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  • 1. Simmons College School of Management GSM 524 Financial Statement Analysis Professor Lori Holder-Webb Summer 2008 Course Description The objective of this course is to provide hands-on experience in the analysis of financial and non-financial information, including developing understanding of its creation and use within the firm’s economic and strategic environments. By the end of the course, you students will become well-versed in reading firms’ financial statements and understanding how financial statement analysis can be used in a variety of business contexts. During the course, we will develop a framework for performing financial statement analysis, develop and learn to use a set of analysis tools, and gain hands-on experience applying these in a variety of business contexts. In the first half of the course, we will develop an analysis framework that integrates accounting information, business strategy, accounting performance, and firm value. Two main topics will be covered in this part of the course: business strategy and accounting analysis, and performance analysis and valuation. After completing this course, you should be able to: • assess a firm’s value proposition and identify key value drivers and risks; • evaluate the degree to which a firm's accounting policies capture the underlying business reality; • assess a firm's earnings quality; • formulate accounting adjustments to eliminate biases; • evaluate current performance and its sustainability; • create forecasts of future profitability and risk; and • develop a value for a business using cash flows and/or earnings and book value data. Course Materials Equity Analysis and Valuation with eVal (2e) + CDROM. Lundholm and Sloan, McGraw- Hill/Irwin. REQUIRED Understanding Financial Statements (8e) Fraser and Ormiston, Pearson/Prentice Hall. SUGGESTED Course Requirements and Performance Assessments The primary goal of this course is to develop your analysis and decision-making skills. Therefore, assessment of the deliverables will be a function of 1) the quality of your analysis, 2) your ability to provide rigorous support to justify your decisions, and 3) your ability to communicate these factors clearly and efficiently. This course requires mastery of technical material in the cause of using the technique to perform evaluations and generate informative reports. Some pre-existing finance and accounting knowledge (from pre-requisite courses) is assumed; it will be supplemented through the textbook, in-class discussions, and other materials I will provide over the course of the term.
  • 2. The primary focus of the class, however, is on using this technical knowledge and integrating across business disciplines in order to provide an evaluation of a business and its future prospects. Furthermore, it is not sufficient to be able to perform an analysis; the results of the analysis must be communicated in a coherent, concise, and business-like manner. Therefore, the graded materials in this class will consist of a series of individual case write-ups, in-class group presentations, individual participation, and a single group project. Discussion of each graded item follows the allocation schedule below. Point Allocation Schedule Case portfolio 100 points Group work and presentations 100 points Individual class participation 100 points Group term project 100 points Total 400 points Case Portfolio You will be accountable for case write-ups according to the accompanying schedule. Each student will deliver her analysis of the assigned case (or solutions to technical questions, where applicable) electronically before the class period in which the case will be discussed. This deliverable should be the product of your individual (solo) efforts. Please bring copies for yourself and your group to use in your group discussion and the in-class analysis (discussed below). Since you do not need to be physically present to turn the case in, no late cases will be accepted. The case analysis should respond specifically to the case questions outlined in the case or syllabus in a clear and concise manner. The report should be no longer than three pages of single-spaced text (unless otherwise indicated on the syllabus) with no more than three pages of supporting exhibits. To maintain these limits, it is important that you focus on answering the guide questions rather than repeating the highly descriptive text that has already been covered in the case. I will provide feedback on the first two cases without providing a grade so that you can get an idea of how well your performance is converging with expectations. After that, I will collect your cases before class and maintain them in a portfolio for you throughout the term. Four of these cases will be graded to yield the 100 points stated above in the point allocation schedule. The determination of which four cases get graded will be up to the individual student. Near the end of the term (I will let you know the deadline in class) I will ask each of you to submit to me a memo indicating which four cases you wish to have graded. Those, and only those, will be factored into your final grade, unless…any case you fail to turn in will be automatically included in your grade as a zero. If you fail to turn in one case, you will have a zero averaging in as 25% of your case grade. If you fail to turn in four cases, your case average will be zero. Group Work and Presentations I will assign you into groups at the beginning of the term. In class you will use your individual efforts at completing the case to provide a collective basis for establishing a group solution. The
  • 3. opportunity to work by yourself initially ensures that each of you masters the main content of the course. However, diversity in work experience, academic experience, and personal perspective suggests that it is highly unlikely that each member of the group will have reached an identical set of relevant matters and conclusions for each case. Taking time in class to discuss the case ensures that you have access to a richer thought-generation and assessment process than is possible to attain individually. Please be prepared to make notes as necessary during this period. After the in-class group work, a group will be chosen to present their results and then lead a discussion of the case with the rest of the class. This discussion will be fairly informal, but you should be prepared as a group to provide visual and/or graphic support for your conclusions and the ensuing discussion, where appropriate. Each group should be prepared to present the case, address what you believe to be the most relevant matters, and yield a conclusion or discuss why it is not possible to arrive at a conclusion, after which you – as a group – will lead the rest of the class in a discussion. This process should take approximately 30 minutes on average. After this, I will provide the instructor’s viewpoint on necessary angles, a wrap-up of the case and the associated technical material, any other relevant commentary, and segue into the next material. Your group work and participation grade will be based on the assessment of your group members. Your group members will evaluate you twice; you will receive compiled feedback from the first evaluation from me. This should let you know whether you are performing in-line with the group’s expectations. While both evaluation results are used in the computation of your final group work and participation grade, I reserve the right to weight the second evaluation more heavily than the first; I will exercise this right when it is obvious to me that a primary low evaluation was a function of not understanding the group expectations or of other extenuating circumstances as noted in the second round of feedback. A copy of the group member evaluation is provided at the end of this syllabus so that you can see against what criteria you will be evaluated. Individual Participation Individual participation is an essential component of the course in terms of developing high- quality analyses and moving the content along. As indicated on the point allocation schedule, 25% of the final grade is driven by your individual participation grade. Please do not be intimidated by this. Past experience suggests that if you spend sufficient time in case preparation and the class environment is nurturing yet stimulating (my goal), you will want to participate. If for whatever reason you are unable to express your ideas in class, come by my office early in the course so that I can assist you in developing a strategy to overcome this shyness. I will assign an initial participation grade based on the following criteria. My criteria are as follows: A Makes substantial contributions during class; attentive and fully prepared for class. Provides insightful comments and/or questions that prompt on-topic discussion; helps clarify or synthesize other students' ideas. Participates enthusiastically in group work. Goes "above and beyond" to add to the atmosphere of the class by being friendly, supportive, and encouraging to peers and the instructor.
  • 4. B Comes prepared to class; on time and attentive almost every class; frequent contributions in class and/or on-line. Participation does not have to be coaxed or prompted. Participates with good will in group work; adds to the atmosphere of the class by being friendly and courteous to peers and the instructor. C Effort is average; sometimes late; could have added more to the class; frequently not fully prepared for class activities. Participates in discussions and group work but without obvious enthusiasm. Comes to class with an indifferent attitude that does not actively help create a positive learning environment. D Often comes to class unprepared; frequently late; rarely adds anything to discussions. Does not do fair share of group work; Does not pay attention to class discussions or activities. F Works against the common welfare of the class by not participating, or by disrupting or dominating, or by failing to do assigned work and so hindering group activities. Excessive absences. You will receive a letter participation grade for every class meeting. Your grade for the day will be based on the criteria above. If you show up for class and do not contribute in any noticeable way, you will receive a C for that day. If you miss class without notifying me in advance, your grade for that day will be a D. If you miss class with suitable notification, your grade for that day will be dropped; this will cause all of your other daily participation grades to become relatively more heavily weighted. Life happens to all of us – some of it we can prepare for, some of it we cannot. If you have some kind of extenuating circumstance, let me know about it and we’ll reach a solution together. As you can see from the guidelines above, high quality participation is that which adds content by contributing new ideas, by expanding on (not repeating) classmates’ contributions, or by raising issues that move the discussion along. Frequency without content or process does not contribute to the class nor to your grade. Group Term Project Please see the Term Project handout for a discussion of the project requirements. Each group should submit their list of industries to me no later than Monday, July 14. Industries are chosen on a first-come, first-served basis and no two groups may have the same industry. The course project will involve a complete financial statement analysis of a firm using the course framework. More detailed guidelines are provided in the handout. At the final class meeting, each team will make a 15-minute Power Point presentation of its analysis to the class. The time limit will be strictly enforced. The Term Project should be submitted by a group member electronically prior to the start of the final class meeting. The Course Projects should be approximately 10 pages in length, plus appropriate exhibits. Study Guidelines To maximize your learning (and grades) from the class, it is important that you spend a significant time in preparing the written case summaries. Because the class discussion is based
  • 5. on these same case summaries, you will be effectively preparing for both requirements of the class. As part of this preparation, you should any read assigned material from the text, read the cases, and review any handouts, and answer the assigned case questions. For each case, carefully consider the guide questions and issues. It is fine to ask me questions about the material in the text, cases, and handouts, although I expect you to make a serious effort to grasp the material before asking questions. I also reserve the right to decline to answer questions if I believe that my answering them for you will diminish your learning experience or impede your ability to master the material. If you have questions to ask during case prep, you may visit me in my office hours or send me an e-mail. Special Accommodations Reasonable accommodations will be provided for students with documented physical, sensory, systemic, cognitive, learning, and psychiatric disabilities. If you have a disability and anticipate that you will need a reasonable accommodation in this class, it is important that you contact the Center for Academic Achievement early in the semester. If you require an accommodation in this course I encourage you to stop by my office so that we can stay on the same page. Honor Code I expect you to comply with all provision of the Simmons College Honor Code. In this class, this means not discussing the case with your group mates or any other individual than me when developing your individual write-up. It also means not consulting solutions you may find on the web, using files of old coursework, or obtaining solutions to the cases from people who have taken this class previously or elsewhere. This class offers a large quantity of “real world” value in terms of obtaining and learning to use tools, and performing equity and credit analyses. These are skills that you will be able to use immediately if you care to join a professional field where these tasks are performed. Taking the kind of shortcuts described above significantly erodes the value that you will derive from this course and impair your ability to deploy these tools successfully in the professional environment. Mission Statement The mission of the Simmons School of Management is to educate women for power and principled leadership. We are committed to the advancement of knowledge and practice in management through excellence in education and research. Our academic programs offer rigorous, applied, management education designed for women. We focus on leadership, and our programs integrate the strategic, functional, and behavioral aspects of management. SOM students gain the knowledge, analytical skills, and confidence that they need to manage successfully in dynamic and global environments. We are invested in our students’ success and support them as they launch, advance, and change their careers. Sample Evaluation Form You will evaluate each of your group members for their performance within the group. Occasionally a group member may believe that they are adequately upholding the work ethic and expectations of the group, while others in the group do not believe that these expectations are being met. Studies show that providing detailed incremental feedback promotes goal-alignment and may resolve some of these problems and the attendant frictions entirely. Regrettably, some
  • 6. group members do not intend to answer to the group’s expectations (slacking off). This is unfortunate in that the other members of the group are then obliged to pick up the slack. For those rare circumstances, this feedback process permits a more personally tailored evaluation for the course (i.e., these students will receive differential grades because of this behavior). Good, detailed feedback is important in resolving these informational asymmetries. On the overall evaluation, you will be “paying” each of your group members with points and will have 100 points to allocate for each member of your group. For example, if you have 3 members on your team, you have 300 points to allocate. If you feel that everyone is pulling a fair share of the work, with no person doing a disproportionate amount of work, then you would pay each member of the group 100 points. If someone consistently does more than her fair share, you would pay that person more than 100 points. Further instructions will be provided near the deadline for submitting completed evaluations. Sample Evaluation Form Name of person being evaluated: Evaluation Criteria For each criterion, rate Provide comments and this group member on a constructive feedback in the scale of 1 (never) to 5 spaces provided below: (always) Consistently prepared for class and case analyses Offered useful analysis and/or was helpful in advancing group processes along Volunteered appropriately during group work activities or team meetings when tasks needed to be accomplished Pulled fair share with regard to overall workload Showed enthusiastic and positive attitude about group activities and group members Delivered agreed-upon parts of term project in a complete fashion Based on the points available for the group, I would “pay” this person Points. Overall feedback (this is mandatory):
  • 7. Tentative Schedule, Summer 2008 (to be used in conjunction with assignment handouts delivered during the term) Class Date Topics and Assignments 1 Thurs, June 26 Introduction, Getting Started Quiz 2 Thurs, June 26 Disney Proxy Case 3 Mon, June 30 Overview of information used in business analysis Read Chapters 1 and 2, Lundholm and Sloan Assignment: Netflix Case, questions 1-7 Submit Netflix and Overstock.com cases prior to the start of class 4 Mon, June 30 Introduction to Quality of Accounting Estimates Read Chapters 3 and 4, Lundholm and Sloan Assignment: Overstock.com Case 5 Thurs, July 10 Quality of Accounting Estimates part 1 Start reading Chapters 3 and 4, Lundholm and Sloan Assignment: EnCom Case Submit EnCom and PrePaid Legal cases prior to the start of class. 6 Thurs, July 10 Quality of Accounting Estimates part 2 Chapters 3 and 4, Lundholm and Sloan Assignment: PrePaid Legal Case 7 Mon, July 14 Quality of Accounting Estimates part 3 Finish Chapters 3 and 4, Lundholm and Sloan Assignment: Boston Chicken Case Submit Boston Chicken, and Boston Chicken and McDonald’s comparative financials prior to the start of class. Deadline for submission of list of industries for the term project through e-mail. 8 Mon, July 14 Introduction to Ratio and Cash Flow Analysis Read Chapters 5 and 6, Lundholm and Sloan Assignment: Boston Chicken and McDonald’s comparative financials (download from course website) 9 Thurs, July 17 Ratio Analysis Finish Chapters 5 and 6, Lundholm and Sloan Assignment: Walmart (download from course website) Submit Walmart Case (including pro-formas that you have completed) prior to the start of class. Bring a computer to class to work on the pro-formas. 10 Thurs, July 17 Building Pro-Forma Financial Statements Read Chapters 7 and 8, Lundholm and Sloan Assignment: Walmart Pro-Formas 11 Mon, July 21 Ratio and Cash Flow Analysis Review Chapters 5 and 6, Lundholm and Sloan Assignment: Love Boat: Royal Caribbean Case part A Submit Love Boat case (including forecasts that you have
  • 8. completed) prior to the start of class. Bring a computer to class to work on the forecasts. 12 Mon, July 21 Forecasting Read Chapters 7 and 8, Lundholm and Sloan Assignment: Love Boat: Royal Caribbean Case part B 13 Thurs, July 24 Valuation Methods Read Chapters 9 and 10, Lundholm and Sloan Assignment: Four Models, AND EnCom (note! 2 cases!) Submit Four Models, EnCom, and Intel cases prior to the start of class. 14 Thurs, July 24 Application of Valuation Methods Chapters 9 and 10, Lundholm and Sloan Assignment: Intel’s Earnings Torpedo Case 15 Mon, July 28 Application of Valuation Methods Chapter 12 (pp. 243-249), Lundholm and Sloan Assignment: Valuation of Amazon.com in June 2001 Submit Amazon and Bally cases prior to the start of class. 16 Mon, July 28 Security Analysis Assignment: Turnaround at Bally Fitness Case 17 Thurs, July 31 Merger and Acquisition Analysis Read Chapter 12 (pp. 249-253), Lundholm and Sloan Assignment: AOL-Time Warner Merger Case Submit AOL and Bandag cases prior to the start of class. 18 Thurs, July 31 Merger and Acquisition Analysis Read Chapter 11, Lundholm and Sloan Assignment: Bandag Case 19 Mon, August 4 Course Wrap-Up 20 Mon, August 4 Group Project Presentations