ACCT 738 / FINA 756 FINANCIAL STATEMENT ANALYSIS SRING 2008

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1 1 ACCT 738 / FINA 756 FINANCIAL STATEMENT ANALYSIS SRING 2008 INSTRUCTOR: Timothy S. Doupnik CLASS: TTH 2:00-3:15, BA 350 OFFICE: BA 310 HOURS: TTH 1:00 2:00, drop-in, and by appointment TELEPHONE: (Office), (Home) doupnik@moore.sc.edu OBJECTIVE: This course provides an introduction to financial statement analysis as an important component of business analysis. The first part of the course focuses on accounting analysis, which seeks to determine the extent to which financial statements reflect economic reality. Students will learn how to identify distortions and make adjustments to financial statements to make them more economically relevant. The second part of the course focuses on financial analysis, which involves the use of financial ratios and other analytical tools to learn as much as possible about a company from its financial statements. Students will learn how to conduct cash flow analysis, return on investment and profitability analysis, and credit and risk analysis. Students also will learn how to conduct prospective analysis, which involves forecasting and the preparation of pro forma financial statements. The course concludes with an introduction to equity analysis and security valuation. TEXTBOOK: Wild, Subramanyam, and Halsey, Financial Statement Analysis: 9 th Edition (2007), McGraw- Hill. ASSIGNMENTS: Several questions/exercises/problems/cases are assigned as homework to give students the opportunity to apply the concepts discussed in the course. These assignments serve as the basis for much of the discussion in class. Several of these assignments will be turned in as part of the course grade. EXAMINATIONS: There are three examinations primarily consisting of questions and problems. The first exam covers Chapters 1-4 of the textbook, the second exam covers Chapters 5-8 of the textbook, and the third (final) exam is comprehensive but will focus on Chapters 9-11 of the textbook. PROJECT: Students form teams to complete a project requiring a comprehensive analysis of an actual company s financial statements. The project is completed in installments with the final product due at the end of the semester. GRADES: Course grades are based upon your performance on graded assignments, examinations, and the course project, weighted as follows: Assignments (3 x 5% each) 15% Exams (3 x 20% each) 60% Project 25% The following grading scale will be used: A C+ Below 60 F B C B D

2 ACCT 738/FINA 756 Financial Statement Analysis Spring 2008 Assignment Schedule (Incomplete and Subject to Change) 2 Week Tuesday Thursday 1 January 15 Introduction January 17 Read Chapter 1 2 January 22 E1-14; E1-15 P1-5 (use ending balances for Days sales); P1-10 Read Chapter 2 Q2-6, 2-7, 2-8; Q2-12; Q2-18, 2-19, 2-20; Q2-21; Q2-22; Q2-23; Q2-27, 2-28 Various Companies Problem 3 January 29 Read Chapter 3 P3-1; P3-4; P3-8 4 February 5 C3-5 (Delta Airlines only); Mattel Problem 5 February 12 W.W. Grainger Problem; Sturm, Ruger & Co. Problem; Black and Decker Problem 6 February 19 Read Chapter 5 Q5-3; Q5-4; Q5-15; Q5-16; Q5-22; Q5-23; Q5-24; Q February 26 Read Chapter 6 Q6-7; Q6-8; Q6-13; Q6-21; Q March 4 Read Chapter 7 Q7-8; Q7-9 E7-4; E7-7; E7-8; E7-10 Q1-17; Q1-19; Q1-22; Q1-33 E1-4; E1-9; E1-11 January 24 E2-11; E2-12; E2-13 P2-11, Part A extended use Excel to calculate Pearson correlation coefficients for a. (1), (2), (3), and (4). Then, calculate year-to-year % change for MPS, EPS, CFOPS, and NCFPS, and calculate the same Pearson correlation coefficients P2-16 Dell Problem January 31 Textron Problem; Campbell Soup Problem February 7 Read Chapter 4 Q4-3; Q4-11; Q4-19; Q4-21 P4-3; P4-4; P4-5 Dos Santos Problem February 14 First Exam; Chapters 1-4 February 21 E5-2; E5-6; P5-5 Google Problem; SanDisk Problem; Sandestino Problem February 28 E6-8; E6-10; E6-12 P6-1; P6-3 C6-2; C6-3 Oertel Problem; Verizon Communications Problem March 6 C7-2; C7-3; C7-4 Eastman Kodak Problem; Callaway Golf Problem March 11 Spring Break March 13 Spring Break

3 9 March 18 March March 25 March 27 Second Exam; Chapter April 1 April 3 12 April 8 April April 15 April April 22 April 24 Saturday, May 3 Third Exam 9:00 a.m.

4 ACCT 738/FINA 756 SRING 2008 FINANCIAL STATEMENT ANALYSIS PROJECT (Tentative) Instructions: 1. Create a team comprised of four students. Each team should have at least one MACC and one IMBA student. 2. Select two U.S.-based companies in the same industry and obtain a copy of their most recent annual reports on Form 10-K. No banks, insurance companies, utilities, or companies that do not manufacture and/or sell a product. Dell and Hewlett-Packard are off limits. Submit your companies to me for approval first come, first served. 3. Complete Parts 1 5 by the (tentative) due dates indicated. Part 1: Company Description (due January 31) For each company, based on information provided in the annual report: Provide a brief description of the company s business. Summarize the risks factors that could have an adverse impact on the company and cause its future performance to differ from expectations. Summarize major differences in the two companies with respect to business and risk factors. Part 2: Accounting Analysis (due March 18) For each company: Summarize the areas in which management s judgment, assumptions, and estimates can have a significant effect on amounts reported in the financial statements. Identify areas in which the financial statements are in need of adjustment. Adjust the financial statements in those areas where it is feasible to do so. Estimate permanent (sustainable) income for the company. Evaluate the relative accounting quality for the two companies in your analysis. Part 3: Financial Analysis (due April 8) Conduct the following analyses for each company: Cash flow analysis Return on invested capital and profitability analysis Credit analysis Your analyses should consist of the calculation of relevant financial ratios and other financial measures, as well as an interpretation of the ratios and amounts you calculate. Directly compare your two companies with respect to these analyses. Part 4: Prospective Analysis (due April 15) For each company: Prepare pro-forma financial statements for the next year (year t + 1), where t is the year of your annual report. Explicitly state the assumptions you make in forecasting next year s financial statements. Part 5: Equity Analysis and Valuation (due April 22) Use the residual income model to determine a value per share for each company s common stock. Use a five-year forecast horizon in your valuation; assume residual income in the terminal year (year t + 6) will grow at the rate of inflation in perpetuity. Cost of Equity Capital = Risk-Free Rate + (Beta x Market Risk Premium). Use the 10-year government bond rate as an estimate of the risk-free rate (available at Beta is available from various sources including finance.yahoo.com, Key Statistics. Current estimates of the market risk premium are 3-4%. 4

5 5 List of Companies by Industry (that might be suitable for project) Manufacturers Aerospace/Defense Lockheed Martin Boeing Northrop Grumman Raytheon Harris General Dynamics Honeywell Semiconductors Intel Texas Instruments Analog Devices Data Storage Devices Western Digital Seagate Imation Steel Nucor CMC US Steel Consumer Products Colgate Palmolive Clorox Kimberly Clark Procter & Gamble Johnson & Johnson Beverage, beer Boston Beer Anheuser Busch Beverage, soft drink Coca-Cola PepsiCo Construction Machinery Caterpillar Deere Terex Apparel Liz Claiborne Ralph Lauren Shoes Nike Reebok Electrical Equipment Eaton Johnson Controls ITT Pharmaceutical Pfizer Merck Bristol-Myers Squibb Abbott Labs Wyeth Eli Lilly Food Heinz Del Monte Conagra Campbell Soup Kellogg General Mills Chemical Dow Du Pont Paper International Paper Mead Westvaco Weyerhauser Conglomerates Textron United Technologies GE Toys Mattel Hasbro Homebuilders Lennar Pulte Homes Beazer Homes Retailers Grocery Kroger Safeway Publix Discount Wal-Mart Target Costco Apparel Abercrombie & Fitch Pacific Sunwear Gap American Eagle Urban Outfitters Autoparts Autozone Advance Auto Parts Genuine Parts Co. Home Improvement Home Depot Lowes Drug Stores CVS Walgreen Consumer Electronics Best Buy Circuit City Office Products Staples Office Depot Office Max Source: cnnmoney fortune 500