To pass this unit the student needs to (1) Achieve an aggregate mark of 50 or more, and; (2) Pass the Final Exam.

CLASSES

Face-to-Face Teaching: Generally 20 hours.

Timetable: Detailed timetable for classes are on the Centre’s website at www.mafc.mq.edu.au

Consultation Times:

Students who wish to contact any of the teaching staff may do so through:

• The unit’s iLearn site, in relation to general queries (so that all students may benefit); or 
• Individual consultation with the lecturer by email in the first instance, if necessary.

REQUIRED AND RECOMMENDED TEXTS AND/OR MATERIALS

Text: Nil

Course Resources:

• The unit notes and iLearn contain all the requisite material for the classes, assignments and final examination. The value of the unit will be maximised if you are able to review unit notes and readings prior to classes. Please critically assess the material in these readings, in particular the case studies.
• iLearn contains spreadsheet solutions for the problems in the notes, and additional discussion on a number of items. Students should download the spreadsheets prior to class, and you should bring printouts or a laptop to help you follow them in class.
• Students should assume any additional readings are examinable unless otherwise advised.

Lecture Notes: Available in printed form and electronically via iLearn. 

Case Studies: 

• There are case studies in the notes (Trees and Portes). Please read these cases before classes, as they will be discussed in class.
• Students are not required to solve the cases – this will be covered in class.

Pre-unit Materials: 

• Your time in class will benefit from having read the course material prior to class.
• The pre-unit assignment draws on your Corporate Finance material, so should be regarded as an opportunity for quick revision of Corporate Finance notes on valuation.

Useful References: 

• Tim Koller, Marc Goedhardt and David Wessels, Valuation: Measuring and Managing the Value of Companies, Wiley, 2011, 5th edition.
• Tom Copeland and Vladimir Antikarov, Real Options: a practitioners guide, Thomson Texere, 2003, Updated edition
• Titman, S and J.D. Martin., Valuation: The Art & Science of Corporate Investment Decisions, 3rd ed., Pearson, 2016
• There are books available to help develop your Excel skills, which are needed for assignments. Two helpful books are:
  • Craig W. Holden, Excel Modelling in Corporate Finance, 2nd ed., Pearson Prentice Hall, 2005; or
  • Michael Rees, Financial Modelling in Practice, Wiley, 2008.
• For those of you with an engineering background, or more interested in the technical aspects of evaluation procedures, The Engineering Economist journal is an excellent source.

Calculators: 

• A financial calculator that can handle time value of money calculations is required.
• In examinations, hand held calculators are permitted. Mobile phones and computers are not permitted.

Assumed Knowledge: Mathematical content

• This unit relies heavily on present value techniques. Students should be able to use the general formula for calculating the present value of a series of cash flows, as shown below:

                                                              Present Value = Σⁿ_t=0 ((Cash Flow _t ) / (1+K_t)^t )

          as well as alternate expressions for calculating the present value of a series of cash flows using level and growing perpetuities and annuities.

          You should review Chapter 4 of the textbook if you are not comfortable with this material.

• Students should also be familiar with option valuation, including the Black Scholes model and binomial valuation.

Assumed Access:

• Access to a computer with word processing and spreadsheet capability is assumed, as is general student computer literacy.
• Access to a laptop, taken to class, is desirable.
• The @Risk software is available for downloading from iLearn.

TECHNOLOGY USED AND REQUIRED

Unit iLearn Site: 

• Found by logging on to iLearn ilearn.mq.edu.au, then clicking on AFCP859 Advanced Valuation for Corporate Finance.
• This is where you will find links to forums, downloadable resources and other important pages.
• The forum allows you to communicate with other students and lecturer(s) and may provide supplementary material.
• You are requested to post your questions to the forum at least 24 hours prior to the assignment submission date or the examination date. Questions posted after that time may not be answered. Please try to not leave your questions to the last few days.

Important Notice: 

• It is important that you familiarise yourself with the unit’s iLearn site. 
• Students should check the unit’s iLearn site regularly (minimum twice a week and prior to all lectures) and look for updates and distribution of materials (including case studies) related to the unit or assessments and, if relevant, participate in forum discussions.

1: REVIEW OF VALUATION FRAMEWORK

Taking the basic DCF model as the starting point the topic presents some extensions of the valuation models introduced in pre-requisite subjects and demonstrates how they can be used in practice to inform strategy development and decision making.

Key learning outcomes for this topic:

• Be able to evaluate the validity of chosen decision criteria in context of shareholder value maximization objective
• Critically analyse the link between value, value creation and value drivers
• Have a working knowledge of typical valuation models, understand the nature of assumptions made using different valuation models and assess their similarities and differences
• Start to critically assess usefulness of alternative models
• Understand the consistency principal as applied to valuation models

2: ALTERNATIVE VALUATION MODELS

The Topic examines the linkages between the various models, similarities and differences and how to determine the appropriate model for a range of valuation scenarios.  Special attention is paid to the Residual Income valuation method as a forerunner to linking it with strategy development.

Key learning outcomes:

• Understand the different valuation methods, the nature of assumptions made, the inputs required and assess their similarities and differences
• Critically assess the usefulness of alternative models
• Understand how simultaneous solution to market value gearing and market values can be assessed i.e. how the circularity problem can be solved using a numerical method
• Critically analyse the link between value, value creation and value drivers
• Understand the benefit of using a Residual Income model for valuation and business management

3: USING THE VALUATION MODELS

The wide ranging applications of valuation techniques used in practice will be reviewed. The material includes a critical analysis of the types of valuation issues which often arise in practice, especially around the estimate of the terminal value which generally represents the largest component of a valuation. [NOTE: this unit does NOT consider the legal or other regulatory issues involved in preparing a valuation, nor issues such as marketability or other discounts. These matters are covered in Applied Valuation].

Key learning outcomes for this topic:

• Students should feel comfortable to be thrown into any valuation situation and be able to develop a strategy for undertaking the necessary valuation
• Technical proficiency in application of various valuation models
• Understand practical issues in estimating Terminal Value, incremental cash flows, and how best to value financial strategy

4: RISK AND VALUATION

How to address risk in the different contexts of valuation is considered. Various ways to assess and measure risk and whether each risk can be assessed by a valuation adjustment (i.e. cash flows or discount rate), deal structure or decision making process (e.g. more information, decision criteria under risk) is considered. Also examined is how to assess the source of a project’s NPV, and how it can be incorporated into risk appraisal.

Key learning outcomes for this topic:

• Students able to critically assess the impact of risk on value, and on the relevant decision
• Be able to implement and critically evaluate various methods for measuring risk in the context of valuation
• Be able to undertake a risk assessment of a business or project, appropriate to the relevant valuation and decision making context

5: PREPARING A COST OF CAPITAL RECOMMENDATION

This Topic extends the discussion of cost of capital from Corporate Finance and discusses the practical application of the cost of capital concepts in the range of valuation situations.

Key learning outcomes for this topic:

• Be able to prepare a defensible cost of capital recommendation in most valuation situations
• Students should be familiar with key reference sources for various valuation parameters
• Introduce the concept of implied cost of capital
• Understand difference between hurdle rates and cost of capital, and issues in determining hurdle rates

5A: FINANCIAL MODELLING AND FORECASTING TOOLS

This Topic reviews financial modelling best practice, and procedures for establishing key relationships in a financial model, including multiple regression.

Key learning outcomes for this reading (time available in class to discuss questions arising from the material):

• Be able to identify and address issues in developing practical and reliable financial models
• Determining and estimating relationships in financial modelling
• Understand issues in applying a range of forecasting techniques, including regression techniques
• Incorporating Monte Carlo simulation into financial modelling using @risk
• Modelling issues: tax losses, circularity, modeling incorporating financial covenants

6: STRATEGIC FLEXIBILITY AND VALUE

The impact of strategic flexibility on value is reviewed to introduce the use of option valuation techniques to value this flexibility. An approach for introducing real options into a valuation is considered along with and comparing the use of decision trees and option valuation approaches. It presents a number of straightforward scenarios which demonstrate the impact of introducing real options into the traditional DCF framework.

Key learning outcomes for this topic:

• Understand the impact that strategic flexibility can have on the risk and return profile of a project or business
• Ability to discern presence of strategic flexibility in a project or business, and map real option characteristics into option valuation models
• Ability to evaluate simple growth and divestment options using binomial and Black Scholes models
• Understand the impact of presence of real options on traditional investment criteria, and the traditional approach the capital investment
• Evaluating whether to invest in the option

7: REAL OPTIONS: ADVANCED VALUATION ISSUES

This topic examines advanced issues in using option pricing methods in real option applications. It will examine in detail the robustness of real options methodology in practice. It will look at the impact of early exercise on option value, projects whose value declines prior to exercise, how to incorporate multiple options within one project and the impact of different project risk profiles on option value. This topic will concentrate on understanding of issues and identifying the appropriate modelling techniques available.

Key learning outcomes for this topic:

• Critically assess the practical application of option pricing methodology in valuation applications
• Understand and critically assess how to approach a more complex, and realistic, real option situation

8: SPECIAL TOPICS IN VALUATION

If time is available, this topic will address emerging or interesting issues in the application of valuation techniques. It can vary from class to class, depending on interests of class, issues of the day and time available. The focus will be on using existing knowledge of finance to resolve interesting valuation problems.

Key learning outcomes for this topic:

• Be able to use understanding of the valuation theories and frameworks to solve and critically assess a new valuation issue, or a contentious issue of the day
• Understand available reference sources to stay current on valuation issues

This Unit Guide may be subject to change. Students will be advised, via an "Announcement" on iLearn, if the Unit Guide is changed.

The latest version is available at https://unitguides.mq.edu.au/.

Students should read the Unit Guide carefully at the start of term. It contains important information about the unit. If anything is unclear, please consult one of the unit lecturers.

University Policy on Grading:

• Macquarie University’s Academic Senate has established a Grading Policy available at https://staff.mq.edu.au/work/strategy-planning-and-governance/university-policies-and-procedures/policies/assessment. Your final result will include: 
  • A Grade ranging from Fail Hurdle to High Distinction; and
  • A numerical Mark which is a summation of the individual assessment components, providing the examination component is passed.
• It is important to note:
  • The Policy does not require that a minimum or maximum number of students are to be failed in any unit; 
  • Grades will not be allocated to fit a predetermined distribution; and
  • Grades for all individual assessment items will be released to students, but Marks may not necessarily be released.

Specific Unit Grading: 

• To pass this unit the student needs to (1) Achieve an aggregate mark of 50 or more, and; (2) Pass the Final Exam.
  • Students who have attained a total raw mark of 50% or greater in a unit, but have failed the unit’s exam requirement and who have demonstrated “sufficient effort” in the exam, will be granted a single opportunity to sit a Supplementary Exam which will be graded on a pass/fail basis. The unit Mark and Grade for students who pass this examination will be those corresponding to the original total raw mark of all their assessment tasks, including the original exam. That is, the Supplementary Hurdle Exam only determines the meeting of the hurdle requirement. Students who have attained a raw mark of 50% or greater in a unit, yet failed all attempts at the requirement, will be awarded an Fail Hurdle grade with a final Mark of 49.
• All final Marks and Grades in the Applied Finance Centre are determined by a grading committee and are not the sole responsibility of the Unit Convenor.

Review of Grade and final examination Script viewing:

• A student who has been awarded a final grade for a unit and who does not believe it is an accurate reflection of their performance, and has grounds for such a claim and can demonstrate those grounds, may apply to have their grade reviewed. 
• For information on requesting a review of grade and/or viewing your final exam script, please refer to the University’s Grade Appeal Policy at http://www.mq.edu.au/policy/docs/gradeappeal/policy.html and MAFC Program Rules at http://www.mafc.mq.edu.au.