By Yashaswi Vig
This course introduces and teaches concepts required for most Investment Analyst job positions. To excel in this course, it is crucial to develop a solid understanding of the theory taught in FINA 395, which relates to the cost of capital for both levered and unlevered firms. FINA 410 covers concepts on the valuation of firms, including corporations, companies in the financial services sector, and startups. Most of the course will be dedicated to learning concepts used to value public firms.
FINA 410 requires an intermediate level of understanding in Accounting, mainly to perform a discounted cash flow model. One will have to extract and use data from income statements and balance sheets to prepare cash flow statements which will then be used to prepare valuation models. Of equal significance is the cost of capital, the measure of risk needed to value a company. Cost of capital is one of the critical inputs in valuation because if this measure is not correct, one will not achieve an accurate value of the project or firm. Another major element is the growth rate, as this is the measure that the company’s future depends on. The growth rate and future expected cash flows significantly impact a company's survival and value.
Within the discounted cash flow valuation model there are multiple methods introduced, including the dividend discount model, free cash flow to equity and free cash flow model. Each of these methods requires you to implement these inputs (growth rate, cost of equity, cost of debt) differently. For example, in the dividend discount model, the growth rate is calculated using the retention ratio and return on equity. Dividends are used as the primary cash flow by relying on the assumption that the only cash flow that a stockholder receives is dividends.
Personally, I found the methods for valuing a public firm very interesting because they helped me better understand the corporate side of a firm—a topic I have been fascinated with since high school. Although it can be cumbersome to build such models, it will help you learn and understand techniques beneficial in making investment decisions and develop financial modelling and analytical skills necessary for most Investment Analyst job positions.
Building a financial model—the method of valuing a company using realistic assumptions to make predictions about a firm's future—uses all of the key inputs (cost of capital, growth rate). This model is ultimately implemented to find the price of the company’s stock and compare it to the price traded on the stock market. It is used to compute a company’s intrinsic value, which then allows one to make investment decisions for a portfolio.
The advanced concepts taught in this course enable students to implement knowledge from FINA 395 and help them develop strong financial modelling and analytical skills necessary for most analyst job positions. It is imperative to read the book and practice the end-of-chapter questions to ace this class. I would even recommend reading the chapters multiple times to better understand some of the more difficult concepts of this course.