Financial Statement Analysis and Corporate Valuation
Instructor: Paul Simko, FOB 292B, 924-1391
Course Overview
Financial statement analysis consists of using reported accounting data for the purpose of deriving measurements that aid in decision making. This course is designed to provide a foundation consistent with this function. Throughout the course we will center on developing an understanding of screening, forecasting, and valuation tools that help one analyze information in corporate financial statements. The course includes but is not limited to topics related to the use of ratio analysis, the development of earnings-based valuation models and how those models relate to conventional cash flow models, and the assessment of accounting assumptions and their impact on firm value.
The course can be considered as encompassing three integrated modules. The first focuses on strengthening understanding of the accounting framework. Emphasis is place on using detailed ratio analysis for a variety of purposes, including using accounting data to provide a historical perspective on firm activities, assessing current profitability, and predicting financial distress. The second part of the course uses this foundation with an explicit focus on common valuation techniques. This will include applied model building using discounted cash flow, multiples, and earnings based valuation methods. The conventions used in forecasting a complete set of financial statements will be emphasized. The final part of the course builds on this developed framework. While the first two parts encompass general methods applicable to most any firm, the focus in the last is on the identification of critical accounting factors that may be unique to a given firm under evaluation. These topics will include consideration of and adjustments for off-balance sheet assets, understated liabilities, and detecting earnings management.
The course is expected to help solidify and integrate core concepts from other finance and accounting courses, particularly the first-year accounting course and the corporate valuation modules in the second year Valuation in Financial Markets course. It should benefit students planning careers in security analysis, investment banking, financial management or corporate finance. The course should also be beneficial to those interested in developing their own framework for using accounting data in their investment decisions.
Materials
Financial Reporting and Statement Analysis: A Strategic Perspective Clyde P. Stickney, Paul R. Brown and James M. Wahlen. 2007. 6th Edition, Thomson Southwestern. Available at the Darden Exchange. New versions of this text come with an access card inside the front cover. Do not discard this card as it provides a Thomson One access code that makes data analysis much more efficient.
A course pack containing supplemental readings is required. A list of the supplemental readings is provided on the following pages.
Course Website
All class assignments will be posted to the class website approximately one week in advance of their discussion. These will include problems, technical notes, and cases. Some course materials are included in the course pack, some will be individually gathered from on-line sources, and some will be distributed during class.
Grading
Participation / 40 / %Final Exam / 35
Group Case / 25
Group Case
A case assignment is due before the start of class on February 15. The case is to be completed in groups of 2 or 3. The case will be designed to reinforce concepts from the first two modules of the course, and will serve as the basis for the class discussion on February 15. You may select your groups on your own, or you may request I place you in a group of my choosing.
Course Topics
1 / January 18 (Thu) / Introduction to Financial Statement Analysis
SBW Chapter 1: pp. 2-41
Moehrle, Moehrle and Tomlinson (2002)
2 / January 19 (Fri) / Assessing Earnings Quality
SBW Chapter 6: pp. 363-366
Fink (2003)
3 / January 24 (Wed) / Ratio Analysis using the Dupont Framework
SBW Chapter 4: pp. 198-211, 214-225, 229-234
4 / January 25 (Thu) / Data Gathering and Detailed Profitability and Risk Analysis
SBW Chapter 5: pp. 285-305
Myers (2005)
5 / January 31 (Wed) / Financial Leverage and Predicting Financial Distress
SBW Chapter 5: pp. 305-317
Altman (2003)
II. Account Forecasting and Valuation
6 / February 1 (Thu) / Forecasting Financial Statements
Review as needed SBW Chapter 10: pp. 720-767
7 / February 2 (Fri) / Cash Flow Based Valuation
SBW Chapter 10: pp. 767-772
Review as needed SBW Chapter 11: pp. 812-828
Review as needed SBW Chapter 12: pp. 855-882
8 / February 7 (Wed) / Accounting-Based Residual Earnings Valuation
SBW Chapter 13: pp. 932-952
Lee (1996)
9 / February 8 (Thu) / Multiples Analysis; Catch up and Review
SBW Chapter 14: pp. 968-997
10 / February 15 (Thu) / Group Case Discussion
Course Topics (cont’d)
III. Special Topics in Accounting Based Valuation11 / February 16 (Fri) / Evaluation of Earnings Management and Off-balance Sheet Transactions
SBW Chapter 5: pp. 317-322
SBW Chapter 8: pp. 543-545
Review as needed SBW Chapter 8: pp. 535-542
Beneish (1999)
Tunick (2004)
Weil (2004)
12 / February 21 (Wed) / Implications of Off-Balance Sheet Transactions
SBW Chapter 8: 561-575
Solomon and Hawkins (2005)
13 / February 22 (Thu) / Implications of Off-Balance Sheet Transactions (cont’d)
SBW Chapter 7: pp. 468-477
Foster (2003); Jopson (2006)
14 / February 28 (Wed) / Using Income Tax Information in Financial Analysis
SBW Chapter 8: pp. 575-587
15 / March 1 (Thu) / Stock Options and Assessing Firm Value; Wrap-up
SBW Chapter 9: pp. 667-671
Listed immediately below each topic are relevant background readings that will aid in the preparation of assigned cases and problems. SBW refers to the Stickney, Brown and Wahlen (2007) text. The remaining supplemental readings are listed on the following page. Most cases, technical notes, and problems will be posted to the course website approximately one week in advance of their discussion.
Supplemental Readings
1. Moehrle, Stephen, Jennifer Moehrle and Wilbur Tomlinson. 2002. Is there a gap in your knowledge of GAAP? Financial Analysts’ Journal.
2. Fink, Ronald. 2003. Mind the gap: The cash-flow scorecard. CFO Magazine (December), 19,16. pp. 50-53, 56.
3. Myers, R. 2005. Stuck on Yellow. CFO. (October): 81-82, 85-86.
4. Altman, Edward I. 2003. Quantitative techniques for the assessment of credit risk. AFP Exchange (March 1), 23,2.
5. Lee, Charles M.C. 1996. Measuring Wealth. CA Magazine (April): pp. 32-37.
6. Beneish, Messod D. 1999. The Detection of Earnings Manipulation. Financial Analysts Journal (September/October): pp. 24-36.
7. Tunick, B. E. 2004. Looking for Red Flags: CFOs Face Continued Scrutiny Over Managed Earnings. The Investment Dealers’ Digest (Apr 26) p. 1+.
8. Weil, J. 2004. Open Secrets: How Leases Play a Shadowy Role in Accounting; Despite a Post-Enron Push, Companies Can Still Keep Big Debts Off Balance Sheets. The Wall Street Journal. (Sep 22) p A1.
9. Solomon, D. and L. Hawkins, Jr. 2005. Pension Inquiry Shines Spotlight on Assumptions – Small Changes in Calculations at Companies Have a Big Effect on Retiree Liability – And Profit. The Wall Street Journal. (November 9): C1.
10. Foster, B. P., R. Fletcher and W.D. Stout. 2003. Valuing Intangible Assets. The CPA Journal. (October) pp. 50-54.
11. Jopson, B. 2006. Big Four in Call for Real-Time Accounts - Firms Want Customised Reports in Major Shake-up. Financial Times. (November 8) p 1.
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