Business Valuation 
Business Valuation
by U. Michigan / Jack Wheeler
Video Lecture 12 of 20
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Views: 2,137
Date Added: December 27, 2009

Lecture Description


- Business (Project) Valuation Equation

- Business (Project) Discount Rate

- Business (Project) Cash Flows

     Components

     To valuation horizon

     Horizon valuation

- Total Business Value

- Business (Project) Valuation Rules



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Course Index

Course Description


HMP 607 - Corporate Finance for Health Care Administrators is the third in a three-course sequence intended to impart to generalist administrators the knowledge of finance and accounting necessary to manage health care organizations. The first course, HMP 608, covers financial accounting. The second course, HMP 606, focuses on managerial accounting topics. This third course concentrates on corporate finance topics. It aims to impart an understanding of how finance theory and practice can inform the decision-making of the health care firm. As such, HMP 607, with 20 video lectures, is most appropriately considered a corporate finance course, as opposed to a course in financial markets. In addition, it will integrate corporate finance and accounting theories, institutional knowledge of health care finance, and applications to specific problems.



 



Course Objectives



Understand Corporate Finance Theory

  - Investing Decision-Making

  - Financing Decision-Making

Apply Corporate Finance Methods

  - Practical analyses, rooted in theory

  - Use of analyses to inform decisions

  - Health care firm

  - Health care financial and other markets



Corporate finance in general and health care corporate finance in particular are usually taught in three major sections:



1. Investments (or capital expenditures). This material focuses on how the firm ought to deploy capital (spend money on new business lines, large programs, and assets) so as to maximize the achievement of its strategic objectives. The principal (if not the only) objective of the firm is the maximization of the wealth or welfare of its owners. In the investor-owned firm, the owners are clearly identified as its shareholders; their wealth and welfare is maximized by increases in stock price and dividend flow. The focus of the decision analysis is therefore on the timing and amount of cash flows associated with a proposed course of action. We will cover investment decision theory and concentrate on very practical applications of this theory to the decision-making of the firm. In addition, we will cover the investment decision analytic techniques used to support these decisions. This part of the course will have the following specific objectives:

1. Achieving a conceptual understanding of valuation and the effects of new business development, project selection, and asset acquisition on firm value;

2. Developing an ability to evaluate the desirability of a project, based on net present value of cash calculations;

3. Gaining a facility with the use of spreadsheet technology in conducting financial analyses.

2. Financing. This material focuses on how the firm ought to raise the money capital necessary to finance its business ventures, large expenditures, and other activities, so as to maximize the achievement of its strategic objectives. There are three general sources of financing: equity, debt, and leasing. The main goal here is to identify and acquire the mix of financing methods that minimizes the cost of financing for the firm overall. This goal is accomplished first by determining the costs (including rates of return and other less obvious costs) of various individual financing sources available to the firm. Then, the effect of capital structure on financing costs must be considered. As with the investments section, we will cover financing theory and concentrate on very practical applications of this theory to the decision-making of the firm. This part of the course will have the following objectives:

1. Achieving a conceptual understanding of the effect of financing method on firm value;

2. Achieving an ability to estimate the cost of various sources of financing, based on projected cash flow;

3. Gaining an understanding of the determinants of the optimal capital structure of the firm;

4. Gaining an ability to evaluate leasing versus buying of an asset.

3. Other topics. Included at the end of corporate finance courses are a variety of topics designed to integrate and complement the investment decision and the financing decision. We will cover three such topics, strategic financial planning, the Statement of Cash Flows, and working capital management. Strategic financial planning provides a convenient integrating function, because it encompasses both the investment decision and the financing decision. We show how the two interact in the development of the organization’s financial plan to achieve its strategic objectives. The Statement of Cash Flows is a financial accounting document that describes sources and uses of cash over the year. We developed the statement in HMP 608. Here we shall review its structure and show how it describes the results of investment and financing decisions on cash balances. Working capital management focuses on the minimization of accounts receivable and the optimization of cash balances. We have the following objectives for this part of the course:

1. Gaining an ability to develop a long range financial plan;

2. Achieving an enhanced understanding the structure of the Statement of Cash Flows;

3. Gaining an ability to develop a cash budget.



Reading list

* Brealey, RA, Myers, SC, Allen, F, Principles of Corporate Finance, Ninth Edition, New York: McGraw-Hill Irwin (2008). (BMA)

* Reiter, KL, Smith, DG, Wheeler, JRC, and Rivenson, H, “Capital Investment Strategies in Health Care Systems,” Journal of Health Care Finance, 26:31-41 (Summer 2000).

* Rivenson, HL, Wheeler, JRC, Smith, DG, and Reiter, KL, "Cash Management in Health Care Systems," Journal of Health Care Finance 26: 59-69 (Summer 2000).

* Wheeler, JRC, and Clement, JP, "Capital Expenditure Decisions and The Role of the Not-for-Profit Hospital," Medical Care Review 47:467-486 (Winter, 1990).

* Wheeler, JRC, and Smith, DG, "The Discount Rate for Capital Expenditure Analysis in Health Care," Health Care Management Review 13:43-51 (1988).

* Wheeler JRC, Smith DG, Rivenson H, Reiter KL, “Capital Structure Strategy in Health Care Systems,” Journal of Health Care Finance 26: 42-52 (Summer 2000).



The original name of this course is Corporate Finance for Health Care Administrators.

Course details
: University of Michigan

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