departament of financial economics, accounting and operations

DEPARTAMENT OF FINANCIAL ECONOMICS,
ACCOUNTING AND OPERATIONS MANAGEMENT
HUELVA UNIVERSITY
(SPAIN)
SUBJECT PROGRAM:
INVESTMENTS AND VALUATION OF FIRMS
(Code: 530099051)
Degree in Business Administration (41 LADE)
(Optional Subject: 6 Credits)
FACULTY OF BUSINESS SCIENCES
ACADEMIC YEAR 2012/13
(1º Semester)
PROFESSOR:
Dr. D. Juan José García Machado.
AIMS AND OBJECTIVES
This is a 4th year subject of the Degree in Business Administration (LADE). The main
objective of this course is to provide the students with an adequate knowledge of the theory and
practice of different methods for analysis, investments valuation and measuring the value of
companies, from an internal and external point of view. The participants develop basic skills for
their professional career in this field, at the same time complete their training in this branch of
Finance. In particular, the course gives a practical insight into the use of valuation methods
(static and dynamic models, Capital Asset Pricing Model –CAPM-, relative valuation models,
discounted cash flows, etc.). It presents the basic tools needed for valuation, the fundamental
principles of value creation and how market risk is measured and rewarded. It also provides a
framework for comparative analysis across the models.
TEACHING METHODS
In order to achieve the objectives, the course combines different teaching methods:
lectures, practical exercises in class or on the computer, group work assignments, student
presentations, and class discussions. In groups, the students have to do a real company valuation
of two current Spanish firms and present it in class for discussion. At the end of the course they
have to write a paper on this.
COURSE SYLLABUS
“INVESTMENTS AND VALUATION OF FIRMS”
PART I. “INTERNAL VALUATION: BUSINESS INSIDE”
UNIT 1.
“GENERALITIES ABOUT VALUATION”
1. Introduction.
2. The role of valuation.
3. Generalities about valuation.
4. Static value.
5. Dynamic value.
6. Basic Investment valuation model.
5. Practice case.
UNIT 2.
“FUNDAMENTAL ANALYSIS”
1. Valuation method of the company.
2. Fundamental valuation principle.
3. Profit model.
4. Dividend model.
5. Investments opportunities model.
6. Zeta model
7. Practice case.
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UNIT 3.
“GOODWILL-BASED METHODS (MIXED METHODS OF BUSINESS
APPRAISAL)”
1. Introduction.
2. The “classic” valuation method or German method.
3. The simplified “abbreviated goodwill income” method or the simplified UEC
method.
4. Union of European Accounting Experts (UEC) method.
5. Indirect method.
6. Anglo-Saxon or direct method.
7. Annual profit purchase method.
8. Risk-bearing and risk-free rate method.
9. Practice case.
PART II. “EXTERNAL VALUATION: BUSINESS OUTSIDE”
UNIT 4.
“MARKET EFFICIENCY THEORY”
1. General issues.
2. Market efficiency theory: definition.
3. The Random Walk.
4. Efficient market hypothesis.
5. What is an efficient market?
6. Efficient market levels.
6.1. Weak form.
6.2. Semi-strong form.
6.3. Strong form.
7. Conclusions.
UNIT 5.
“THE CAPITAL ASSET PRICING MODEL (CAPM)”
1. Introduction.
2. Risks and returns.
3. Diversification and portfolio effects.
4. The Capital Asset Pricing Model (CAPM) and the Capital Market Line (CML).
4.1. Determining the risk-free rate.
4.2. Determining the market risk premium.
4.3. Estimating the systematic risk. What is a Beta?
5. The Security Market Line (SML).
6. The problem of growth
7. Leverage and the cost of equity.
8. Is Beta dead? Criticism of the CAPM.
9. Practice case.
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PART III. “OTHERS COMPANY VALUATION MODELS”
UNIT 6.
“RELATIVE VALUATION MODELS”
1. Introduction.
2. Price/Book Value Multiples.
2.1. Estimating PBV ratios from fundamentals.
2.2. Estimating PBV ratios from comparables.
2.3. PBV ratios and investment strategies.
2.4. Variants on PBV ratios.
3. Price/Sales Multiples.
3.1. What is PS ratio?
3.2. Advantages and Disadvantages using PS ratio.
3.3. PS ratio for a stable firm.
3.4. PS ratio for a high-growth firm.
3.5. PS ratios and profit margins.
3.6. The value of a brand name.
4. Price/Earnings Ratio (PER).
4.1. What is PER?
4.2. Why do we use PER?
4.3. Calculating PER for stable firms.
4.4. Calculating PER for high-growth firms.
4.5. Comparison of PER and Expected Growth Rate.
4.6. Mistakes while comparing PE ratios.
4.7. Comparing company to entire cross-section.
4.8. Problems with PER.
5. Conclusions.
6. Practice case.
UNIT 7.
“CASH FLOW DISCOUNTING-BASED METHODS”
1. Introduction.
2. General method for cash flow discounting.
3. Deciding the appropriate cash flow for discounting and the company’s
economic balance sheet.
3.1. The free cash flow.
3.2. The equity cash flow.
3.3. Capital cash flow.
4. Calculating the value of the company using the free cash flow.
5. Calculating the value of the company as the unlevered value plus the
discounted value of the tax shield.
6. Calculating the value of the company’s equity by discounting the equity cash
flow.
7. Calculating the company’s value by discounting the capital cash flow.
8. Basic stages in the performance of a valuation by cash flow discounting.
9. Which is the best method to use?
10. Practice case.
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PART IV “SHAREHOLDER VALUE CREATION AND MARKET RISK”
UNIT 8.
“MEASURES OF SHAREHOLDER VALUE CREATION”
1. Introduction.
2. Measuring the created value.
3. Traditional value indicators.
4. Economic value added (EVA).
5. Estimation of EVA.
6. Market value added (MVA).
7. Correct interpretation of EVA and MVA.
8. Other measures of value creation: The cash flow return of investment
(CFROI.).
9. Practice case.
UNIT 9.
“MARKET RISK”
1. Introduction.
2. Value at risk (VaR).
2.1. VaR for general distributions.
2.2. VaR for parametric distributions.
2.3. VaR as a risk measure.
3. Choice of quantitative factors.
3.1. VaR as a benchmark measure.
3.2. VaR as a potential loss measure.
3.3. VaR as equity capital.
3.4. Criteria for backtesting.
3.5. Application: The Basel parameters.
3.6. Conversation of VaR parameters.
4. Assessing VaR precision.
4.1. The problem of measurement errors.
4.2. Estimation errors in means and variances.
4.3. Estimation error in sample quantiles.
5. Comparison of methods.
5.1. Backtesting VaR models.
5.2. Model vilification based on failure rates.
7. Conclusions.
8. Practice case.
PART V “CHARTISM”
UNIT 10.
“TECHNICAL ANALYSIS”
1. Introduction.
2. The Dow Theory.
3. Basic concepts of trends: Support and resistance.
4. Trendlines.
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5. Channel lines
6. Chart patterns: Types of charts available.
6.1. Reversal patterns.
6.2. Continuation patterns.
6.3. Price gaps.
7. Statistical measures: The moving average.
8. Main technical indicators.
9. Systematic trading.
10. Technical versus fundamental forecasting.
11. Conclusions.
12. Practice case.
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BIBLIOGRAPHY
BASIC BIBLIOGRAPHY
Theoretical part
GARCÍA MACHADO, J. J. [2001]: Opciones Reales: Aplicaciones de la Teoría de Opciones a las Finanzas
Empresariales. Pirámide. Madrid.
MARTÍN MARÍN, J. L. y TRUJILLO PONCE, A. [2000]: Manual de Valoración de Empresas. Ariel Economía.
Barcelona.
RUIZ MARTÍNEZ, R. J. y GIL CORRAL, A. Mª. [2004]: El Valor de la Empresa. Instituto Superior de Técnicas
y Prácticas Bancarias. Madrid.
Practical part
GARCÍA MACHADO, J. J.; DE LA VEGA JIMÉNEZ, J. J. y TOSCANO PARDO, D. [2002]: Supuestos de
Valoración de Empresas. Materiales para la Docencia, nº 23. Servicio de Publicaciones de la Universidad
de Huelva. Huelva.
COMPLEMENTARY BIBLIOGRAPHY
AMAT, O. y PUIG, X. [1999]: Análisis Técnico Bursátil. 7ª Edición. Gestión 2000. Barcelona.
ANSÓN LAPEÑA, J. A. [1997]: Valoración de Empresas. Análisis de los Métodos utilizados en la Práctica.
Instituto de Auditores Censores Jurados de Cuentas de España. Madrid.
BODIE, Z.; KANE, A. y MARCUS, A. J. [2004]: Principios de Inversiones. McGraw-Hill. Madrid.
BREALEY, R. A. y MYERS, S. C. [2003]: Principios de Finanzas Corporativas. 70 Edición. McGraw-Hill.
Madrid.
BREALEY, R. A. y MYERS, S. C. [2004]: Fundamentos de Finanzas Corporativas. 40 Edición. McGraw-Hill.
Madrid.
CABALLER MELLADO, V. [1997]: Métodos de Valoración de Empresas. 2ª Edición. Pirámide. Madrid.
CODINA CASTRO, J. [1998]: Curso Práctico de Análisis Técnico y Chartismo. 2ª Edición. Inversor Ediciones.
Madrid.
DAMODARAN, A. [1996]: Investments Valuation. John Wiley & Sons. Nueva York.
DAMODARAN, A. [2001]: The Dark Side of Valuation: Valuing old Tech, new Tech, and new Economy
Companies. Prentice Hall. Nueva York.
DELGADO UGARTE, J. I. [2000]: La Valoración de Empresas. Ediciones Beta III Milenio. Bilbao.
DELGADO UGARTE, J. I. [2000]: La Valoración de Empresas. Cómo realizar la Valoración de Empresas en la
Prácticas. Marcial Pons. Toledo.
ELVIRA, O. y PUIG, X. [2003]: Análisis Técnico Bursátil. Gestión 2000. Barcelona.
FERNÁNDEZ, P. [2001]: Valoración de Empresas. 2ª Edición. Gestión 2000. Barcelona.
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FERNÁNDEZ, P. [2000]: Creación de Valor para los accionistas. Gestión 2000. Barcelona.
FUNDACIÓN BBV. [1998]: La Gestión del Riesgo de Mercado y de Crédito. Nuevas Técnicas de Valoración.
Fundación BBV. Bilbao.
GARCÍA MACHADO, J. J. [2001]: Opciones Reales: Aplicaciones de la Teoría de Opciones a las Finanzas
Empresariales. Pirámide. Madrid.
INSTITUTO SUPERIOR DE ESTUDIOS EMPRESARIALES [1995]: Gestión Económico-Financiera I:
Valoración de Empresas. Mundi-prensa. Madrid.
LAMOTHE, P. y ARAGÓN, R. [2003]: Valoración de Empresas asociadas a la Nueva Economía. Pirámide.
Madrid.
LÓPEZ LUBIÁN, F. J. y DE LUNA BUTZ, W. [2001]: Valoración de Empresas en la Práctica. McGraw-Hill.
Madrid.
LLAMAZARES, J. A. [2002]: Análisis Técnico. Pirámide. Madrid.
MATEU, J. L. [2003]: Análisis Técnico de los Mercados Financieros. Instituto Superior de Técnicas y Prácticas
Bancarias. Madrid.
MOCHÓN MORCILLO, F. y RAMBLA BEL, A. [1999]: La Creación de Valor y las Grandes Empresas
Españolas. Ariel. Barcelona.
MURPHY, J. [2003]: Análisis Técnico de los Mercados Financieros. 2ª Edición. Gestión 2000. Barcelona.
MURPHY, J. [2003]: Prácticas de Análisis Técnico de los Mercados Financieros. 2ª Edición. Gestión 2000.
Barcelona.
PRING, M. J. [1989]: Análisis Técnico Explicado. Gesmovasa. Madrid.
RODRÍGUEZ DE PRADO, F. y MARAZUELA, E. [2002]: Curso Práctico de Análisis Fundamental. 2ª Edición.
Inversor Ediciones. Madrid.
ROSS, S. A.; WESTERFIELD, R. W. y JAFFE, J. F. [2001]: Finanzas Corporativas. 50 Edición. McGraw-Hill .
Madrid.
ROSS, S. A.; WESTERFIELD, R. W. y JORDAN, B. D. [2001]: Fundamentos de Finanzas Corporativas. 50
Edición. McGraw-Hill. Madrid.
SANJURJO, M. y REINOSO, M. [2003]: Guía de Valoración de Empresas. 2ª Edición. Financial Time / Pearson
Prentice Hall. Madrid.
SANTANDREU MARTÍNEZ, E. [1990]: Manual Práctico de Valoración de Empresas. Gestión 2000. Barcelona.
SHARPE, W. F.; ALESANDER, G. J. y BAILEY, J. V. [1995]: Invesments. 50 Edición. Prentice Hall. New
Jersey.
VAN HORNE, J. C. [2003]: Fundamentos de Administración Financiera. 110 Edición. Prentice-Hall. México.
VIÑOLAS, P. y ADSERA, X. [2003]: Principios de Valoración de Empresas. Deusto. Bilbao.
WESTON, J. F. y COPELAND, T. E. [1995]: Finanzas en Administración. Vol. I y II. 90 Edición. McGraw-Hill.
México.
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ASSESSMENT
To pass this course, the students have to:
1º) Attend class and participate actively.
2º) Do a seminar on a case study: do a presentation and lead a discussion on a real
company valuation of two current Spanish firms.
3º) Write a group essay to be handed in by 31st January 2013.
4º) Pass a final written exam.
There are no mid-term exams in the course, but there will be a final written exam at the
end. In February, the final grade will consist of an average of the written exam (where at least 5
is required to pass) and coursework. The final exam consists in a theoretical and practical part.
The theoretical part is worth 40% of the final exam grade. The practical part is worth 60%. The
students have to obtain a minimum of 3 in the theoretical and 3.5 in the practical. The final exam
grade will be an average of the theoretical and practical parts.
The theoretical exam consists in a multiple choice test of 20 questions, where correct
answers are worth 1 point and incorrect answers -0.25. The theoretical grade will be obtained by
adding the scores of all the questions answered and dividing by 2. The practical exam consists in
1-3 exercises.
Nevertheless, students can ask for an oral theoretical exam in any of the two sittings, thus
renouncing the chance of doing the written version of the same exam. The practical exam is only
written and before the oral theoretical. Permission to do the oral exam should be sought prior to
sitting the written exam.
Students who fail at both sittings (Feb and Sept) can not sit a further exam. Neither will
they be considered as “No Presentado” once the exams have been corrected. Moreover, marks
will not be kept from one sitting to another.
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