Firm Valuation and ROE Analysis

In this course Professor Pratt demonstrates how properly managing the key determinants of return on equity (ROE) increases the value of the firm. He first provides a brief summary of the relevant features of time value of money with a special emphasis on internal rate of return, and then he demonstrates what it exactly means to create shareholder value. The ROE model is then introduced and fit into a value creation framework, followed by an intuitive and straightforward present value analysis that shows how improving ROE can drive up the value of the firm.

Professor Pratt then uses a spreadsheet, in which the model has been programmed, to conduct an analysis on the current market value of Best Buy, the well-known electronic equipment retailer. The viewer is then guided through some sensitivity analysis designed to highlight which financial metrics are most important to driving up Best Buy’s market value.

The overall theme of this course is that understanding this system provides a guide to identifying where management should focus its attention in its effort to increase the value of the firm, and due to their special understanding of financial statements, accountants are in an excellent position to take full advantage.

Course Key Concepts: Time value of money, internal rate of return, value creation, cost of equity, return on equity, operating decisions, investing decisions, financing decisions, value drivers, stock market value, market capitalization.