Dr. P.V. Viswanath



Economics/Finance on the Web
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  Courses /  

Lubin School of Business
Pace University
New Course Proposal

1.            School:           Lubin School of Business 

2.           Campus:         PLV and PNY 

3.           Department:   Finance and Economics 

4.           Proposed Course Number:             Finance 36X 

5.           Proposed Course Title:  Valuation of Firms: Theory and Practice 

6.           Proposed Number of Credits: 3        

7.          Catalog Description:  This course deals with the valuation of corporate securities, primarily stocks. Students will learn about the techniques of investigating and valuing stocks. Most of the course will be devoted to the valuation of stocks based on fundamental analysis, paying attention to the macro-economy as well as to firm-specific issues such as industry characteristics, quality of accounting numbers, forecasting growth and using appropriate discounted cash flow and relative valuation models.

8. Objective and rationale for the course.  The Lubin School currently has several courses, such as FIN 320, FIN 351 and ACC 360 that explain the accounting and financial concepts relevant to asset valuation.  These courses also explain how these concepts would apply to actual firms.  The present course would go one step further, by bringing all these principles together in the valuation of actual corporate securities, primarily stocks.  Such a course gives the sort of hands-on experience that is crucial for students to, on the one hand, learn effectively, and, on the other, to convincingly present themselves as qualified candidates for jobs in finance fields, such as Mergers and Acquisitions, Stock Analysis, Portfolio Management and others.  

9.         Which students are expected to be served?  Finance 320, which deals with Corporate Financial Analysis, is a prerequisite for this course.  Hence, most of our students will be Finance majors.  However, we hope to attract specific non-finance majors as well, such as Accounting students and Marketing students who are interested in the marketing of financial services.  Other Lubin majors who can demonstrate the necessary competence are welcomed as well.           

10.       How does this course relate to the department's total program?  This course will become an additional finance elective; it will also be a course that students following the corporate finance track would be expected to take.

11.       Are there courses elsewhere in the department, school or university, which are similar to this proposed course?     No

12.       Who is expected to teach this course and what will be the probable teaching method?  Professors Viswanath will be teaching this course, to begin with. However, other finance faculty, such as Professor Kadiyala and Professor Ottoo, who is a CFA, can also teach the course.  The teaching method is partly lectures.  Students are also expected to make presentations.  Significant amounts of learning are also expected to occur through Blackboard.

13.              When will the course be first offered and what is the expected frequency of future offerings?  Fall 2007; one section per semester; the offering might alternate between PLV and PNY, according to needs.

14.              What are the texts, bibliography and related educational material required for students in this course?  The primarily text will be Aswath Damodaran, Investment Valuation, John Wiley and Sons, Second Edition, 2002.  Students will be expected to keep abreast of economic and financial news by reading periodicals such as the Wall Street Journal, Investors Business Daily and the Economist.  They will also extensively use programs such as StockVal and Bloomberg, as well as Internet websites such as http://finance.yahoo.com to research the stocks.  Professor Damodaran also maintains a website with up-to-date information, which students will use.  The text is also supplemented by notes on Prof. Viswanath’s website. 

Required textbooks: Aswath Damodaran, Investment Valuation, John Wiley and Sons, Second Edition, 2002. 

Reference Texts: None  

 15.       What are the topics to be covered in this course? 

Tentative List of Topics to be Covered

  • The basics of risk – Asset Pricing Models (CAPM) and Models of Default Risk
  • Riskless rates and Risk Premiums
    • Historical Risk Premiums
    • Implied Equity Premiums
    • Behavior of the Default Spread
  • Estimation of Risk Parameters and Cost of Financing
    • Regression beta
    • Adjusting the regression beta for regression towards the mean
    • Adjusting the beta for changes in financial leverage
    • Fundamental approaches to beta estimation
    • Bottom-up betas
    • Measuring the cost of debt
      • Measuring Default Spreads
      • Estimating a Tax Rate
      • Estimating the cost of hybrid securities
      • Estimating Debt and Equity weights -- capitalizing operating leases and R&D
  • Measuring Earnings
    • Converting Operating Leases into Debt; adjusting operating income
    • Capitalizing Recruitment and Training Expenses
    • Capitalizing Selling, General & Administrative Expenses?
    • Warning Signs in Earnings Reports
    • How to deal with merger accounting -- amortization of goodwill
    • How to deal with divestitures
    • How to deal with minority and majority interests
  • From Earnings to Cash Flows
    • Tax Rates -- Federal Tax rates and State taxes
    • Lumpy Capital Expenditures -- Averaging over time; caution regarding firms that change business models
    • How to treat acquisitions
    • Investments in Working Capital -- Should these be broken down into components or not?
  • Estimating Growth
    • Historical estimates of growth
    • Estimating growth rates for the components of earnings -- forecasting revenues vs. forecasting earnings.
    • Using Analyst Forecasts
    • Fundamental Determinants of Growth
      • Growth in Earnings per share
      • Growth in Net Income
      • Growth in Operating Income
      • Growth in Revenues
  • Estimating Terminal Value
    • Estimating Stable Growth Rates
  • Versions of Discounted Cash Flow Models
    • Dividend Discount Model
    • Free Cash Flow to Equity
    • Free Cash Flow to the Firm
  • Relative Valuation, Earnings Multiples, Book Value Multiples, Revenue Multiples and Sector-Specific Multiples
    • Price-Earnings Ratios
    • Book Value Multiples
  • Valuation of ESOPs
  • Value Enhancement: EVA, CFROI and Other Tools

It is also envisaged that there will be guest speakers, mainly equity analysts, who will be invited about a couple of times per semester. 

Additional Course Requirements: Periodical reports on relevant topics, as well as PowerPoint presentations of stock recommendations (see proposed course calendar).

Exams: At least one exam, perhaps two -- a Midterm and Final

Cases/Group Assignments: Students will form groups and investigate a company selected in consultation with the instructor. They will be required to value the company, write a report on it and make a presentation to the class.

 Additional Readings, Class Participation:  Students will be expected to keep up with business news.  Active student class participation will be important, both in class and on Blackboard. 

Course Outline and Time-Table 

Class Meeting

Topics (Chapters  refer to Damodaran, Investment Valuation)

Meeting 1

Macro Aspects of Investing -- the Macro Economy and the firm

Meeting 2

Chapter 4: The basics of risk -- CAPM and Models of Default Risk

Meeting 3

Chapter 7: Riskless rates and Risk Premiums

Meeting 4

Chapter 8: Estimation Risk Parameters and Cost of Financing

Meeting 5

Chapter 9: Measuring Earnings

Meeting 6

Chapter 10: From Earnings to Cash Flows

Meeting 7

Chapter 11: Estimating Growth

Meeting 8

Chapter 12: Estimating Terminal Value

Meeting 9

Chapter 13, 14, 15: Choosing the Right Model

Meeting 10

Chapter 17: Relative Valuation

Meeting 11

Chapter 32: Value Enhancement: EVA, CFROI and Other Tools

Meeting 12

Stock Research Report Presentation

Meeting 13

Stock Research Report Presentation

Meeting 14

Stock Research Report Presentation


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