FINANCIAL INFORMATION ANALYSIS
This course introduces and develops an economic framework for financial information analysis
and valuation. The economic framework covers key analysis components such as business
strategy analysis, accounting analysis, financial analysis, and prospective analysis. It is then
applied to a variety of decision contexts including credit analysis, securities analysis, merger and
acquisition analysis, and management communications analysis. The primary focus of the
course is on equity valuation. Methods to determine “intrinsic values”, including both
accounting-based and cash flow-based approaches, are examined and applied in projects
involving valuations of listed companies. Each of the topics introduced in this course covers
institutional details, results of relevant academic research, and is furthermore supported by a
The course should appeal to those contemplating careers in investment banking, security
analysis, strategy consulting, venture capital, and corporate finance.
The course comes in the form of lectures, case studies, and exercises, and involves a course
project. By the end of the course, students should be able to answer the following questions:
• What is the relevance of business strategy analysis for financial analysis?
• How does one analyze the quality of accounting earnings?
• How is financial analysis developed for strategy and planning?
• How does financial analysis help in equity valuation?
• What is the relevance of cash flow information? What is the relevance of accruals in
• How does one measure value added?
• What are the determinants of a firm’s P/E Ratio?
• What are the determinants of a firm’s market-to-book (P/B) Ratio?
• How are “intrinsic values” calculated?
• What is the role of financial statements in determining “intrinsic values?
• Are some aspects of financial statements more important than others?
• How does one trade on the basis of financial analysis?
• How does the market value internet stocks?
Office hour: Wednesday, 2:30pm - 4:30pm (F477)
Wednesday, 7:30pm - 8:15pm
The main text is “Introduction to Business Analysis and Valuation” by Palepu, Bernard, and
Healy (1996) published by South-Western.
The core text is supplemented by relevant journal articles and working papers1. In addition, the
following books provide useful reference for the course:
A good introduction is:
Copeland, Koller, and Murrin, 1994, “Valuation: Measuring and Managing the Value of
Companies”, published by Wiley.
Other books on financial information analysis:
Stickney, 1999, “Financial Reporting and Statement Analysis: A Strategic Perspective”,
published by Dryden Press.
White, Sondhi, and Fried, 1998, “The Analysis and Use of Financial Statements”, published by
1 Copies of the working papers will be supplied to you in due time.
Other useful books for reference include:
Keiso and Weygandt, 1998, “Intermediate Accounting”, published by Wiley.
Brealey and Myers, 1996, “Principles of Corporate Finance”, published by McGraw-Hill.
The course grade will be calculated 40% from an exam and 60% from a project. The exam will
be of 2 hours duration.
The project consists in writing an equity research report on a company (with an estimated
intrinsic share price). The project may be done individually or in groups of up to four students.
The project report has to be handed in prior to the exam.
Remaining Course Schedule
Wednesday 1st March
Prospective Analysis: Forecasting
Questions 1, 2, and 7 [Palepu, Bernard, and Healy, Chapter 5]
The Home Depot (2)
CUC International (1)
Chapter 5 [Palepu, Bernard, and Healy]
Wednesday 8th March
Prospective Analysis: Discounted Cash-Flows Based Valuation
Questions 2, 5, 7, and 8 [Palepu, Bernard, and Healy, Chapter 6]
CUC International (1)
The Gap (1)
Chapters 6 and 11 [Palepu, Bernard, and Healy]
Prospective Analysis: Accounting-Based Valuation Techniques (1)
Wednesday 15th March
Questions 2, 3, and 4 [Palepu, Bernard, and Healy, Chapter 7]
America Online (2)
The Gap (2)
Chapters 7 and 8 [Palepu, Bernard, and Healy]
Wednesday 22nd March
Prospective Analysis: Accounting-Based Valuation Techniques (2)
Questions 5, 6, and 7 [Palepu, Bernard, and Healy, Chapter 7]
The Computer Industry in 1992
Fairfield, P. P/E, P/B and the present value of future dividends. Financial Analysts Journal,
July-August 1994, p.23-31.
Francis, J., Olsson, P., and Oswald, D. Comparing the accuracy and explainability of dividend,
free cash flow, and abnormal earnings equity valuation models, Working Paper, 1997,
University of Chicago.
Wednesday 29th March
Credit Analysis and Distress Predictions (1)
Chapter 9 [Palepu, Bernard, and Healy]
Wednesday 5th April
Credit Analysis and Distress Predictions (2)
Questions 1, 5, and 6 [Palepu, Bernard, and Healy, Chapter 9]
Debt Ratings in the Chemical Industry
Wednesday 12th April
Mergers and Acquisitions
Questions 1 and 5 [Palepu, Bernard, and Healy, Chapter 10]
Schneider and Square D
Chapter 10 [Palepu, Bernard, and Healy]
Wednesday 19th April
Advanced Accounting-Based Valuation Models
Ohlson, J. Earnings, book values, and dividends in security valuation. Contemporary Accounting
Research, Spring 1995, p. 661-687.
Wednesday 3rd May
Valuation of Internet Firms
Trueman, B., Wong, F., and Zhang, X. The eyeballs have it: searching for the value in internet
stocks. Working Paper, 2000, University of California at Berkeley.