsNFO
Shareholders’ EquityS/E
TotalOA – OLTotalNFO + S/E



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Step #1 – Operating Assets (OA) versus Financial Assets (FA)

Operating Assets (OA) – essentially assets used in selling goods and services (the company’s business)
Financial Assets (FA) – essentially assets used to invest excess cash (i.e. financial investments not tied to the company’s business)

Aside: there is an active debate in the accounting literature about how best to achieve this separation (e.g., Barker, 2010, Accounting and Business Research) – this is why accountants have not adopted this structure for IFRS reporting!

There are two broad things to consider (Barker, 2010):
nature of the item itself e.g., p,p&e is inherently operational (physical assets that are used in production) compared to an investment in government bonds
function of the item in the company’s operations e.g., a retail company does not generate profits from trading financial securities, but a hedge fund does  investments in financial securities are likely a FA for a retail company, but an OA for a hedge fund

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Typical Operating Assets (OA):
Operating cash (see later slide)
Accounts Receivable: almost always an OA, but check that is isn’t a hidden loan to another company
Inventory: almost always an OA
Prepaid expenses: check what it relates to, but usually an OA
Goodwill: almost always an OA
Equity-accounted investments (e.g., investment in associates/JVs): usually an OA, but check nature of the investment to ensure it is related to the company’s operations
Property, plant & equivalent (p,p&e): almost always OA
Intangibles: almost always OA
Deferred tax assets: treat this as an OA in this course

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Typical indicators of Financial Assets (FA) (none are decisive on their own):
the item is financial nature, such as investments in debt/equity securities
typically measured at fair value e.g., investments in debt or equity
typically earn interest or dividends for the company
the asset is not integrated into the company’s operations (could be sold without disrupting anything) and/or the company is not expected to generate value above ordinary investment returns on the asset
Typical Financial Assets (FA):
financial cash (see later slide)
short-term investments
investments in debt or equities securities (without control/significant influence e.g., an investment in another company’s bonds or a small <20% equity stake in another company)21note – there is sometimes room for disagreement about what constitutes a OA and FA for a particular company. Use your judgement where there is doubt, but make sure you can justify your decisionaside: in the Balance Sheet, assets and liabilities are classified into current and non-current – this distinction does not play a part in the reformulated Balance Sheet; rather, similar current and non-current accounts are combined together (e.g., short-term and long-term bank loans)‘common’ problem areas –cash & cash equivalentsinvestment properties‘other assets’22Cash & Cash Equivalents most businesses need some cash to operate i.e., to meet day-to-day cash flows (transaction motive)  ‘working cash’  ‘operating cash’  OAhowever, many businesses maintain much larger cash balances than they need for daily operations  ‘financial cash’  FAseparating operating cash (OA) and financial cash (FA) is a matter of judgementthings to consider:competitor cash balancesthe company’shistorical cash balancesnature of the company’s operationsa classic approach (used by the textbook and often in practice) is to assume operating cash is some percentage of sales (e.g., 0.5% of sales)23Investment Propertiesfor most companies, land and buildings will be an OA i.e., the company uses them in its operations (perhaps a factory)however, some/all of a company’s land and buildings can be FA in the following circumstances:the land and buildings are clearly excessive to the company’s needsthey are rented/leased out to other companiesthey are accounted for using ‘AASB 140 Investment Property’ (note – investment properties can be carried at fair value or cost)‘Other assets’check the notes for details about what ‘Other assets’ means (if provided)if the company provides a break-down, classify each component as OA or FA depending upon detailsif the company provides no information, usually it is safe to assume they are OA24re: ColesOA (after checking note)OA (after checking note)FAOA (after checking note)OA (after checking note)OA / FA (0.5%) 25OA (after checking note)OA (after checking note)OA (after checking note)OA (after checking note)OA (after checking note)OA (after checking note)26PART 4 – Reformulating the Balance Sheet (cont)Step #2 – Operating Liabilities (OL) versus Financial Obligations (FO)Operating Liabilities (OL) – liabilities associated with selling goods and services (i.e. the company’s businessFinancial Obligations (FO) – sources of financing other than CSE (basically debt)Typical indicators of Financial Obligations (FO):the company pays interest on them and has an obligation to repaymost are measured at amortised cost (or rarely fair value)the liability is not integrated with the company’s operations, e.g. an industrial company could switch a bank loan for a bond without much disruption, but couldn’t easily separate its provision for warranty expenses from its operations27Typical Operating Liabilities (OL):Accounts Payable: almost always an OL (but if the company has to pay interest, you should investigate whether it is a hidden FO)Accrued Expenses: almost always an OLProvisions: almost always a OL, but check the notesDeferred revenueDeferred tax liabilities: treat this as an OL in this courseIncome tax payableTypical Financial Obligations (FO):Interest-bearing liabilities/loansLease obligationsNotes/bonds (in liabilities)Preference shares and other hybrid securities28Dividends payable is sometimes classified into Current Liabilitiesthis make no sense from a shareholder perspective – can’t owe ourselves money!why do accountants recognise dividends payables in current liabilities?we will instead treat Dividends payable as part of CSEPreference shares (or preferred stock) is sometimes classified as part of Equitypreference shares are usually a type of hybrid security that does not neatly fit the definition of Liability or Equity from the common shareholder perspective, preference shares should be classified as a FO and dividends on preference shares should be classified as a financial expense29Derivative Securities‘derivative financial assets’ and ‘derivative financial liabilities’ basically representunrealised gains/losses on derivative contractsconceptually, classification should depend on why the company uses the derivative – to illustrate,if it is an interest rate swap used to hedge interest rate risk related to a loan, then the derivative asset/liability should also be a FA/FOif it is forward contract used to hedge currency risk on the purchase of an operating asset, then the derivative asset/liability should be an OA/OLgiven the challenges in specifically confirming each contract, we will treat ‘derivative financial assets’ as FA and ‘derivative financial liabilities’ as FO30Leasesleases appear on both the asset and liabilities side of the Balance Sheethistorically came in two varieties:Operating leases: basically rental agreementsthe company does not recognise the leased asset or the associated liability on the Balance Sheet; but recognised an ‘operating lease expense’ on the Income StatementFinance/capital leases: basically a loan to buy an assetthe company recognises the leased asset and a liability on the Balance Sheet; and associated depreciation and interest components on the Income Statementunder the new AASB 16, operating leases will basically disappear and all leases will be recognised as finance leasestreat financial lease assets as OA and lease obligations as FOtreat lease interest as a financial expense31OL (after checking note)FO (after checking note)FO (after checking note)FO (after checking note)OL/FO (after checking note)OL/FO (after checking note)OL (assumed)OL (assumed)* Note 2.9 reveals that 2019 ‘provisions’ include amounts for ‘lease provisions’  FO322020201920202019OA17,5029,028FA847749OL5,2976,308FO10,437112NFO9,590(637)S/E2,6153,357NOA12,2052,720NFO + S/E12,2052,720Reformulation Summary – Coles33‘market value of equity’ (16 December)= 1,334 million shares x $18.16 = $24,225.44 million‘market value of NFO’ – most practitioners use book (accounting) value of NFO instead of market valuation $9,590‘market value of net operating assets’ (enterprise value) = $24,225.44 million + $9,590= $33,815.44 millionmarket value of equity market value of net financial obligationsmarket value of net operating assets=+applied to valuation34PART 5 – Income Statement Reformulationoverview – reformulation of the AASB/IFRS Income Statement and Statement of Comprehensive Income into a Reformulated Income Statement such that it:divides Income Statement items into operating versus financing activity relatedfurther divides operating income into three categories, based on whether the items are recurring and driven by salesreallocates income tax expense to remove the tax effects of debt financing/financial assetsdivides OCI into operating and financing aspects35Process (as per schema on the next slide) –Step #1: divide every line item in the Income Statement between operating and financingStep #2: divide operating items into:core operating income from salescore other operating incomeunusual operating incomeStep #3: divide income tax expense between:core operating income from salescore other operating incomeunusual operating Incomenet financial expense (or net financial income)Step #4: divide OCI items (after-tax) between operating and financingAASB/IFRS Income Statement & Statement of Comprehensive IncomeSales- COGS= Gross margin- Other expenses= EBITDA- Depreciation & amortisation= EBIT+ Interest revenue- Interest expense= PBT- Income tax expense= NPAT+OCI (with tax effects)= Comprehensive Income (CI)Reformulated Income StatementCore Operating Income from Sales (before-tax)Core Other Operating Income (before-tax)Unusual Operating Income (before-tax)Net Financial Expense (before-tax)Steps 1 and 2Step 3Step 436Mark Wallis, UQOperating OCI (after-tax)Financing OCI (after-tax)Tax allocation:Tax shield from NFETax on Core Other OITax on Unusual OITax on Core OI from Sales3637Step #1: divide every line item in the Income Statement between operating and financingOperating items: revenues/expenses (or gains/losses) related to the company’s operations e.g., sales, COGS, wages, advertising, depreciation, etc.Financing items: revenues/expenses (or gains/losses) related to the company’s financing activities e.g., interest revenue, interest expense, etc.consider information in the notes and the company’s operating model (use judgement)try to be consistent in how you reformulate the B/S and I/Soperating revenues/expenses should relate to operating assets/liabilitiesfinancial income/expenses should relate to financial assets/obligationse.g.,if a company’s ‘equity-accounted investments’ are classified as a FA, then ‘share of profits of equity-accounted investments’ should be a financial gain/loss38Typical operating items:sales or revenue from sales of goods/provision of servicescost of goods sold or cost of saleswages and salaries or employee benefitsadvertisingresearch and developmentselling, general & administrative expenses (SG&A) repairs and maintenancedepreciation and amortisationoperating lease expenseshare of profits/loss on equity-accounted investmentsTypical financial items:interest revenue or financial revenueinterest expense or financial expensefinance lease expensedividend revenue from financial assetsgain/loss on revaluation of financial assets reported in the income statement (e.g. investment property, financial securities)39lacking Notes on ‘other operating revenue’ and ‘other income’, will treat all items as ‘operating items’ except ‘financing costs’ which will be classified as a ‘financial item’40Step #2: divide ‘operating items’ into:core operating income from sales recurring operating income related to the company’s main operations (driven by sales volume) e.g., sales, COGS, wage expensecore other operating income recurring operating income that is not related to the company’s main operations (not driven by sales volume) e.g., share of profits of equity-accounted investments, royalty incomeunusual operating income  non-recurring (one-time) operating income e.g., restructuring charges, extraordinary items, gain/loss on sale of PPEPART 6 – Reformulating the Income Statement (cont)41Why these classifications?facilitates forecastingWhy separate ‘core operating income’ and ‘unusual operating income’?when evaluating historical performance, it is useful to know whether earnings was affected by unusual items e.g., suppose a company makes $100m in profit, but $80m came from a one-time gain on selling surplus landwhen forecasting, it is useful to know whether an item is likely to repeat in the future e.g., a loss due to a flood is not likely to occur every yearWhy then further split ‘core operating income’ into ‘core operating income from sales’ and ‘core other operating income’?for forecasting purposes, it is useful to know the ‘driver’ of an itemitems in ‘core operating income from sales’ are likely to be associated with sales volume (e.g., COGS), whereas items in ‘core other operating’ are likely driven by other factors (e.g., royalty income)42Core versus Unusualcore items occur every year, and are fairly stable and predictableunusual items do not occur every year, or vary greatly from year-to-year and/or are unpredictablerestructuring charges, extraordinary items, impairments, asset/business sales are generally unusual items, but check to make sure they are not recurringclues as to what be non-recurring can be found in other sections of the annual report and the company’s investor presentation (note – exercise judgement; do not necessarily follow the company’s advice if an item looks like it is actually a normal expense or recurring)note – ‘other comprehensive income (OCI)’ is considered separately in Step #4; we will implicitly treat all OCI items as ‘unusual’43Core Operating Income from Sales versus Core Other Operating Incometypical ‘core operating income from sales’:sales or revenue from sales of goods/provision of servicescost of goods sold or cost of saleswages and salaries or employee benefitsadvertisingresearch and developmentselling, general & administrative expenses (SG&A) repairs and maintenancedepreciation and amortisation44typical ‘core other operating income’:royalty incomerental income (not related to Investment property, which would be financing)grant incomeshare of profits/loss on equity-accounted investments‘other income’income from ‘side businesses’ if they are separately broken-out on the income statement45Core OI from salesCore other OICore OI from salesCore other OICore OI from sales & Unusual OI* Core other OIUnusual OICore financing expense (NFE) Step #3* Note 1.4 indicates that ‘Administrative expenses’ include an ‘impairment reversal’ of $41 million in 2020 and an ‘impairment expense’ of $42 million in 2019‘Unusual OI’Core financing expense (NFE) 46Summary – Coles reformulated Income Statement (following Steps #1 & #2)20202019Core OI from Sales (before tax)1,243934Core Other OI (before tax)478721Core OI (before tax)1,7211,655Unusual OI (before tax)41315Core NFE (before tax)(443)(188)versus reported profit before tax from the I/S20202019Profit before tax1,3191,425* 2020 reconciles; 2019 does NOT – tax adjustment on ‘discontinued’47Process –Step #1: divide every line item in the Income Statement between operating and financing Step #2: divide operating items into:core operating income from salescore other operating incomeunusual operating incomeStep #3: divide income tax expense between:core operating income from salescore other operating incomeunusual operating Incomenet financial expense (or net financial income)Step #4: divide OCI items (after-tax) between operating and financing48overarching objective: to conduct fundamental value for the purpose of estimating the ‘intrinsic value’ of a firm’s common sharesrequires an understanding of the firm’s ‘value drivers’need to accumulate a ‘tool kit’ as the basis for developing the pro forma Financial Statements STEP 1Understanding the past Information collectionUnderstanding the businessAccounting analysisFinancial ratio analysisCash flow analysis        STEP 2Forecasting the future Structured forecastingIncome Statement forecastsBalance sheet forecastsCash flow forecasts        STEP 3Valuation Cost of capitalValuation models – AE, FCF, DValuation ratiosComplicationsNegative valuesValue creation and destructionPART 7 – Summary: Sessions #1  #649external environment economic prospectsmacroeconomic factorssocio-cultural forcespolitical / regulatoryIndustry dynamics Porter’s five forces(suppliers, buyers, new entrants, substitutes, rivalry)Analysis of Financial Statementsunderstanding current F/Sre-formulating the F/Saccounting qualityanalysts’ reportsmanagement forecastsfinancial press???0V =tx( 1+ tkt)t =1∞∑ =E( tx )t(1+k)t=1n∑ +E( nx ) (1+ g)k − g1n(1+k)0V=tx(1+tkt)t=1¥å=E(tx)t(1+k)t=1nå+E(nx)(1+g)k-g1n(1+k)/docProps/thumbnail.jpeg