Financial Analytics and Valuation Techniques

Course Information

• Course title: AFA300 - Section 011
• Instructor: Harjot Mehmi
• Email: [email protected]
• Office: YDI 1066 (1 Dundas St W)
• Office hours: Mondays, 1–3 PM
• Week: 3, Sept. 23, 2024

In-Class Questions

• Questions E3.1, E3.4, E3.6, E3.7, and P3.1 solutions will be posted on D2L.
• Solutions to textbook brief exercises are already on D2L.
• Solutions to other textbook questions will not be shared.
• Students can visit the instructor during office hours for help.

Data, Digitization, and Digitalization

• Technological innovations are changing the accounting profession.
• Digitization and digitalization lead to large amounts of data (big data).
• Digitization: converting things into machine-readable format.
• Digitalization: transforming processes with new technologies and digital information.

Big Data

• Big Data has five attributes/challenges: volume, velocity, variety, variability, and veracity.
• Volume: handling large amounts of data.
• Velocity: dealing with the speed of new data creation.
• Variety: sorting and cleaning data of many forms.
• Variability: accommodating constantly changing data.
• Veracity: ensuring quality data.

Analysis versus Analytics

• The field is evolving from data analysis to data analytics.
• Data sets are studied to make deductions using software and systems.
• More diverse and sophisticated tools (Excel, Power BI, AI) are used.

Types of Analytics

• Descriptive analytics: examines historical data to answer questions and provides basic insights (e.g., past sales figures).
• Diagnostic analytics: identifies patterns and relationships in historical data to determine “why” (e.g., why sales are decreasing).
• Predictive analytics: uses statistics and other techniques to forecast future trends (e.g., predicting sales trends).
• Prescriptive analytics: applies rules and models to determine the next steps or decisions (e.g., what actions to take).

Measuring Financial Statement Elements

• Fair value is straightforward with market prices; otherwise, valuation models are used.
• Initial measurement is usually fair value.
• Subsequent valuation may use historical cost techniques (e.g., for PPE, inventory).
• Many items are based on fair value (e.g., financial instruments).
• Some items are measured based on both historical cost and current value.

Measurement Categorizations

• Cost-based Measures: Property, plant, and equipment are carried at cost or net book value. Financial instruments (like bonds payable) are carried at cost or amortized cost. Inventory uses cost flow assumptions.
• Hybrid Measures: Impaired property, plant, and equipment are measured at recoverable amount (higher of value in use and fair value less costs of disposal). Inventory is measured at the lower of cost and net realizable value. Impaired notes receivable are measured at best estimate of revised cash flows, discounted.
• Current Value Measures: Financial instruments are carried at fair value. Biological assets and agricultural inventories are measured at fair value. Investment properties can be measured at fair value.

Valuation Techniques

• Income models: convert future cash flows into current values (e.g., discounted cash flows).
• Market models: use market prices and other information from identical or similar transactions (e.g., earnings multiples).

Approaches to Discounted Cash Flows

• Stream of cash flows is discounted.
• Discount rate is adjusted to reflect risk.
• Works well for certain cash flows (e.g., fixed interest and principal payments).

Present Value Concepts

• Time value of money: $1 today is not equal to $1 tomorrow.
• Interest earned over time must be considered.
• Riskier investments have higher interest rates.
• Macroeconomic factors affect interest rates.

Present Value Variables

• Interest (return) is a function of principal, interest rate, and the number of time periods.
• Variables:
  • Principal (P): amount borrowed or invested
  • Interest rate (i): percentage of outstanding principal
  • Number of time periods (N): number of portions of a year.

Present Value Concepts: Calculating Interest

• Simple interest: interest earned only on the principal for one period.
• Compound interest: interest earned on both principal and accumulated interest.

Present Value Concepts: Calculations

• Initial principal is the present value.
• Future value is the value at the end of a term.
• Calculating present value is done using several tools. Formulas, tables, financial calculators, and spreadsheet programs can be utilized.

PV of a Single Future Amount

• Present value (PV) is the amount to invest today to have a certain future amount (FV). Formula for calculating PV of a single future amount.

PV of a Single Future Amount: Using Table

• Look up the PV factor from a table given the interest rate and number of periods and multiplying this factor by the Future value (FV).

PV of a Single Future Amount: Using Financial Calculator

• Use the financial calculator's present value function with the required inputs.

PV of a Single Future Amount: Using Excel Functions

• Use the Excel PV function to calculate the present value (with relevant inputs in the formula).

PV of a Series of Future Cash Flows (Annuities)

• These are a series of equal payments made over a period of time. Calculation of PV involves discounting each cash flow for the period to the present value.

Present Value of an Annuity: Using a Formula

• Formula to calculate present value with equal periodic payments.

Present Value of an Annuity: Using a PV Table

• Relevant table to find the Present Value factor associated with the stated discount rate and number of periods, and multiplying it by FV.

PV of an Annuity: Using a Financial Calculator

• Use the financial calculator to calculate the present value of an annuity.

PV of an Annuity: Using Excel Functions

• Use the PV function in Excel to determine the present value. Relevant inputs are required for the function.

Test your understanding of prescriptive and predictive analytics in finance. This quiz covers essential concepts such as fair value estimation, historical cost, and valuation models used in accounting. Assess your knowledge on key financial decision-making tools and their applications.