The ROE Model and Firm Valuation (Video) (Course Id 1979)

In this single-video 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 Learning Objectives

• Use the concept of interest and time value of money.
• Define value creation.
• Link value creation to return on equity and how it is affected by management’s operating, investing, and financing decisions.
• Use a spreadsheet-based valuation model using ROE inputs.
• Compute the inherent value of Best Buy.
• Describe how this valuation framework should be interpreted and used, which includes conducting sensitivity analysis on the model’s key inputs.