LOYOLA MARYMOUNT UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION Financial Statement Analysis: MBA 698 Fall 2009 Instructor: Dr. Carol Graham Office: HIL 211 Phone #: (310) 338-7557 E-mail: carol.graham@lmu.edu Office hours: Monday 6pm-7pm, Tuesday and Thursday 12.30pm-1.30pm and By Appointment COURSE DETAILS: Lectures: Monday 7.15pm-10.00pm (HIL 63) Text: Financial Statement Analysis John K. Wild, K.R. Subramanyam and Robert F. Halsey 10th Edition, Irwin McGraw-Hill Course Objective: This course is designed to enable you to utilize financial statements and other pertinent data in order to conduct a comprehensive analysis of a company’s business activities and economic performance. While many of the concepts that we will study can be used in a number of different contexts (e.g. credit analysis, the analysis of mergers and acquisitions, venture capital decision etc) our primary focus will be that of the external equity investor whose goal is determining the intrinsic value of a potential investment. As such, we will examine the key sources of information required to conduct an in-depth fundamental analysis, the techniques that are used in order to carry out sophisticated accounting and financial analyses and also the processes involved in forecasting financial statements. By so doing, we will be able to estimate expected payoffs for a company that can then be applied to valuation models commonly used in practice. While this course will draw on relevant theory and academic research, it will most importantly, give you practical, hands-on experience in using the financial statements of a wide variety of publicly listed companies. In addition to focusing on the theoretical, technical and practical aspects of financial statement analysis, we shall also address a variety of ethical issues throughout the course. The financial press is replete with examples of how financial information is misused and abused. These issues fall under the rubric of “earnings quality”, an area that I will emphasize throughout the semester. Furthermore, mindful of the fact that we live in an increasingly global environment, our discussions will also encompass accounting principles and practices followed in countries other than the U.S. This will hopefully provide you with a useful global perspective. By the end of this course you should be able to: 1. Determine which information is critical to a sound evaluation of a company’s past, present and future performance. 2. Understand, and critically examine, the accounting methods and assumptions that form the basis of reported financial statements. 3. Conduct a thorough financial analysis of a company including the creation of pro forma financial statements. 4. Derive an informed estimate of company value. 1 Homework and Quizzes: You will be assigned questions from each chapter that we cover in the book. I will not collect your solutions to these questions, however, it is essential that you do complete the questions assigned to the best of your ability before the next class session. I will make solutions to all of these problems available to you via Blackboard. I will give quizzes on a frequent basis. Although only some of these quizzes will count toward your final grade, ALL of them will be collected by me. I will inform you a week in advance of quizzes that will count toward your final grade. The primary purpose of these quizzes is to enable you to track your progress throughout the semester. Examinations: Two examinations will be given throughout the semester – one mid-term and one final. The final examination will require you to conduct a comprehensive analysis of a publicly listed company. If you are unable to sit a particular exam (and have a VALID) excuse, I will arrange an alternative time as long as you inform me before the date of the original exam. Class Project: The class project is a financial statement analysis project that also includes a component delineating the manner in which “non-traditional/nascent” companies could be valued. You should organize yourselves into groups of approximately 4 students to collaborate on the project throughout the semester. A detailed description of the project accompanies this syllabus. Course Grade: Your grade will be determined on the following basis: Quizzes Class Project Midterm Exam Final Exam Total 10% 30% 30% 30% 100% 40 points 120 points 120 points 120 points 400 points Note: Students cannot earn “extra credit” in this course. Honor code: Please familiarize yourself with the University’s Honor Code. Disciplinary action will be taken against students who violate this code. Class Participation: It is important that students participate in class discussion. I regularly use “cold calling” in my classes. As such, it is a good idea to review the relevant chapter in the text before coming to class. 2 *Caveat: This is a tentative outline, changes may be necessary* Chapter/Date Topic 1 (8/31) Overview of Financial Statement Analysis This chapter highlights the scope of financial statement analysis by focusing on the purpose(s) of such an analysis, the importance of the financial statements to such an analysis and the valuation models that one might use in order to conduct such an analysis. 2 (9/7) Financial Reporting and Analysis The primary sources of information (both financial and non-financial) that are used in financial statement analysis are discussed in this chapter. In addition, the conceptual framework and measurement principles underlying the financial reporting process are discussed as are the biases that one might expect to find at work within this important process. 3 (9/14) (9/14) (9/21) Special Session: Investment Research – William H. Hannon Library, led by Laurel Burkst Analyzing Financing Activities This chapter will teach you how to dissect financial statement disclosures relating to liabilities such as leases, pensions, commitments and contingencies. As such, the thorny issue of off-balance-sheet financing shall be addressed. Finally the reporting and disclosure of shareholders’ equity shall also be examined. 4 (9/28) Analyzing Investing Activities Chapter 4 emphasizes the analysis of both current and long-term assets. As such, it considers both tangible and intangible assets and the important issue of capitalizing versus expensing and the impact that this has on the financial statements and financial statement ratios. 5 (10/05) Analyzing Investing Activities: Inter-corporate Investments This chapter focuses on the accounting for investments in other companies, business combinations and derivative securities. 6 (10/12) Analyzing Operating Activities The income statement, its guiding measurement principles and the notion of transitory and non-transitory income shall be addressed in this chapter. Other issues such as interest and income taxes shall also be examined. (10/19) EXAM I 7 (10/26) (11/02) Cash Flow Analysis In this chapter, you will be introduced to the statement of cash flows, the limitations of cash flows and how to effectively and critically analyze cash flows. Financial ratios pertaining to cash flow shall also be discussed. 8 (11/02) Return on Invested Capital and Profitability Analysis Chapter 8 examines the important areas of return on capital, return on assets and return on equity. We shall closely examine the components that make up these three key measures of company performance. 9 (11/09) Prospective Analysis This chapter will focus on how to prepare pro forma financial statements and how we can utilize forecasted accounting information in the residual income valuation model. 10 (11/16) Credit Analysis In order to conduct a credit analysis, one must examine a company’s short-term liquidity and its long-term solvency and capital structure. This chapter examines these areas in detail. 11 (11/23) Equity Analysis and Valuation The topics of earnings persistence and earning power are examined in chapter 11. In addition, issues such as key multiples use in equity valuation and the empirical relationship between stock prices and accounting information are examined. 12 (11/30) Comprehensive Case: Applying Financial Statement Analysis This case enables us to take what we have learned throughout the semester and apply it to the analysis of the Campbell Soup Company. This final chapter is very rewarding and practical. (12/07) CLASS PRESENTATIONS 3