Financial Statement Analysis and Valuation 4th Edition

MACC 6375 Financial Statement Analysis UNIVERSITY OF TEXAS-PAN AMERICAN Professor s Contact Information Online Course Syllabus Andrew Anabila, Ph. D. Associate Professor Room 220C, Accounting and Business Law, College of Business Administration The University of Texas-Pan American Time zone: Central Phone: 956-665-8084, anabilaaa@utpa.edu I am available from Monday through Thursday from 2PM to 5PM central time zone. If these times are not convenient for you, please let me know and I will be happy to accommodate your schedule if at all possible. I provide you with these times to make it easier to communicate with me, not to limit our contact and want you to know that, should you need to contact me outside these time frames, you should not hesitate to do so. Normally you will be able to hear back from me by email within 24 hours. Grade for homework will be available within 72 hours of the assignments due date. This syllabus, for SPRG 2015 MACC 6375-90L CRN 27969, may be revised in the term. Coach Information To be announced REQUIRED READING (Textbook): Easton, P., McAllally, M., Sommers, G., and Zhang, X. (2015) Financial Statement Analysis and Valuation 4th Edition. ISBN 13.978-1-61853-104-9 Read all materials available at the Blackboard Learn site for this course on mycourses.utpa.edu/ PREREQUISITES: Admission to the MACC/MSA Program, or by approval of Department of Accounting and Business Law. MINIMUM TECHNICAL SKILLS: Need to know how to use Microsoft Office s Excel, Word, and PowerPoint. Familiar with Blackboard Learn You should be able to open pdf files. 1

Words of Welcome Welcome to MACC 6375: Financial Statement Analysis. We will be learning about how to analyze and interpret a firm s financial statements with an emphasis on understanding the reporting choices available to management, and the3ir implications. The topics include understanding, interpreting and analyzing financial statements, evaluating firm performance using information provided in financial statements, understanding the impact of different accounting methods on firm valuation, and evaluating firm value using different firm valuation models and diagnosis of firm risk. Course Objectives This course aim to cover following four objectives: 1. Interpret information in financial statements and related disclosures. 2. Analyze information in financial statements using financial statement analysis tools (e.g., ratio analysis) to evaluate business activities. 3. Assess quality of disclosed financial statement information and illustrate using different reporting choices can results in different set of financial information. 4. Evaluate firm value based on the financial information provided. The Online Weekly Schedule Electronic weeks begin on Wednesday and end on Tuesday. Day 1 - Wednesday Day 2 - Thursday Day 3 - Friday Day 4 - Saturday Day 5 - Sunday Day 6 Monday Day 7 Tuesday 2

Approximate beginning dates (Date of Day 1) by week Week Begins: Wednesday Week Begins: Wednesday Week 1 21-Jan-15 SPRG BRK 18-Mar-15 Week 2 28-Jan-15 Week 9 25-Mar-15 Week 3 4-Feb-15 Week 10 1-Apr-15 Week 4 11-Feb-15 Week 11 8-Apr-15 Week 5 18-Feb-15 Week 12 15-Apr-15 Week 6 25-Feb-15 Week 13 22-Apr-15 Week 7 4-Mar-15 Week 14 29-Apr-15 Week 8 11-Mar-15 EXAMS 6-May-15 CLASS POLICIES AND PROCEDURES Attendance and Participation Attendance and participation are very important online. You will be expected to participate 4 days a week in several different discussions and to contribute at least two substantive discussion messages on each of those 4 days. This is a required part of your grade. Participation consists of notes you send above and beyond graded assignments, Week Discussion questions. This generally means the messages you send as replies to messages from your classmates and me and are about 75 words. Please note that both quantity and quality are important considerations when it comes to participation. For example, a message which says simply, "I agree," does not constitute participation, because it does not add anything of substance to the discussion. In order to earn full participation points, you must add something of substance to the discussion 4 out of 7 days per week this would consist of new ideas, your perspectives, pointed follow-up questions, and etc. and are about 75 words in length. You will find it is much easier to keep up with an on-line class when you are logging in and participating regularly. Participation and Discussion Question Grading Discussion question responses will not count towards the class participation requirement and will be evaluated separately. Expectations for Discussion Question and Weekly Summary Responses Week Discussion questions should be at least 100-200 words. Please post responses to the threads provided. To respond, highlight the appropriate thread, click on Reply, type your response, and send. Please do not start a new thread for the weekly discussion questions. 3

Unlike your formal written assignments, I do not require that your discussion question responses adhere to specific formatting requirements. However, please make sure to proofread carefully. Grammar and spelling errors may impact the grading. I expect your discussion question responses to reflect critical thought. Whenever possible, please try to relate the course content to real-world applications from your work experience. Late Assignments Late assignments will be penalized with a 20% grade deduction for each day late. Deadlines will be defined as 11:59 p.m. Central Time. If you know you will be offline the day an assignment is due, please make sure to post it early. Anytime you feel that you might be falling behind in the course, it is best to contact me to discuss your situation. As noted, no assignments can be accepted after the final day of class. Academic Integrity By virtue of membership in the University s academic community, students accept a responsibility to abide by the Student Code of Academic Integrity. A link to the Code can be found on the Student Life and Transition Services Web site or by clicking the following URL: http://portal.utpa.edu/utpa_main/dess_home/dos_home/slts_home/ez_home/ez_sjs/sjs_integrity What is the process for resolving accusations of academic dishonesty? http://portal.utpa.edu/utpa_main/dess_home/dos_home/slts_home/ez_home/ez_sjs/sjs_dishonesty Confidentiality and Proprietary Information One of the cornerstones of the University of Texas Pan American online learning model is the practical application of theoretical concepts. You are encouraged to share your personal and professional experiences as a means to integrate knowledge by reflecting on its application. However, it is important to note that we all are bound by confidentiality in this class. To assure that we can have a free and open discussion in which you may elect to discuss your company and its policies and procedures as they apply to the course material, I expect each person to respect the confidentiality of what your classmates are willing to share with us. At the same time, I ask that each of you exercise good judgment in what you choose to share and avoid disclosing non-public or competitively-sensitive information. As a rule students and faculty members must not share present or past employer information that is considered to be proprietary, confidential, company-sensitive, or 4

protected trade secrets. Students are encouraged to examine their organization's limitations on sharing information externally. Students and faculty members may appropriately choose to illustrate lessons from their experience that might challenge these boundaries, without identifying specific employers or individuals by name. If you have any questions about any of the information contained in this syllabus, or about any other aspect of this class, please do not hesitate to ask! GRADING FORMULAR Points 90+ A 80+ B 70+ C 60+ D <60 F Grade For dispute resolution, this syllabus will be the main point of reference. The instructor should not be required to round-off scores to help students achieve grades that go with a higher percentage score. Incomplete Grades Incomplete grades will not be awarded. Point Values for Course Assignments ASSIGNMENTS Weight Introduction (2 points) 2% Weekly Discussion (3 points x 14 discussions) 42% Assignments (3 points x 14 assignments) 42% Final Exam 14% Total 100% 5

Weekly Course Schedule Week 1 Assignments and Due Dates Introduction, and download the annual (10-K) reports (excel version) of your 2 companies from the list that uploaded with this syllabus. See instructions for downloading in Appendix 1A beginning page 1-26. Module 1. Framework for analysis and valuation. View lecture PowerPoint Presentation in Week 1 Course Materials Folder: Module 1. Read textbook: Module 1. Due Day 2 (Thursday): Read/Study Syllabus, Download your companies 10-K. Due Day 3 (Friday): Introduction of yourself in Discuss. Due Day 6 (Monday): Module 1 Discussion: Describe the following users of accounting information and their information needs (what information they need and how they use the information), and explain the costs of providing them with such information: Shareholders and directors, Creditors and suppliers, financial analysts. Due Day 7 (Tuesday): Submit Module 1 Assignment (ONGOING ANALYSIS PROJECT on page 1-37, using the information on your pair of companies). Week 2 Assignments and Due Dates Module 2. Overview of business activities and financial statements. View lecture PowerPoint Presentation in Week 2 Course Materials Folder: Module 2. Read textbook: Module 2. Due Day 6 (Monday): Module 2 Discussion: The financial statements provide pieces of information relating to the organization, such as the value of the organization. What do you understand by book value and market value respectively, or the 6

organization and how are each of these values determined respectively? What is the relationship between these two constructs, if any? Due Day 7 (Tuesday): Submit Module 2 Assignment (ONGOING ANALYSIS PROJECT on page 2-51, using the information on your pair of companies). Week 3 Assignments and Due Dates Module 3. Profitability analysis and interpretation. View lecture PowerPoint Presentation in Week 3 Course Materials Folder: Module 3. Read textbook: Module 3. Due Day 6 (Monday): Module 3 Discussion: What is a ratio? What are the uses/advantages/strengths and limitations/disadvantages/weaknesses of ratio analysis? Briefly explain profitability ratios, state what they are measuring and explain why they are important to investors, creditors and managers. Due Day 7 (Tuesday): Submit Module 3 Assignment (ONGOING ANALYSIS PROJECT on page 3-52, using the information on your pair of companies). Week 4 Assignments and Due Dates Module 4. Credit risk analysis and interpretation. View lecture PowerPoint Presentation in Week 4 Course Materials Folder: Module 4. Read textbook: Module 4. Due Day 6 (Monday): Module 4 Discussion: Briefly explain liquidity ratios, state what are they are measuring and explain why they are important for creditors, investors, and managers. What is bankruptcy and how is it predicted? Due Day 7 (Tuesday): Submit Module 4 Assignment (ONGOING ANALYSIS PROJECT on page 4-48, using the information on your pair of companies). 7

Week 5 Assignments and Due Dates Module 5. Revenue recognition and operating income. View lecture PowerPoint Presentation in Week 5 Course Materials Folder: Module 5. Read textbook: Module 5. Due Day 6 (Monday): Module 5 Discussion: Define and describe high quality accounting information, using appropriate examples if possible. Due Day 7 (Tuesday): Submit Module 5 Assignment (ONGOING ANALYSIS PROJECT on page 5-66, using the information on your pair of companies). Week 6 Assignments and Due Dates Module 6. Asset recognition and operating assets. View lecture PowerPoint Presentation in Week 6 Course Materials Folder: Module 6. Read textbook: Module 6. Due Day 6 (Monday): Module 6 Discussion: What are operating assets? Property, Plant and Equipment (PPE) are generally valued at historical cost in the USA. State and explain two main departures from historical cost when accounting for PPE. Due Day 7 (Tuesday): Submit Module 6 Assignment (ONGOING ANALYSIS PROJECT on page 6-60, using the information on your pair of companies). Week 7 Assignments and Due Dates Module 7. Liability recognition and non-owner financing. View lecture PowerPoint Presentation in Week 4 Course Materials Folder: Module 7. 8

Read textbook: Module 7. Due Day 6 (Monday): Module 7 Discussion: State and describe the main types or classes of debt and explain the advantages and disadvantages of debt financing. Due Day 7 (Tuesday): Submit Module 7 Assignment (ONGOING ANALYSIS PROJECT on page 7-53, using the information on your pair of companies). Week 8 Assignments and Due Dates Module 8. Equity recognition and owner financing. View lecture PowerPoint Presentation in Week 8 Course Materials Folder: Module 8. Read textbook: Module 8. Due Day 6 (Monday): Module 8 Discussion: State and describe the main types or classes of equity and explain the advantages and disadvantages of equity financing. Due Day 7 (Tuesday): Submit Module 8 Assignment (ONGOING ANALYSIS PROJECT on page 8-51, using the information on your pair of companies). Week 9 Assignments and Due Dates Module 9. Intercorporate entities. View lecture PowerPoint Presentation in Week 5 Course Materials Folder: Module 9. Read textbook: Module 9. Due Day 6 (Monday): Module 9 Discussion: Define investments that are labelled as passive, significant influence and controlling interests respectively. Explain how each of these categories of investment is valued and explain why. Due Day 7 (Tuesday): Submit Module 9 Assignment (ONGOING ANALYSIS PROJECT on page 9-55, using the information on your pair of companies). 9

Week 10 Assignments and Due Dates Module 10. Off-balance-sheet financing. View lecture PowerPoint Presentation in Week 5 Course Materials Folder: Module 10. Read textbook: Module 10. Due Day 6 (Monday): Module 10 Discussion: What do you understand by offbalance sheet financing? For the following off-balance sheet items - capital leases, pensions and special purpose entities - describe them, explain how they are accounted for and explain their significance in financial statement analysis. Due Day 7 (Tuesday): Submit Module 10 Assignment (ONGOING ANALYSIS PROJECT on page 10-53, using the information on your pair of companies). Week 11 Assignments and Due Dates Module 11. Forecasting financial statements. View lecture PowerPoint Presentation in Week 11 Course Materials Folder: Module 11. Read textbook: Module 11. Due Day 6 (Monday): Module 11 Discussion: What is a forecast, and why make forecasts in financial statement analysis? What items are typically forecast(ed) in financial statement analysis? Due Day 7 (Tuesday): Submit Module 11 Assignment (ONGOING ANALYSIS PROJECT on page 11-81, using the information on your pair of companies). Week 12 Assignments and Due Dates Module 12. Cost of capital and valuation basics. 10

View lecture PowerPoint Presentation in Week 12 Course Materials Folder: Module 12. Read textbook: Module 12. Due Day 6 (Monday): Module 12 Discussion: Define each of the following and compare and contrast them: intrinsic value and market value. What is the cost of capital and what is its use in valuation? Due Day 7 (Tuesday): Submit Module 12 Assignment (ONGOING ANALYSIS PROJECT using the information on your pair of companies to answer the following problems below: Problem 1: Estimating cost of debt: a. How much interest expense did each company incur during for 2013? b. What is the book value of each company s interest bearing debt at the i. beginning of 2013 (i.e. at the end of 2012) ii. end of 2013? c. Estimate each company s Pretax cost of debt capital for 2013 d. Estimate each company s effective (i.e. average) tax rate for 2013 from information on its income statement. e. Estimate each company s after tax cost of debt capital for 2013, assuming the statutory tax rate is 37% for all companies. Problem 2: Estimating cost of Equity Capital and Weighted-average cost of capital. a. For each company, explain what its market beta implies regarding its stock price volatility? b. Given the market risk premium and the risk free rate in the excel file, estimate each company s cost of equity capital using the CAPM model (Hint: go back to equation 12.1). c. Assume that the market value of debt is a good proxy for the intrinsic value of debt. Now given that the market value of each company s debt is 20% higher than the book value of the debt for 2013, and the after-tax cost of debt is as per your solution to Problem 1e above, estimate the each company s weighted average cost of capital.). Week 13 Assignments and Due Dates Module 13. Cash-flow-based valuation. View lecture PowerPoint Presentation in Week 13 Course Materials Folder: Module 13. 11

Read textbook: Module 13. Due Day 6 (Monday): Module 13 Discussion: Differentiate between the dividend discount model, the discounted cash flow model and the residual operating income models of valuation. Which of these models appeals the most and why? Due Day 7 (Tuesday): Submit Module 13 Assignment (ONGOING ANALYSIS PROJECT on page 13-28, using the information on your pair of companies). Week 14 Assignments and Due Dates Module 14. Operating-income-based valuation. View lecture PowerPoint Presentation in Week 14 Course Materials Folder: Module 14 Due Day 6 (Monday): Module 14 Discussion: Describe the residual income model and explain how it is used to value equity securities. What information can management gather from such a valuation model? Due Day 7 (Tuesday): Submit Module 14 Assignment (ONGOING ANALYSIS PROJECT on page 14-30, using the information on your pair of companies). Week 15 Review and Final Exam Content: to be announced. Structure: to be announced. Date, Time and Place To be announced. Protocols: Naming and Submitting Documents Before you submit a document, name your file according to the format below. Avoid special characters and spaces in file names. Use a single underline _ to separate words. 12

The name of your should follow the format: Example: Essay LastName_Firstname_MiddleInitial_Essay.doc Smith_John_F_Essay.doc Assignment LastName_Firstname_MiddleInitial_Essay.xls Smith_John_F_Essay.xls Classroom Expectations The following ground rules will help your work in this course to go much more smoothly. Please carefully review these expectations and follow them. 1. Academic integrity will be appraised according to the student academic behavior standards outlined in The University of Texas Pan American Student Handbook. See http://www.utpa.edu/hop/policies/?5.5.1 for further details. 2. Late submissions will result in a lower grade. 3. Keep up with the reading. You have quite a few chapters, modules, discussion postings, and e-mail messages to read for the class. Please keep up with the reading. Students who keep up with the reading tend to do much better in this kind of class than those who do not. E-mail E-mail will be an integral part of this course. Make sure you: 1. Check your e-mail at least twice per week (more often is better). 2. Be patient. Don t expect an immediate response when you send a message. Generally, two days is considered reasonable amount of time to receive a reply. 3. Include "Subject" headings: use something that is descriptive and refer to a particular assignment or topic. 4. Be courteous and considerate. Being honest and expressing yourself freely is very important but being considerate of others online is just as important as in the classroom. 5. Make every effort to be clear. Online communication lacks the nonverbal cues that fill in much of the meaning in face-to-face communication. 6. Do not use all caps. This makes the message very hard to read and is considered "shouting." Check spelling, grammar, and punctuation (you may want to compose in a word processor, then cut and paste the message into the discussion or e-mail). 7. Break up large blocks of text into paragraphs and use a space between paragraphs. 8. Sign your e-mail messages. 9. Never assume that your e-mail can be read by no one except yourself; others may be able to read or access your mail. Never send or keep anything that you would not mind seeing on the evening news. Note: Review the Netiquette and Viruses section below 13

Discussion Many of the "rules of the road" or protocols that apply to e-mail also apply to the use of discussions. Use the following conventions when composing a discussion posting: 1. During a Discussion assignment, deadlines for posting to and replying will be specified with each assignment. It is a good practice to always check the Discussions multiple times during the week. 2. If you want to send a personal message to the instructor or to another student, use e-mail rather than the discussions (see above E-mail Protocols). 3. Use the appropriate Discussion Topic; don t post everything on the "Main" Discussion Topic. 4. Be patient. Don t expect an immediate response when you send a message. 5. A helpful hint for use with both discussions and e-mail --- Compose your message in your wordprocessing application in order to check spelling, punctuation, and grammar --- then copy and paste your composition into e-mail or the discussion. This also saves online time. 6. Everyone should feel free to participate in class and online discussions. Regular and meaningful discussion postings constitute a substantial portion of your grade. 7. Respect each other s ideas, feelings and experience. 8. Be courteous and considerate. It is important to be honest and to express yourself freely, but being considerate of others is just as important and expected online, as it is in the classroom. 9. Explore disagreements and support assertions with data and evidence. 10. "Subject" headings: use something that is descriptive and refer to a particular assignment or discussion topic when applicable. Some assignments will specify the subject heading. 11. Use the "reply" button rather than the "compose" button if you are replying to someone else s posting. 12. Do not use postings such as "I agree," "I don t know either," "Who cares," or "ditto." They do not add to the discussion, take up space on the Discussions, and will not be counted for assignment credit. 13. Avoid posting large blocks of text. If you must, break them into paragraphs and use a space between paragraphs. 14. Use the Technical Discussion topic for assistance with technical issues. Use the Help Discussion topic for questions about course material or assignments. There will be specific discussion topics for particular discussions - pay close attention to the assignment, and post appropriately. Note: Review the Netiquette, Viruses and Technical Resources sections below. Netiquette "Netiquette" has evolved to aid us in infusing our electronic communications with some of these missing behavioral pieces. "Emoticons" and other tools have become popular and I encourage their use when it will add to the clarity of your communication. :-) happy, pleased :-( sad, displeased :-O surprised >:- angry 14

Abbreviate when possible. Examples: LOL laugh out loud, "I find this funny" ROFL rolling on floor laughing, really funny BTW by the way *grin* smiling IMHO in my humble opinion FYI for your info Flame antagonistic criticism Netiquette continues to evolve and I am sure that we will have constant additions to this growing language. The important thing to remember is that all of the "cute" symbols in the world cannot replace your careful choice of words and "tone" in your communication. Viruses A virus can spell disaster. Your use of a reputable anti-virus program is a requirement for participation in this course (good ones include McAfee or Norton). Also, back up your files: "My hard drive crashed." "My modem doesn t work." "My printer is out of ink." These are today s equivalents of "My dog ate my homework." And these events really do occur and they are really inconvenient when they do. However, these are not valid excuses for failing to get your work in on time. Technical Resources For specific problems in any of the areas below or for further information go to the corresponding link for assistance. UTPA Home Page will help find UTPA resources Blackboard Help Desk: Your contact for technical difficulties related to blackboard o Phone: 956-665-5327 o Online Ticket System site o Location: Education Building Room 2.202 UTPA Help Desk You can also call the Service Desk at 956-665-2020. Mandatory Course Evaluation: Mandatory Course Evaluations period (Apr 15 May 6): Students are required to complete an ONLINE evaluation of this course, accessed through your UTPA account (https://my.utpa.edu/); you will be contacted through email with further instructions. The evaluation window closes at 11:59 pm on May 6 th, the last day of Spring classes. Students who complete their evaluations by May 6 th will have priority access to their grades. 15