A discussion of a key accounting issue faced by the company
The accounting issue that you choose can be any accounting issue that relates to how your company operates. It does not need to be complicated, and
it does not need to be controversial
. What I am looking for here is an awareness of how the accounting is done for this particular issue in general, and then a discussion of how the company deals with it.
How to choose an issue? Look at the nature of how your company operates. Are there any major aspects that may be interesting from an accounting perspective?
Example:
Your company operates in 20 countries around the world.
Potential issue: foreign exchange translation
How does the company deal with this? What standards are relevant? How is the standard applied? To find out how the company applies the standard, you can look at the Notes to the Accounts.
A valuation of the company over the next 5 years, using the method you feel fits the company best given your knowledge of it
See Table 1 below, also refer notes from Lecture 9
A discussion on why the multiples method is not suitable for valuation
A brief discussion of why the multiples method is not suitable for the valuation of YOUR COMPANY must be discussed.
What Have We Done So Far and How Does This Relate To The Coursework?
ACTIVITY UNDERTAKEN
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HOW TO DO THIS
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THINGS TO CONSIDER
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CWA
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Understand the firm
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Understand the firm’s history, products, innovative capability, industry, competitors, management, future plans etc.
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Read annual report(s), firm’s history, news articles about the firm trade magazine info about the firm, use databases
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Utilise skills you have learnt in your undergraduate degree to research and evaluate this
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Poster
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Understand the firm’s current / recent performance
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Reformulate the firm’s financial statements (Lecture 5 & 6), apply the ratio analysis (Lectures 5 and 6), analyse the firm’s key profitability and growth (Lecture 7).
Use at least 3 years’ worth of past information – 5 is better.
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How has the firm been performing? How profitable is it? Is there good growth?
What is driving the firm’s profitability and growth? What are the key growth and profitability drivers?
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Valuation Report
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Understand the firm’s future prospects
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Understand the firm’s strategy (annual report, news report, firm website)
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Evaluate this in the context of:
Firm’s current performance and drivers of profitability and growth;
General global, regional, national and industry outlook
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Understanding key accounting issues
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Evaluate the firm’s core activities (Lecture 7), identify the firm’s key profit / growth drivers and use this to find relevant accounting issues (from the Notes to the Accounts)
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What are key features of this industry? How is this accounted for?
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Valuation Report
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Forecast future firm performance
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Determine an appropriate growth rate
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Evaluate the firm’s current growth rate given the share price
Evaluate global outlook and GDP growth
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Would you go higher or lower than the market? (Lecture 4 – challenging the share price) How does this square with global outlook for this industry / region?
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Determine an appropriate asset turnover rate, given your projections of sales growth
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Evaluate the firm’s current asset turnover rate. Given your projection of sales growth, how do you expect this to be going forward?
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Determine an appropriate profit margin
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Evaluate past profit margins, and then contextualise this for the global economic conditions
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Are you the market leader? Does your profit margin reflect the market share?
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Valuation Report
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Determine a dividend payout rate
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Look at past payout rates. It is also plausible for firms to not pay out dividends
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Determine / find an appropriate cost of borrowing
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Forecast pro-forma reformulated financial statements
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Use Excel to forecast this. See steps as per lecture notes.
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Valuation Report
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Value the firm
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Choose an appropriate earnings measure (suggest use ReOI)
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Valuation Report
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Choose an appropriate rate of return
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You may want to do a sensitivity analysis with different rates of return
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Valuation Report
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What I Expect To See In The Report
Your coursework must take the format of a report. You do not need an executive summary, but as a working guideline I would suggest the following sections:
1.Introduction
A very brief introduction to the report. Don’t report anything that’s already on the poster. Maximum 150 words.
2.Poster
The poster serves to introduce the company – so it should be early on in the report.
3.Key Accounting Issue
A discussion of the key accounting issues should have the following as a bare minimum:
·What is the accounting issue you are going to discuss
·Why is it relevant to the company that you are analysing
·How does the company deal with this issue
You may also want to discuss other issues but be aware that there is a strict word limit in this essay.
4.Valuation
a.Discussion on how you determined the growth rate, profit margin, asset turnover, dividend payout, cost of borrowing and other key variables
b.Discussion on key assumptions made
c.For a and b above, you may want to include references to your pro-forma statement or your analysis findings. This should be placed in the appendix.
d.The findings of your valuation; and a comparison of this with the current market price. You may want to suggest a buy, hold or sell recommendation.
5.Discussion on Multiples
6.References – if you source material from the databases, this MUST be included in the references
7.Appendix (not included in the word limit)
a.Excel table of the pro-forma financial statement and valuation
b.Optional (but will help you strengthen your case): findings of your analysis that helped you determing 4a. and 4b.