NEW YORK UNIVERSITY
Leonard N. Stern School of Business Administration
Fall 2000
B10.2303.0A
Financial Statement Analysis
Sundays 1:00-4:00
Classroom: MEC 2-65
Web page: www.stern.nyu.edu/~jlivnat
Prof. Joshua Livnat
Office Hours: W 2:30-3:30
and by appointment
Office: 311 Tisch
Phone: 998-0022
Fax: 995-4230
E-mail: jlivnat@stern.nyu.edu
Course Description:
The objective of this course is to illustrate the application of information communicated
in financial statements about the operating, investing, and financing activities of business entities
within the USA and abroad. The course will concentrate on accounting disclosure standards, the
differential effects of alternative accounting principles, and the interpretation of financial
information. Traditional and nontraditional methods of financial statement analysis will be
discussed and evaluated. The course is designed to develop financial analysis skills, as well as
an appreciation for the limitations of these skills in various contexts.
Pre-requisites:
Students are assumed to have a working knowledge of accounting principles comparable
to materials covered in the core financial accounting course.
Classroom Procedures:
This is an alternative delivery course; it is offered on seven Sundays throughout the
semester, and it assumes a nontrivial self-learning component. Typically, students are assumed to
master the required materials on their own before coming to class. Homework assignments on
the self-study components have to be submitted on due dates.
The basic approach to class sessions will be a combination of discussions and lectures. A
wide variety of examples will be used to discuss the different topics addressed. Another
important objective is to foster a debate with and among students. Current events, reported in the
Wall Street Journal and other financial periodicals, will be discussed.
The class materials and communications will be handled through BlackBoard. To log into
BlackBoard (BB), you need to use your E-mail ID and password. All homework assignments
should be submitted through the drop box on BB. To access BB, use the following address:
www.class.stern.nyu.edu
Please feel encouraged to contact me through E-mail or phone if you have any questions.
Texts:
Required:
Kenneth S. Hackel and Joshua Livnat, Cash Flow and Security Analysis, Business-One
Irwin, Second Edition, 1995.
Recommended:
1.
Financial Statement Analysis, H.D Fried, A. Sondhi and G. White, John Wiley, latest
edition.
2.
Intermediate Accounting, Latest Edition, Kieso & Weygandt, John Wiley.
Grade:
Homework assignments: (best six)
Examination
Group project:
Total
40%
30%
30%
100%
Late assignments will not be graded!
Course Schedule
In-Class Date
Meeting
Subject
1
Introduction, Financial statements
Ratio analysis
The economic environment of a
firm
Statement of cash flows
Components of cash flows
Free cash flow
Pensions and other benefits
Leases
Investment styles and process
Portfolio construction and testing
International investments
Pensions
Leases
Income taxes
Stock options to employees
Investments in other firms
Valuation
Examination
E-Commerce valuation
Class Presentations
2
3
4
5
6
7
9/10
9/10
9/17
9/17
9/24
9/24
10/8
10/8
10/15
10/22
10/22
10/29
10/29
11/5
11/5
11/19
11/19
12/3
12/3
12/10
Reading
Assignment
To be done
before class
To be handed-in
on designated
date
1
2
1,2
3
4
5
pp. 365-400
pp. 352-364
8
9
10
10
11
pp. 405-413
6,7
3
4
5
8,9
6
12
Group Project
Collected
FINANCIAL STATEMENT ANALYSIS
Homework Assignments
Note: All homework assignments must be dropped on BB. Late assignments will not be
graded. Make sure to print your name and ID on the assignment.
Assignment No. 1
1.
2.
3.
Describe the segments of your selected firm. Allow 1-2 sentences (at most) for each
segment.
Tabulate the contribution of each segment to sales and profits.
Evaluate the sensitivity of the firm to the business cycle (3 sentences).
(Expected length : 1 page)
Assignment No. 2
1.
2.
3.
4.
5.
Provide expected growth rates for each segment (you may use analysts forecasts for
industries, governmental sources, etc.).
Determine the reliance on major customers or suppliers.
Determine the degree of competition for each segment.
Determine the firm's ownership structure, i.e., what percentage is held by management,
insiders, and institutional investors.
Provide any other relevant information according to the checklist in Chapter 2.
(Expected length : 1-2 pages)
Assignment No. 3
1.
2.
3.
4.
Compute financial ratios according to the five major groups discussed in class.
Compare these ratios to ratios in prior years.
Compare these ratios to industry ratios.
Discuss your conclusions (1-2 sentences for each group).
(Expected length: 3 pages in total, 2 for ratio comparisons)
Assignment No. 4
1.
Estimate the components of operating cash flows.
2.
Analyze the important investment and financing events as reflected in the statement of
cash flows.
(1 - 2 pages)
Assignment No. 5
1.
2.
3.
4.
Estimate free cash flow of the firm for the most recent three years using the traditional
method.
Attempt to identify any major components of discretionary items.
Compare the market value of the firm, net income, and free cash flow.
Discuss your findings.
(1 page)
Assignment No. 6
1.
2.
3.
4.
5.
6.
7.
What type of retirement benefits are provided by your firm? Does it have defined
contribution plans? Defined benefit plans?
Reconcile the interest cost component with the plan data for the prior year and the
assumed rates.
Compare the actual and expected return on plan assets.
Compare the funding status (over- or under-funding) with the accrual on the balance
sheet. How much should be added to assets/liabilities because of the pension plans?
Did the firm have a transition asset or an obligation?
What were cash contributions and payments to retirees?
Assess the effect of post-retirement benefits on assets/liabilities. Does the firm have any
funds to satisfy this liability?
(Expected length: 1-2 pages)
Assignment No. 7
1.
2.
3.
Does your firm have capital or operating leases?
Estimate the additional liability due to operating leases. Use footnote information about
expected future payments.
Repeat (2) by using information about rent expense in the three most recent years.
(Expected length: 1-2 pages)
Assignment No. 8
1.
2.
3.
Explain the three major items that contributed to deferred tax assets/liabilities.
Explain the three major permanent differences between tax returns and accounting for
taxes.
Examine the valuation allowance. Is it reasonable? Discuss (if applicable) the changes in
the valuation allowance.
(Expected length: 1 page)
Assignment No. 9
1.
2.
3.
4.
Does your firm have employee stock option plans?
If all employee stock options will be exercised, what would be the dilution in existing
shareholders’ stake? (Please assume cash from the exercise price will be used to buy back
shares, and do not forget to exclude treasury stock, if applicable).
What is the value of a stock option granted during the most recent year?
What is the effect of stock options on reported earnings?
(Expected length: 1 page)
Group Project
1.
Choose a manufacturing, merchandising or a service firm for an in-depth analysis. Make
sure the firm has at least 3 segments.
2.
Analyze the economic environment of the firm. Use the check-list in chapter 2. Make
sure to include an analysis of segments.
3.
Provide analysis of the industries in which the firm operates, including future
expectations.
4.
Analyze financial ratios of the firm. List some questions you would have wanted to ask
management.
5.
Estimate components of operating cash flows. Analyze the statement. Provide a list of
questions you would have wanted to ask management.
6.
Find the free cash flow for the most recent year and the four-year average free cash flow.
Estimate the free cash flow multiple.
7.
Provide an estimate of net assets for the most recent balance sheet date, taking into
account such items as pensions, other post-retirement benefits, and leases.
8.
Try to find answers to your questions through the management letter or discussion of
operations. If you still have unanswered questions call up the firm and get their replies.
Incorporate that in your report.
Expected length - 5 typewritten pages and
as many appendices as
needed