Financial Statement Analysis



                                          Group Project

Your group project is an importan...
•   Can National Steel Corporation recover from accounting misstatements? Has the market
    “punished” the company too se...
compare the accounting methods chosen by your firms in their most recent financial statements.
How do these choices affect...
These CD-ROM databases provide quick access to summarized financial information for many
publicly traded companies. The ad...
Bloomberg

Though not available at Haas, this is a standard source of data for many analysts. The Bloomberg
terminal conta...
Group Presentation Peer Review Sheet
            Please evaluate today's presentations (excluding your own group):

      ...
Acc712
                               Term Project Grading Sheet


Section: ______Group: ______


Project Title: _________...
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  1. 1. Financial Statement Analysis Group Project Your group project is an important part (25%) of your course grade. It gives you an opportunity to study, for example, a firm’s prospects (e.g., valuing an IPO), a specific type of financial transaction (such as a management buyout, spinoff or merger), or special circumstances surrounding a firm or industry (such as financial distress). This project will also serve to develop your report-writing, presentation and discussion skills. Group size should not exceed four members without approval of the instructor. Your project should demonstrate evidence of detailed analysis of financial statement data. Integration of tools and concepts developed in the course will enhance your grade e.g., forecasting, valuation techniques, and discussions of accounting choices or risk analysis. Your project should also include some form of "bench-marking," that is, comparison to other similar firms, transactions or special circumstances. The sooner you can form a group and select a topic the better. Groups will meet with me for 15 to 20 minutes on a designated day in late February to discuss their progress toward identifying and developing project topics. A brief written project proposal no more than two pages in length must be submitted by April 1. This document should describe the topic you have chosen explain why it is interesting, and how you plan to carry out the project, including how you plan to obtain necessary data for your analysis. The written part of your project should be no more than 10 to 12 pages of text and 6 to 8 pages of tables, graphs, appendices and references. In addition, you may be asked to submit certain supporting data, financial statements, or press articles. Your written projects are due by the beginning of class on Thursday, April 29. Each group will present its project to the class at the end of the term. The length of these presentations will depend on class size and number of groups. Non-presenting groups ("the audience") will assist in the grading. Your participation in evaluating other group presentations is part of both your class participation and group project grades. Structure of the Project The following are some suggested approaches for your project. Other forms are encouraged, but it is best to check with me informally before putting too much work in on a project that differs radically from the suggested approaches. 1. Case study of one firm Select a firm in which you have a particular interest (perhaps as a potential employee or because it has been the subject of speculation in the financial press). Analyze this firm's performance relative to its past performance and relative to the performance of other firms in the same industry. The types of questions you might wish to address include the following: 1
  2. 2. • Can National Steel Corporation recover from accounting misstatements? Has the market “punished” the company too severely? Can you judge the company's real performance over time using its restated accounting numbers? How does company performance compare to that of its major competitors under the restated financial statements. Would you recommend a buy/sell/hold strategy given current stock prices? Why? • What's the secret at Southwest Airlines? In an industry swamped by red ink, how can this company stay profitable? Is it clear skies for this high flier, or are there clouds on the horizon? • Discount brokerage services are a growing industry. One niche of this market, on-line trading, is characterized by several companies such as Ameritrade that have shown steady earnings growth in recent years; but competition is heating up. Is the company’s strategy the right one for this market? What, if any, unique elements are there in valuing “Internet” stocks? 2. Case study of one transaction Choose a transaction in which you are especially interested, for example, a proposed or completed management buyout, acquisition, merger, divestiture, or initial public offering. If the transaction is not complete, analyze the price at which you think it should occur. What is a “fair" price to all relevant corporate claimants? Is the transaction a desirable one based on publicly available information at the time and financial data for comparable firms? If the transaction has been completed, did it turn out well? Why or why not? If the eventual outcome is not yet obvious, what future scenarios will justify the price paid? 3. Case study of one circumstance. Choose a firm that is in a particular circumstance that you find of interest such as; financial distress (search Lexis/Nexis for a recent case, for comparison purposes), alleged bad management (e.g., Kmart), alleged fraudulent reporting (e.g., Fine Host), strong competitive pressures to restructure (e.g., IBM, Sears), target of large short-selling interest (the Wall Street Journal publishes a monthly list of such firms), had volatile recent prices, appears over/under-priced, or was recently scrutinized in the business press in columns like “Heard on the Street”. Compare the firm's financial performance to its own past performance and that of "comparable firms." Recommend a course of action for management and/or investors to pursue. For firms in financial distress, you should document the symptoms of such distress and comment on the firm's ability to survive. For fraud cases, you should evaluate what early signs might have been available to the auditors. 4. Industry analysis Select several firms in the same industry. Discuss how you define the boundaries of' your industry and any difficulties you encounter with this definition (the annual Forbes survey of American industries -- first January issue of each year -- might be helpful). Tabulate and 2
  3. 3. compare the accounting methods chosen by your firms in their most recent financial statements. How do these choices affect comparability? Compare the major financial ratios for your set of firms. What do these ratios tell you about firm strategies within the industry? If you were making stock recommendations, would you recommend buy/sell/hold on any of these firms? Why or why not? 5. Accounting analysis Choose an industry or set of firms across industries that has been criticized for a particular accounting practice. What is the substance of the criticism; is it real or just misperception? Are the firms’ stock prices penalized or inflated as a result of this accounting practice? Alternatively, can you identify a set of firms or an industry engaged in a questionable accounting practice that has not been highly publicized and address a similar set of questions to those raised above? 6. Some original ideas that students have pursued in the past include: • What is the Value of the North Carolina Tar Heels basketball team? • Valuing a Privately Owned Company that Wants to Buyout a Troublesome Sibling. • The “Oprah” Effect. • Valuation of Paired-Share REIT status. • A Statistical Analysis of Trading Strategies Based on Analysts’ Forecasts. Data Sources Annual reports and 10-Ks Your group project requires you to obtain financial statements. Annual reports and 10-K forms for many public (and international) corporations are available in the library, in either LaserDisclosure or microfiche form. Many firms also file their reports with the SEC electronically, so you can obtain them from the Internet at: http://www.sec.gov/cgi-bin/srch-edgar. However, students often find it more convenient to work with actual hard copies. You can call the company directly and request the reports you want from the Shareholder Relations Department. Most firms will respond within a few days. News Wire Services The Lexis/Nexis on-line database has a wealth of information and is one of the few remaining bargains left on campus. You can search a variety of news and journal sources as well as financial statements (including full text of footnotes). Other sources of news about a given company may be found via the Wall Street Journal Index or the Dow Jones News Retrieval Service. In choosing a topic, scanning the headlines and indices in such publications as WSJ, Business Week, Forbes, and Fortune may generate ideas. Compact Disclosure and One Source 3
  4. 4. These CD-ROM databases provide quick access to summarized financial information for many publicly traded companies. The advantage of these sources is that they offer standardized ratios and data and are easy to use. The disadvantage is they do not always have footnotes, management discussions or other details needed for a complete analysis. The information is also somewhat dated (typically as of the last quarter). Be careful when using the financial ratios directly downloaded from these databases. These are typically based on end-of-period balance sheet numbers. Long Business and Economics Library Company and Industry Research See home page at http://library.berkeley.edu/BUSI/ for pull down menus of available resources. Value Line This service (available in hard copy only in Long library) provides useful one-page summary analyses on most publicly traded firms in the U.S. Its convenient at-a-glance format is easy to use and offers a good starting point for more in-depth analyses. For our purposes, this service provides an alternative source of earnings and sales forecasts. Firms are arranged by industry, so it is easy to obtain information on a set of competitors for a firm of particular interest to you. Industry-specific Information To obtain industry benchmarks, you might find the following items useful; they are in the Reference section at the library: • Leo Troy, Almanac of Business and Industrial Financial Ratios, 1998 edition (Prentice Hall, 1995) - a good reference on comparative industrial ratios. • Jan Williams and Martin Miller, Miller's Comprehensive GAAP Guide 1998, College Edition (The Dryden Press, 1995) - a good reference on accounting rules for specialized industries. Analyst's Handbooks and Statistical sources We have a variety of sources of industry data in the library. The S&P Index e.g., which has up to 30 years of historical data on over 100 S&P Industry Indexes. These databases include composite balance sheets and income statements as well as market and ratio data for each industry. Industry Ratios on the Internet Many WWW sites have terrific industry ratios for every SIC code. For example, check out: http://www.peerscape.com Sites developed by search engine also provide pages with a variety of links to business data. See, for example: http://quote.yahoo.com 4
  5. 5. Bloomberg Though not available at Haas, this is a standard source of data for many analysts. The Bloomberg terminal contains volumes of information, both firm-specific and market-wide. This information is up-dated continuously through a live satellite feed. Extensive information is available on past prices and trading volume, as well as accounting fundamentals and up-to-date earnings forecasts. Like Compact Disclosure, this source typically has the long-term earnings growth forecast necessary for some of our valuation work. 5
  6. 6. Group Presentation Peer Review Sheet Please evaluate today's presentations (excluding your own group): Scale: 5 - strongly agree 1 - strongly disagree Group number: ______ Project title: ____________________ • The project objective was clearly defined 5 4 3 2 1 • The presentation was effectively delivered 5 4 3 2 1 • The analysis was persuasive/convincing 5 4 3 2 1 • Overall, I learned a lot from this presentation 5 4 3 2 1 Group number: ______ Project title: ____________________ • The project objective was clearly defined 5 4 3 2 1 • The presentation was effectively delivered 5 4 3 2 1 • The analysis was persuasive/convincing 5 4 3 2 1 • Overall, I learned a lot from this presentation 5 4 3 2 1 Group number: ______ Project title: ____________________ • The project objective was clearly defined 5 4 3 2 1 • The presentation was effectively delivered 5 4 3 2 1 • The analysis was persuasive/convincing 5 4 3 2 1 • Overall, I learned a lot from this presentation 5 4 3 2 1 Group number: ______ Project title: ____________________ • The project objective was clearly defined 5 4 3 2 1 • The presentation was effectively delivered 5 4 3 2 1 • The analysis was persuasive/convincing 5 4 3 2 1 • Overall, I learned a lot from this presentation 5 4 3 2 1 Your Name: ____________________ Section #: ______ Group #: ______
  7. 7. Acc712 Term Project Grading Sheet Section: ______Group: ______ Project Title: _________________________ Max. Your Grade Grade A. Objective Clearly defined? 1 Interesting? 1 B. Analysis Appropriate? 3 Sufficient? 4 Accurate? 4 Creative/Elegant? 4 C. Conclusion Consistent 1 Persuasive 2 Written Project Grade 20 D. Presentation 1/2 peer review; 10 1/2 prof evaluation Total Grade 30

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