Financial Analysis

Objectives: The objective of the course is to know how to value the equity of a company. Whether in the context of M&A transactions, take-over bids or withdrawal, or in negotiations with tax authorities, the cases where it is essential to understand how to value equity in a company are numerous. After reviewing the tools for comparing investment projects (measuring their profitability and value) and deciding whether to complete them, the four basic methods of valuing equity and economic assets of enterprises are examined in detail. Finally, we review the practical difficulties of each method, as well as the lessons that can be drawn from the differences observed between the different valuations. Many practical exercises and practical cases of business evaluation are seen throughout the course.

Outline:

Introduction:

• What is financial valuation, what is the valuation of shares used for?
• How to compare investment projects?

1st method: Valuation of shares by discounting future dividends

• Dividend profit distribution rate, earnings per share
• Reinvestment of undistributed earnings, and dividend growth rate
• The discount rate, profitability required by the shareholders, depends on the leverage
• The CAPM model: beta, risk free rate and risk premium

2nd method: valuation of equities by comparable

• PER analysis. The PER depends on the expected growth of results and risks. Adjustment of the PER of the target company compared to comparables
• Examples of PERs (historical by sector and growth-value compartments).

3rd method: valuation of economic assets by discounting future cash flows (DCF)

• Reminders: equity = economic asset - debts, how to calculate Free Cash Flows.
• Discount rate = weighted average cost of capital (WACC). Proof of the Modigliani-Miller Theorem: the WACC is independent of the debt-to-equity ratio

^4th method: valuation of economic assets by comparable

• Multiple of EBIT, EBITDA, and adjustment of multiples of the target company against multiples of comparables. Examples of EBIT multiples (by sector and compartments)

Stock valuation practices

• How to do it, what are the pitfalls to avoid?
• Reading of the survey published in the journal Analyse Financière on the methods that are actually followed
• Presentation of public reports of independent experts on the valuation of the shares of a particular company

Grading:

• 1 continuous assessment during the semester
• A final exam at the end of the semester

Bibliography:

• Vernimmen : Finance d’entreprise (édition : Dalloz).