#2936 - Ac330 Stream Ii Syllabus - Financial Accounting, Analysis and Valuation

Market efficiency

1. Proof of market efficiency

2. Proof of market inefficiency

3. Anglo-Saxon vs. continental countries

4. The “Lemons” problem

   1. Market failure

   2. Inefficient allocation of resources

   3. Information intermediaries

   4. IPOs and signalling

Managerial incentives

1. Accounting standards

Reporting strategy

1. Cash accounting

   1. Disadvantages

2. Accrual accounting

   1. Managerial discretion

3. Quality of accounting information

Investment styles

1. Intuitive investing

2. Passive investing

3. Fundamental analysis

Why is business strategy analysis important?

Key profit drivers

Industry analysis

1. What determines industry profitability?

   1. Porter’s five forces

      1. Rivalry among existing firms

         1. Perfect competition

         2. Monopoly

         3. Oligopoly

         4. Intensity of competition

      2. Threat of new entrants

         1. Abnormal profits

         2. Barriers to entry

      3. Threat of substitute products

         1. Switching costs

         2. Propensity to substitute

         3. Product differentiation

      4. Bargaining power of buyers

         1. How do buyers compete?

         2. Relative buying power

      5. Bargaining power of suppliers

         1. Power of suppliers

         2. How do suppliers exert power?

2. Limitations

Competitive strategy analysis

1. Cost leadership

2. Differentiation

3. Sustainability

Corporate strategy analysis

1. Transaction cost economics

2. Multi-business strategy

3. Synergies

Purpose

1. Account discretion

Recasting financial statements

1. Differences

   1. Nomenclature

   2. Classifications

   3. Formats

2. Time-series and cross-sectional comparison

3. Why do we recast?

Standardized balance sheet

1. Credit risk analysis

2. Profitability analysis

3. Net operating assets (NOA)

4. Net financial assets (NFA)

5. Net financial obligations (NFO)

6. Common shareholder equity (CSE)

7. Reformulated balance sheet

Standardized income statement

1. IFRS classifications of expenses

   1. Nature

   2. Function

2. Reformulated income statement

Indicators

1. EBITDA

2. EBIT

3. EBT

4. NOPAT

Standardized cash flow statement

1. IAS 7 format

2. Reformulated cash flow statement

3. Cash conservation equation

Business activities flow

Issues with recasting financial statements

1. Recognition of assets

2. Timing of revenue recognition

3. Allowances

4. Recognition of liabilities

5. Equity distortions

Goals

Ratio analysis

1. Determinants of the value of a firm

2. Growth and profitability

   1. Product market strategy

      1. Operating management

      2. Investment management

   2. Financial market strategy

      1. Financial decisions

      2. Managing payout

Profitability analysis

1. Operating performance

2. Financial performance

3. Uses

4. Residual claimants

5. Cost of capital

   1. Cost of equity capital

      1. CAPM

   2. Cost of debt capital

   3. Weighted average cost of capital (WACC)

6. Return on equity (ROE)

   1. Long-run value of equity

   2. ROE vs. cost of equity capital

   3. 3 methods:

      1. Starting balance

      2. Ending balance

      3. Average balance

   4. Traditional (multiplicative/Du Pont) ROE decomposition

      1. Limitations

   5. Alternative (additive) ROE decomposition

      1. Return on assets

      2. Operating ROA

      3. Effects of different spreads

Evaluating operating management

1. Profit margins

   1. Net profit margin

   2. Gross profit margin

   3. EBITDA margin

2. Common-sized income statement

Evaluating investment management

1. Asset turnover

   1. Turnovers in general

   2. Working capital management

      1. Working capital turnover

      2. Trade receivables turnover

      3. Trade payables turnover

      4. Inventory turnover

   3. Non-current asset management

      1. PPE turnover

   4. Current asset management

      1. Current assets turnover

2. Trade payables days

3. Trade receivables days

Evaluating Financial management

1. Leverage

   1. Effects

2. Short-term liquidity

   1. Current ratio

   2. Cash ratio

   3. Quick ratio

   4. Operating cash flow ratio

3. Solvency analysis

   1. Debt-to-equity ratio

   2. Debt-to-capital ratio

   3. Interest coverage

      1. Earnings basis

      2. Cash flow basis

4. Sustainable growth rate

   1. Dividend payout ratio

Why is the cash flow statement important?

Operating activities

Investment activities

Financing activities

Stocks and flows

Drivers of free cash flow FCF

Drivers of net operating assets

Drivers of indebtedness

Profit drivers

1. Profit flow ratios

   1. Return on NOA

   2. Return on NFA

Why are forecasts important?

Benchmarks

1. How do you choose which benchmark?

2. What determines driver patterns?

Forecasting sales

1. Mean-reverting

Forecasting earnings

1. Earnings as a random walk

2. Earnings shocks

3. Analyst forecasts

Forecasting ROE

1. ROE vs. earnings

2. Behaviour of ROE components

3. Mean-reverting property

4. Contrarian stock selection strategy

Steps to forecasting:

1. Forecast sales growth

2. Forecast gross margin

3. Calculate COGS

4. Forecasting operating expenses

5. Forecast taxation

6. Forecast depreciation

7. Forecast change in WC

8. Forecast capital expenditure

Sensitivity analysis

Seasonality

Interim forecasts

Refinement of forecasts

Economic wide trends

1. Total market demand

Dividend Discount Model (DDM)

1. Constant dividend growth rate

Discounted Cash Flow Model (DCF)

1. Free cash flow from operations

2. Free cash flow to equity

3. Equity valuation

   1. Value of equity

   2. Terminal value

4. Asset valuation

   1. Value of assets

   2. Terminal value

Residual Income Valuation (RIM)

1. Clean surplus relation

2. Value of equity

3. Residual earnings

4. Terminal value

5. Residual operating income

   1. Value of assets

   2. Terminal value

6. Value of equity vs. value of assets

Price multiples

1. Using price-earnings

2. Using market-to-book value

3. Assumption

4. Limitations