Valuation plays a key role in many areas of finance - corporate finance, in mergers and acquisitions, and in portfolio management. The models presented in this course will provide a range of tools that will be useful in these areas. This subject deals with valuation of stocks, bonds, businesses, and real assets. The module aims to cover the range of valuation models that are available to an analyst doing a valuation, while presenting the common elements in these models and providing a framework that can be used to pick the right model for any valuation scenario; capture some of the problems inherent in applying these models; demonstrate that valuation models are universal and not market-specific. This module prepares students for a career in the financial services industry. This module applies the various techniques developed in Corporate Finance. The module will be of particular benefit to those who wish to pursue careers in equity research and/or trading.
Introduction:
Introduction and general basis for valuation models; the role that valuation plays in different investment philosophies. An overview of the basic approaches to valuation - discounted cashflow valuation, and comparable/relative valuation.
Basic Valuation Tools:
The basic tools needed for valuation: models for analyzing risk and return, and estimating discount rates. Financial statements and the process of estimating cash flows. Estimating growth rates in earnings and cash flows from historical and fundamental data.
Discounted Cash Flow Models :
Different discounted cashflow models to value both equity and the firm. The basis dividend discount model and its variants. The two-stage and three-stage FCFE discounted cashflow models description and it application to high growth firms which do not pay dividends. The alternative of valuing a firm by discounting free cashflows to the firm at the weighted average cost of capital. The advantages of this approach and caveats on its usage. The problems in valuing cyclical and troubled firms, and possible solutions.
Relative Valuation Models:
The use and misuse of price-earnings (PE) and price-cashflow ratios, an examination of the determinants of price-earnings ratios, an analysis of why PE ratios change over time and why earnings multiples are different across industries and countries. The relationship between price and book value, the determinants of Price/Book Value ratios and a rationale for why some firms sell for less than book value while others sell for more. How to use price-book value ratios sensibly in investing. The price to sales ratio and reasons for differences across firms and industries on this multiple. The price to sales ratios as a useful tool to examine the value of a brand name and the effects of changes in corporate strategy.
Valuing Fixed Income Securities:
The determinants of the level of rates, the term structure and the default premia. Special features on bonds, including conversion and call options, as well as the effect of caps and floors on floating rate bonds.
The module will be supported through lectures with the aim of the tools that the participant will need in order to be able to apply theoretical models to real-world situations. A dynamic approach will be taken in the presentation of the lectures, where the learner will have to interact, participate and discuss topics designed for the session. Debate would be a major tool of this module, where participants should be able to discuss current issues affecting financial markets. Especially, students will be required to demonstrate that their conclusions are based on a well-founded reflection and critical analysis, from which they will derive a constructive conclusion. In doing this, students will have to relate their conclusions to the main theoretical models and academic literature in the area under study. Each session will be supported with an appropriate research article that students will have to read and work on it before each lecture.
| Module Content & Assessment | |
|---|---|
| Assessment Breakdown | % |
| Formal Examination | 80 |
| Other Assessment(s) | 20 |