Yale School of Management
MGT 812 Financial Statement Analysis
Fall 2015 – MW 2:40-4:00pm, EVANS 4400
Professor Frank Zhang
Phone: (203) 432-7938
Office hours: Monday 10:00-11:45am
TA: John Heater (john.heater@yale.edu)
Qin Tan (qin.tan@yale.edu)
Office: Evans Hall 3538
Email: frank.zhang@yale.edu
Course Objectives
This course examines the role of financial statement analysis in the evaluation of the firm’s
financial performance and the prediction of its future economic condition. Topics covered
include fundamental analysis and applications related to credit and equity markets. This
course combines both accounting and finance into a practical framework for equity
valuation, with an emphasis on the implications for IPO, mergers & acquisitions, and
equity investment. The course is designed to provide:
 Exposure to public sources of financial information used by capital market
participants.
 Skills to critically analyze current financial statements, SEC filings, and other
financial information.
 Exposure to accounting tricks firms play.
 Skills to predict the future economic condition of a firm.
 Practice applying financial information in a variety of trading strategies.
Prerequisites
 Basics of Accounting (MGT 402) is a must
 Financial Reporting (MGT 871) is highly desirable. Alternatively, you should have
some prior training/experience in accounting.
 Some exposure to finance (MGT 541 or similar courses) would be very helpful.
Course Materials
 Business Analysis Valuation: Using Financial Statements, Krishna G. Palepu and
Paul M. Healy 5th edition, 2012. South-Western College Publishing (ISBN-10:
1111972303 | ISBN-13: 978-1111972301). The book is optional, but I recommend
it if you do not have a strong accounting background. An earlier edition is fine.
 PowerPoint slides, cases and supplementary materials are either handed out in class
or available in ClassesV2.
Tardiness and Missed Classes:
I understand that occasionally students are unable to arrive to class on time due to professional
commitments such as interviews and/or meetings. Please do not hesitate to come to class late
when you are delayed for these reasons. When arriving late, please be considerate of your
fellow classmates. Notice: do not come late to class unless you absolutely are unable to be in
class on time. If you have time to stop for coffee or a Whopper with cheese, you probably
should have been to class on time. If you miss a class, please have a classmate get a copy of
any materials handed out in class. To the extent possible, also make arrangements to turn in
assignments in a timely fashion.
Course Grade
The course grade will be based on the following three components:
a. Cases (60%): There are four cases throughout the course. Each assignment
represents 15% of the total grade. The assignments are designed (1) to give you
practice applying the related concepts and tools and (2) to prepare you for class
discussion and examples. Students are encouraged to work in groups (maximum of 3
people per group), and students should turn in 1 case per group. I recommend that you do all
assignments on a spreadsheet or a word processor. Solutions: In-class discussions are
structured to give you feedback and insight into the key issues and “solutions” for
each assignment. Cases are due at the beginning of the class, so please keep extra
copy to refer to during in-class discussion.
b. Final exam (40%).
Readings:
Articles listed in syllabus below are for your interest only. Although the readings are optional,
I strongly recommend you to read at least some of these articles. You may find these articles
online at Yale library (some articles will be posted in ClassesV2, with journal links as follows:
Fortune:
http://infotrac.galegroup.com/itw/infomark/1/1/1/purl=rc18%5fITOF%5F0%5F%5Fjn+%2
2Fortune%22?sw_aep=29002
Business week
http://infotrac.galegroup.com/itw/infomark/1/1/1/purl=rc18%5fITOF%5F0%5F%5Fjn+%2
2Business+Week%22?sw_aep=29002
Forbes
http://infotrac.galegroup.com/itw/infomark/1/1/1/purl=rc18%5fITOF%5F0%5F%5Fjn+%2
2Forbes%22?sw_aep=29002
Course Outline (*** Subject to change ***)
Class 1 (10/26)
 Introduction to MGT 812
 An Overview of Financial Statement Analysis
Reading:
 Business Analysis & Valuation: Chapter 1
 Death, Taxes & Sarbanes – Oxley? (Business Week, January 17, 2005)
 The new accountability: In a post-Enron world, “I didn’t know” won’t cut it. But can
CEO meld caution with vision? (Business Week, July 26, 2004)
 The smoldering hedge fund (Fortune, Feb 8, 2010)
 A better way to index? (Fortune, October 30, 2006)
Class 2 (10/28)
 An Overview of Financial Statements
 Balance Sheet
 Income Statement
 Statement of Cash Flows
 Strategy Analysis
Reading:
 Business Analysis & Valuation: Chapter 2
 Pro Forma puff jobs. (gaps between companies’ standard net income and pro forma
income) (Forbes, December 9, 2002)
 Kodak’s fuzzy numbers: The company has taken “one-time” charges every year for the
past 12. (Business Week, February 9, 2004)
 Amazon’s secret: The internet retailer just turned a full-year profit. Or did it? (Fortune,
April 19, 2004)
 Don’t forget the fine print: If you fail to read the footnotes in a company’s filings,
you’re not getting the whole story. (Fortune, June 23, 2003)
 Ouch! Real numbers: New accounting rules will deflate earnings hype and, perhaps,
stocks. (Business Week, March 24, 2003)
 What lurks on the books of banks. (Business Week, Dec 14, 2009)
Class 3 (11/2)
 Accounting Analysis I
 Introduction
 Leeways in GAAP
Reading:
 Business Analysis & Valuation: Chapter 3
 The secret behind those profit jumps: Many companies are boosting earnings by
reversing write-downs and not disclosing it. (Business Week, December 8, 2003)
 Fuzzy Numbers; Despite the reforms, corporate profits can be as distorted and
confusing as ever. Here’s how the game is played. (Business Week, October 4, 2004)
 Pumped-up pension plays? Regulators are investigating how some companies tinker
with retiree accounting. (Business Week, October 25, 2004)
 Presto chango! Sales are huge! (Fortune, March 20, 2000)
 Accounting games in the grocer’s aisle: Loose rules on supplier payments give chains
lots of discretion. (Business Week, April 14, 2003)
Class 4 (11/4)
 Accounting Analysis II
 Gaps in GAAP
Class 5 (11/9)
 Case 1: Demand Media (due at the beginning of the class)
 Accounting Analysis II (cont.)
 Gaps in GAAP
 Accounting fraud
Reading:
 Business Analysis & Valuation: Chapter 4
 Innovation: analyzing research and development costs in picking stocks. (Forbes, July
5, 2004)
 Stock options: Old game, new tricks. (Business Week, December 19, 2005)
 The hidden bite of retiree health: At many companies, the costs may be a bigger drain
than those for pension plans. (Business Week, January 19, 2004)
 False front: analyzing financial statements. (Forbes, October 14, 2002)
 The mystery of the $890 billion insurer: MBIA guarantees the safety of bonds that fund
everything from the Eurotunnel to commercial aircraft to cities across America.
(Fortune, May 16, 2005)
 Partners in crime (Fortune, October 17, 2003)
 Master of disguises (DVI Health Services Corp’s financial misrepresentation leads to
bankruptcy) (Forbes, July 26, 2004)
Class 6 (11/11)
 Financial Analysis
 Ratio Analysis
 Factors Hindering Comparability
Reading:
 Business Analysis & Valuation: Chapter 5
 Honey, I shrunk the profits: Accounting made a bad year look a whole lot worse.
(Fortune, April 14, 2003)
 Free lunch. (Forbes, March 28, 2005)
 Pension pangs (how pension fund performance affects companies). (Forbes, June 9,
2003)
 Many performance ratios lie about a company’s health. A new metric has emerged that
can’t easily be gamed – and savvy investors and managers will check it out. (Fortune,
Jan 18, 2010)
Class 7 (11/16)
 Case 2: Harnischfeger Corporation (due at the beginning of the class)
 Pro Forma Analysis
 Overview
 Pro Forma Income Statement
Class 8 (11/18)
 Pro Forma Analysis (cont.)
 Pro Forma Income Statement
 Pro Forma Balance Sheet
 Pro Forma Statement of Cash Flows
Reading:
 Business Analysis & Valuation: Chapter 6
 The classic approach. (Forbes, November 29, 2004)
 What did Joe know? Joe Nacchio’s Qwest booked hundreds of millions on bogus deals.
He says that’s news to him, A Fortune investigation suggests otherwise. (Fortune, May
12, 2003)
 Why AOL’s accounting problems keep popping up: The online giant created ad
“revenues” out of thin air. Now, it’s got scandals. (Fortune, April 28, 2003)
Class 9 (11/30)
 Case 3: FZ Enterprises I (due at the beginning of the class)
 Equity Valuation
 Overview
 The Cost of Capital
 Calculating Free Cash Flows
Reading:
 Business Analysis & Valuation: Chapter 7
 The urge to merge: With the tally of high-priced mergers growing by the day, one can’t
help but ask: Did we learn nothing from the crash? (Fortune, February 21, 2005)
Class 10 (12/2)
 Equity Valuation (cont.)
 The DCF-WACC approach
Reading:
 Should you buy Apple stock? (Fortune, September 27, 2010)
Class 11 (12/7)
 Equity Valuation
 The DCF-APV approach
Reading:
 Business Analysis & Valuation: Chapter 8
 On Google, bubbles, and market madness (Fortune, June 27, 2005)
 Why tech is a bad bet (Fortune, May 2, 2005)
Class 12 (12/9)
 Equity Valuation (cont.)
 Accounting-based Valuation: The DAE Model
 The multiple approach
Class 13 (12/14)
 Case 4: FZ Enterprises II (due at the beginning of the class)
 Equity Investment: Trading Strategies and Fundamental Analysis
 Investment process
 Factor research
Reading:
 Business Analysis & Valuation: Chapter 9
 What’s wrong with Cisco? Nothing, really. (Fortune, March 21, 2005)
 Dell’s midlife crisis: The powerhouse PC maker has hit a sudden speed bump. Can the
company get back on track? (Fortune, November 28, 2005)
 Partners in crime (Fortune, October 2, 2006)
 My hedge fund, myself (Fortune, August 7, 2006)
 Inside the world’s biggest hedge fund (Fortune, March 30, 2009)
 Can you outsmart the market? (Fortune, Dec 21, 2009)
Final exam: Wednesday, Dec 16, 1:00-4:00pm