THE UNIVERSITY OF TEXAS AT AUSTIN
Financial Statement Analysis -- Spring 2002
Class Hours: Unique #02370, 8-11am Tuesdays in UTC 4.102
Unique #02375, 8-11am Thursdays in UTC 4.102
Unique #02385, 12:30-3:30pm Tuesdays in UTC 1.144
Professor: Susan Eldridge (email@example.com)
Office: GSB 4.126K Phone: 471-6181
Office Hours: Tuesdays and Thursdays, 11:30am - 12:15pm
Teaching Asst.: Kevin Jackson (See Blackboard for contact details.)
In this course we will develop and apply a framework for business analysis and security valuation.
Although there are many different uses of financial statement analysis, our focus will be on
estimating the value of publicly-traded common stocks, using financial statement data as our primary
data source. The steps in our analysis framework include:
(1) establishing the objectives of the analysis,
(2) developing background knowledge about the company (business strategy analysis),
(3) analyzing historical data in published financial reports,
(4) forecasting payoffs based on historical data analysis and data from other sources,
(5) converting forecasts to a valuation, and
(6) summarizing findings and reaching conclusions relevant to established analysis objectives.
By the end of this course, you should be:
• familiar with a framework for making business decisions using financial statement
• able to apply the analysis framework to estimate common stock values;
• able to use multiple valuation methods and identify strengths and weaknesses of each;
• able to evaluate existing market prices and estimate forecasts implied by those prices;
• able to identify and discuss how a business generates value for shareholders;
• able to evaluate and discuss the sensitivity of estimated stock values to various assumptions;
• able to think logically and creatively about the strengths and weaknesses of information
available to decision-makers.
ACC 380K.7-Eldridge 1
Financial Statement Analysis & Security Valuation by Stephen H. Penman, McGraw-
Hill/Irwin, New York (2001).
Class slides and notes: Available through Blackboard.
A financial calculator is required. You should be able to calculate present value of future cash
flows using a financial calculator.
Internet access. You will be required to obtain certain data via the Internet.
Knowledge of word processing and spreadsheet software will be very helpful in preparing case
solutions and your final group project. Personal computers and software are available in the CBA-
GSB computer labs.
We will use Blackboard as a vehicle for communication. You will find announcements and documents
to download on Blackboard at various times during the semester. You may also check your
assignment and test grades through Blackboard. The following paragraph is your official notice that
this course uses a web site that provides an electronic class roster to all those registered for the
Beginning Fall 2001, web-based, password-protected class sites will be available for all accredited
courses taught at The University. Syllabi, handouts, assignments and other resources are types of
information that may be available within these sites. Site activities could include exchanging e-
mail, engaging in class discussions and chats, and exchanging files. In addition, class e-mail
rosters will be a component of the sites. Students who do not want their names included in these
electronic class rosters must restrict their directory information in the Office of the Registrar,
Main Building, Room 1. For information on restricting directory information see:
ACC 380K.7-Eldridge 2
Your grade for this course will be based on your performance on 7 homework assignments, 2 in-class
tests, class participation, and a final group project.
Homework assignments (7 @ 3%) 21%
Tests (2 @ 20%) 40%
Class participation 9%
Final group project 30%
The tests are closed-book, closed-notes tests. You may use one (1) index card (3"x5" size) for
reminder notes during each test. No make-up tests will be given. Medical emergencies and family
emergencies are the only valid reasons for missing a test. In such instances, you must provide
supporting documentation (e.g., signed note from your physician). If you do not have a valid and
documented reason for missing the test, you will receive a zero on the test.
Course letter grades will be assigned as follows: scores of 85 and above will be As, scores of 70 - 84
will be Bs, scores of 60 - 69 will be Cs, and scores below 60 will be Ds or Fs.
READING AND HOMEWORK ASSIGNMENTS
The Course Schedule lists specific reading assignments for each class session. You will be prepared
for and benefit more from class discussions if you have completed the reading assignments prior to
class. Remember that part of your performance evaluation (grade) is based on your class
The analysis framework we discuss in this class is best understood through application. Homework
assignments help you practice using the tools and skills of financial statement analysis and help you
prepare for daily class discussions. The Course Schedule lists written assignments for each class.
Assignments to be turned in for grading are indicated by bold print on the Course Schedule. Points on
the graded homework assignments will be assigned as follows:
3 points (full credit) - reasonable effort, mostly correct
2 points - reasonable effort, a number of errors
0 points - no effort, little correct, or not turned in.
Homework is due at the beginning of class on each due date. LATE HOMEWORK will receive a
grade of zero. We will try to discuss most of the homework problems in class, so make a copy of
your graded assignments to use during class. Solutions to problems not covered in class will be
available on Blackboard after the due date. Notice that these homework points are equivalent to
course grade percentage points. Take this homework seriously!
ACC 380K.7-Eldridge 3
Class participation is both an opportunity and a responsibility. It provides an opportunity for students
to practice important career skills in a low cost environment. Among other skills, these include the
ability to express and defend one's ideas. (Remember that we may challenge ideas, but we will not
challenge individuals. Rude classroom behavior will result in a reduction in class participation points.)
Class participation is also a responsibility because students who attend a top academic program expect
to learn from the viewpoints of their peers. Non-participating students do not provide their peers with
this important benefit. I reserve the right to "cold call" students who are not participating in class
discussions. My intent is not to embarrass you; rather it is to help you get involved in the discussion
so that you and your peers can benefit.
Class participation does not mean simply hearing your voice during class. To receive full class
participation credit, your comments must be relevant to the topics being discussed and must reflect
your preparation for class and your careful consideration of the issues. Remember that this is an
analysis class. Your ability to consider the facts and circumstances and make informed judgments is an
integral part of this course. In many situations, there is no right or wrong answer; you must make a
decision and logically support that decision.
I will grade your participation during 10 of our 15 class days. I will assign daily participation points as
3 points - outstanding and insightful contribution
2 points - effective participation in class discussions (prepared for class)
1 point - present during entire class but no contribution to discussions
0 points - absent from class or disruptive in class.
To earn the full 9% for class participation, you must accumulate 16 daily participation points. If you
accumulate less than 12 daily participation points, you will earn 0% for class participation. If you
accumulate 12 daily participation points, you will earn 5% for class participation, and you will earn
another 1% for class participation for each additional daily participation point until you earn the full
9% at 16 accumulated points. I will not post daily participation points on Blackboard.
Additional Required Disclosures
Commitment to students with disabilities: Any student with a documented disability
(physical or cognitive) who requires academic accommodations should contact the
Services for Students with Disabilities area of the Office of the Dean of Students at 471-
6259 as soon as possible to request an official letter outlining authorized accommodations.
ACC 380K.7-Eldridge 4
The primary purpose of this project is to test your ability to apply the financial statement analysis
framework you've learned this term in a specific decision context. Your 4-person team will complete
this project together and turn in one typewritten report (double-spaced, 12-point font, and 1" margins)
to me no later than 9:00am on Monday, May 13, 2001. Late reports will not be graded, and each
team member will receive a grade of zero on this project. Each team member should keep a copy of
your team's report because the graded report will not be returned to you. After I grade the reports,
you may examine your report in my office. The project is described below.
TO SELL OR NOT TO SELL?
You will analyze either Procter & Gamble or Weyerhaeuser Co. Your group should choose one of
these two companies for this project. The objective of your analysis (Step 1) is to recommend
approval or rejection of a take-over bid. For context, assume that you are a member of the company's
Board of Directors and that you will be making a presentation to the Board for a vote on the proposed
merger agreement. The proposed P&G merger agreement offers a cash purchase price of $75 per
share. The proposed Weyerhaeuser merger agreement offers a cash purchase price of $50 per share.
Your analysis report should begin with an Executive Summary. The executive summary will contain
your recommendation and briefly state the reasons for your recommendation. Include a table of
contents to facilitate your readers' use of your report. Include only relevant data in your report. For
any tables, spreadsheets, and graphs you include as attachments, you should include interpretation of
these data and references to these data in your written report.
For your report to be complete, you should include qualitative and quantitative analyses. (Assume
that a few of the Board members are new and need full information to make an appropriate decision.)
Quantitative analyses should cover at least the three most recent fiscal years for your company. Use
the quantitative tools you think are most appropriate. Include interpretations of your quantitative
analyses. Describe reasons for any changes you make to historical data used in your analysis. If you
choose to make cross-company or industry comparisons, choose comparable firms carefully and justify
your choices. Your forecasting analysis should include pro-forma financial statements for at least 3
years. In doing prospective analysis, you will generate a set of assumptions to be used in valuing the
company's stock. Document the set of assumptions you use for forecasting and valuation and justify
the assumptions you make. Evaluate the sensitivity of your valuations to changes in key assumptions.
Include a detailed bibliography (including web site addresses) as an attachment to your report.
Financial statement analysis involves judgment. You must decide on the tools you use, make
interpretations and inferences based on available data, and make conclusions based on your analyses.
Your choices, judgments, and decisions should be logically supported. Organize your report carefully
and make your presentation clear and persuasive. There is no explicit "page limit" for this report. (A
suggested length is 15 pages of text excluding attachments.) Your ability to be both complete and
concise is important and will be considered in my grading of the projects. Extraneous material will
detract from your report and your grade. Groups MUST work independently - this means no
consulting or sharing with other groups. You may compare your analysis results to published analysts'
reports, but do not do so until you have completed your analysis. Scholastic dishonesty will not be
ACC 380K.7-Eldridge 5
SCHOOL POLICY ON SCHOLASTIC DISHONESTY
The McCombs School of Business has no tolerance for acts of scholastic dishonesty. The
responsibilities of both students and faculty with regard to scholastic dishonesty are described in
detail in the Policy Statement on Scholastic Dishonesty for the McCombs School of Business. By
teaching this course, I have agreed to observe all of the faculty responsibilities described in that
document. By enrolling in this class, you have agreed to observe all of the student responsibilities
described in that document. If the application of that Policy Statement to this class and its
assignments is unclear in any way, it is your responsibility to ask me for clarification. Policy on
Scholastic Dishonesty: Students who violate University rules on scholastic dishonesty are subject to
disciplinary penalties, including the possibility of failure in the course an/or dismissal from the
University. Since dishonesty harms the individual, all students, and the integrity of the University,
policies on scholastic dishonesty will be strictly enforced. You should refer to the Student Judicial
Services web site at http://www.utexas.edu/depts/dos/ or the General Information Catalog to
access the official University policies and procedures on scholastic dishonesty as well as further
elaboration on what constitutes scholastic dishonesty.
APPLICATION OF SCHOLASTIC DISHONESTY POLICY TO
WRITING ASSIGNMENTS IN THIS COURSE
Discussing homework assignments (before submission) with other students who are currently
enrolled in ACC 380K.7 is permitted. However, merely copying the work of another student
who has previously completed the assignment is not permitted. Copying solutions from any
source is not permitted. This also includes copying solutions or receiving excessive guidance
from students who have already discussed assignments in class. Violation of this policy will be
treated as an act of "scholastic dishonesty." Evidence of copying solutions will be forwarded
to the Dean of Students with a recommendation that a grade of "F" be assigned in the course.
Each student is expected to independently complete tests during the designated test periods.
Each student should not refer to other students' test solutions and should not discuss the tests
with anyone during the examination periods. Because students in different sections will take
the tests at different times, any discussion of the tests between students who have taken the test
and students who have not is strictly prohibited. Use of notes or materials during the test
other than the allowed 3"x5" index card is prohibited. Violation of this policy will be treated
as an act of “scholastic dishonesty.” Evidence of giving assistance to or obtaining assistance
from another student will be forwarded to the Dean of Students with a recommendation that a
grade of "F" be assigned in the course.
Each team’s solution should be independently prepared. Each team should not refer to other
students, to other team’s solutions, or to solutions prepared in prior semesters or prepared by
ACC380K.7 students for other professors. Violation of this policy will be treated as an act of
“scholastic dishonesty.” Evidence of non-independent work will be forwarded to the Dean of
Students with a recommendation that a grade of “F” be assigned in the course.
ACC 380K.7-Eldridge 6
Part 1: Introduction to Framework & Valuation
1 (1/15 or 17) Introduction & Background analysis In class: E1.4 & E1.5
2 (1/22 or 24) Valuation I Penman Chapters 1-3
Valuation Worksheet I, Items 1-4
3 (1/29 or 31) Valuation II
Homework #1 due
Penman Chapters 4 & 5
HW #1 Worksheet
4 (2/5 or 7) Valuation III
Homework #2 due
Penman Chapter 6
HW #2 Worksheet
5 (2/12 or 14) Test #1 in class
Part 2: Historical Analysis (Step 3)
6 (2/19 or 21) Analysis of Financial Statements I Penman Chapters 7 & 8
7 (2/26 or 28) Analysis of Financial Statements II
Homework #3 due
Penman Chapter 9
8 (3/5 or 7) Analysis of Financial Statements III Penman Chapters 10 & 11
9 (3/19 or 21) Analysis of Financial Statements IV
Homework #4 due
Penman Chapter 12
10 (3/26 or 28) Test #2 in class
Part 3: Prospective Analysis & Valuation (Steps 4 & 5)
11 (4/2 or 4) Forecasting & Valuation I Stickney & Brown Chapter 10
12 (4/9 or 11) Forecasting & Valuation II
Homework #5 due
Penman Chapter 15
HW #5 Worksheet
13 (4/16 or 18) Forecasting & Valuation III Penman Chapter 18
14 (4/23 or 25) P/E and P/B Ratios
Homework #6 due
Penman Chapter 16
HW #6 Worksheet
15 (4/30 or 5/2) Summary and evaluation
Homework #7 due HW #7 Worksheet
5/13 (M) Final group project due by 9AM
TBA is "to be announced."
ACC 380K.7-Eldridge 7