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Monday, January 14 Tuesday, January 15


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Monday, January 14 Tuesday, January 15

  1. 1. The University of Illinois Department of Accountancy Accy 417 Syllabus Financial Statement Analysis, Spring 2002; MW, 3:00-4:50 p.m. Michael J. Sandretto; 225 C DKH Office hours: 10:00-11:30 a.m., Monday, Tuesday, and Wednesday and by appointment; 244-6410 (office); 352-4832 (home; before 10:30 p.m.) Reading Material: Palapu, Krishna G., Paul M. Healy, and Victor L. Bernard, Business Analysis & Valuation: Using Financial Statements (paperback), South-Western College Publishing (Cincinnati, Ohio) 2000. Financial Accounting Standards Board of the Financial Accounting Foundation, Statement of Financial Accounting Standards No. 141, Business Combinations, FASB (Norwalk, CT) 2001 Financial Accounting Standards Board of the Financial Accounting Foundation, Statement of Financial Accounting Standards No.142, Goodwill and other Intangible Assets, FASB (Norwalk, CT) 2001 Case packet available at TIS The Course: This course is designed to help you understand and interpret financial statements and to value firms. Much of the analysis is general but the course focuses on financial statements of publicly traded U.S. corporations subject to SEC regulations. We will focus on three primary areas: (1) Financial accounting information, including footnotes; (2) financial projections, and (3) valuation models. Within the past ten or fifteen years published financial accounting statements have become far more complex and far less useful for valuing companies. Part of the problem lies with the nature of business. In the past, most of a company’s value consisted of physical assets, supported by a simple financial structure. Now, intangibles are the most important assets for many companies and, in most cases, those assets are not shown on a firm’s balance sheet. Financial structures have also become more complex. In such cases, price-to-book ratios may be meaningless. Companies are also far more complex than in the past. They are larger, operate in far more countries, and use complex hedges to limit risk. Thus, for most firms it is far more difficult to estimate the future performance and current value. Another problem is that firms change far more rapidly than in the past. Reported net income may be a poor predictor of future income because of write-downs, restructurings, and rapid growth or decline. As a result, simple rules of thumb, such as price-earnings ratio, often work poorly. Finally, analysts place great pressure on firms to meet quarterly earnings-per- share (EPS) targets. It is very difficult to predict EPS because business is volatile. As a result, managers probably distort accounting earnings far more than in the past to meet analysts’ expectations. Given that setting, analysts must know what information is available and must understand it. They must also know how to adjust and incorporate that information into financial projections and then use those projections to value companies. This course is designed to help you with those tasks. Copyright © by Michael J. Sandretto, 2002
  2. 2. Grading: 1. Group case analysis 25% 2. Group company analysis and valuation 25% 3. Group industry analysis and valuation 30% 4. Class participation 20% Optional 5. Take-home Final Exam 20%; each of the above reduced by 5 percentage points Grading is strictly on a curve. The mean grade will be approximately 3.5-3.6 on a 4.0 scale. Group presentations. You will be assigned to a different five-person group for each of the above three group assignments. I will try to balance those groups by program so that groups do not consist entirely of accounting students or entirely of MBAs. We will pass out a list of the three sets of groups on the third day of class. 1. Presentation: Group case analysis. Please prepare a PowerPoint presentation and, if necessary, supporting spreadsheets. Your presentation should be between 30-60 minutes, depending on the complexity. Please feel free to contact me prior to making your presentation. I will be glad to provide you considerable information on each case. The objective is not to determine whether you can prepare a case presentation on your own; it is for you to learn how to teach technical material to other professionals. You need not prepare a written report for this project. However, you should have PowerPoint handouts for your classmates. If you e-mail me a copy prior to 8:00 a.m. the day of your presentation, I will have copies made for you. 2. Write-up: Group firm analysis and valuation. State Farm bank and technology analysts will speak with our class. Five groups will be assigned a bank to analyze and value; five will be assigned a technology company to analyze and value. You should prepare a 5-10 page write-up of your company, plus Excel spreadsheets to support your valuation. Your report is due one week before each analyst’s visit. I will grade and return your paper before each analyst’s visit. The analyst will comment on each report in class but his or her comments will not influence your grade. 3. Presentation: Group industry analysis and valuation. Please select an industry and then analyze and value two-four companies within that industry. If the firms are complex, two are adequate; if the firms are relatively simple, you may wish to analyze three or four of them. You should prepare a 10-15 page write-up of your industry, plus Excel spreadsheets to support your valuations. You should also prepare a PowerPoint for your presentation. Each presentation should last 30-40 minutes. I have attached as an appendix a list of possible industries and companies for this project. You need not select from this list but if you choose to do so, please e- mail me your selection as soon as possible. Those industries are on a first-come first-served basis. 2
  3. 3. Selected Web sites SEC Edgar Database may provide the most usable downloads of SEC Edgar information. On that Web page select “EDGARSCAN” from the Pull-down menu titled “Online Solutions” in the center of the page. Select “EDGARSCAN” on each of the next two pages and then enter the name of a company, such as General Motors corp. Select a filing, such as 10-K 2000-12-31. To download an Excel file containing one of the three principal financial statements, under Item 8, select “Excel Spreadsheet” to the right of the statement you wish to download. To download an entire 10-K, under “Fetch the entire filing as,” select “rich text.” Money Management Databases You can obtain the investment holdings for individual money management firms by using any Edgar database, including Simply type in the name of the money management firm and then select Form 13-F, which is a listing of the stocks owned as of the end of a quarter, together with the number of shares owned of each company. The total value of all stocks owned at the end of that quarter will be listed at the top or bottom of Form 13-F. You can also obtain detailed information on each money manger by viewing the manager’s Form ADV, available at: Nelson’s Directories provides information about money management firms at: And at the following free registration site: NewPath=true&newPath=true Financial Information Numerous Web sites provide a wide range of financial information. Two of the most relevant for this course are: at: Yahoo! Finance at: Yahoo! Finance also provides industry information at: 3
  4. 4. Course Schedule Note: You will receive detailed assignments approximately every other week. Session 1, Monday, January 14 Case: Palm, Inc. (Sandretto; class handout) Janet O’Brien, CPA (Sandretto; class handout). Read: Presenting Technical Material (class handout) Session 2, Wednesday, January 16 Case: The Korean Stock Exchange, HBS 199-033 Read: Chapter 1, A Framework for Business Analysis and Valuation Using Financial Statements, Palapu, Healy, and Bernard Holiday, Martin Luther King, Jr. Day, Monday, January 21 Session 3, Wednesday, January 23 Case: Sears, Roebuck and Co. Vs. Wal-Mart Stores, Inc., HBS 101-011 Read: Chapter 2, Strategy Analysis, Palapu, Healy, and Bernard Session 4, Monday, January 28 Case: Standard International, HBS 100-064 Packet 1 from the Center for Financial Research & Analysis (class handout) Read: Measuring Interim Period Performance 100-002 Chapter 3, Overview of Accounting Analysis, Palapu, Healy, and Bernard Session 5, Wednesday, January 30 Case: Olympic Financial Ltd., HBS 197-081 Packet 2 from the Center for Financial Research & Analysis (class handout) Read: Chapter 4, Asset Analysis, Palapu, Healy, and Bernard Session 6, Monday, February 4 Case: Enron Corp. (Sandretto; class handout) Read: Chapter 5, Liability and Equity Analysis, Palapu, Healy, and Bernard. Mini-lecture: Pension footnotes Session 7, Wednesday, February 6 Case: IBM (B), HBS (Case analysis, group 6) 100-033 GM Retirement Plans (Sandretto; class handout) (Case analysis, group 9) Read: Retiree Benefits, HBS 197-021 4
  5. 5. Session8, Monday, February 11 Case: IBM (C), HBS (Case analysis, group 2) 100-034 Bethlehem Steel Corp. (Sandretto; class handout) Read: Accounting for Income taxes 100-035 Session 9, Wednesday, February 13 Case: Microsoft’s Financial Reporting Strategy, HBS 100-027 Pre-paid Legal Services, Inc., 2001 (Sandretto; class handout) (Case analysis, group 10) Read: Chapter 6, Revenue Analysis, Palapu, Healy, and Bernard Session 10, Monday, February 18 Case: Cash Flow Projections (Sandretto; class handout) Valuation Exercise, HBS (Case analysis, group 4) 800-441 Read: Accounting Choices and EVA, HBS (Business Horizons) BH007 Session 11, Wednesday, February 20 Case: Hicorp, Inc., HBS (Case analysis, group 3) 198-014 Cisco Systems, Inc., In-process R&D (Sandretto, class handout) Read: Chapter 8, Equity Accounting Analysis, Palapu, Healy, and Bernard Mini-lecture: Employee stock option footnotes. Handouts on direct charges to owners’ equity. Session 12, Monday, February 25 Case: Cisco Systems, Inc. Non-qualified Employee Stock Options (Sandretto; class handout) (Case analysis, group 5) EBay, Inc. (Sandretto; class handout) Read: FASB and Employee Stock Options, HBS 196-137 Chapter 7, Expense Analysis, Palapu, Healy, and Bernard Session 13, Wednesday, February 27 Case: Banc One Corporation (A) 195-207 Read: Chapter 9, Financial Analysis, Palapu, Healy, and Bernard Session 14, Monday, March 4 Case: Mr. Dave Tips, Vice President, Equities Securities Division, CSFB-Holt (pending acquisition). Read: Chapter 10, Prospective Analysis: Forecasting, Palapu, Healy, and Bernard Session 15, Wednesday, March 6 5
  6. 6. Case: Merck & Company: Evaluating a Drug Licensing Opportunity, HBS 201-023 Read: Free Cash Flow Valuation Methods, HBS 201-094 Chapter 11, Prospective Analysis: Value Theory, Palapu, Healy, and Bernard Preliminary write-ups due; banking sector (see attached schedule) Session 16, Monday, March 11 Visitor: Ms. Michelle Marsh, Senior Investment analyst, banking, State Farm Insurance Companies (MBA, Illinois, 1996). Session 17, Wednesday, March 13 Read: FASB 141, Business Combinations (Case analysis, group 8) FASB 142, Goodwill and Other Intangible Assets (Case analysis, group 7) Final write-ups due; banking sector Spring Vacation: Saturday, March 16-- Sunday, March 24, Spring Vacation ends Session 18, Monday, March 25 Visitor: Mr. Jim Brace, Executive Vice President and Senior Vice President, KEHI Case: Knowles Electronics Holdings, Inc. (Sandretto; class handout) Read: Chapter 12, Prospective Analysis: Valuation Implementation, PBH Note on Alternative Methods for Estimating Terminal Value, HBS 298-166 Session 19, Wednesday, March 27 Case: AOL Time Warner, Inc. Goodwill (Sandretto, class handout) Conoco, Inc. Goodwill (Sandretto; class handout) Strategic Brand Valuation: A Cross-functional Perspective BH031 Session 20, Monday, April 1 Visitor: Mr. Al King, Managing Director, Valuation Research corporation and former managing Director, Institute of Management Accountants Session 21, Wednesday, April 3 Case: Warnaco Group, Inc. (A), HBS (Case analysis, group 1) 101-068 Read: Valuing companies in Corporate Restructurings, HBS 201-073 Chapter 13, Equity Security Analysis, Palapu, Healy, and Bernard Preliminary write-ups due; technology sector (see attached schedule) Session 22, Monday, April 8 6
  7. 7. Visitor: Mr. Brad Commincioli, Investment Analyst, technology sector, State Farm Insurance (EMBA, Illinois, 2002) Read: The Earnings Game: Everyone Plays, Nobody Wins, HBR R0106c Tread Lightly Through These Accounting Minefields, HBR R0107k Session 23, Wednesday, April 10 Visitor: Jeffrey H. Margolis, Chief Executive Officer and founder, TriZetto Group (BS, Illinois, 1984, High Honors) Read: Chapter 14, Credit Analysis and Distress Prediction, Palapu, Healy, and Bernard Final write-ups due; technology sector Session 24, Monday, April 15 Case: Xerox Corp. Leasing (Sandretto; class handout) Patten Corp., 1994 (Sandretto, class handout) Read: Chapter 15, Mergers and Acquisitions, Palapu, Healy, and Bernard Session 25, Wednesday, April 17 Case: Ford Motor Co. 0% Financing, 2001 (Sandretto; class handout) Polaroid Corp. (Sandretto; class handout) Series of fraud cases (Sandretto; class handout) Read: Chapter 16, Corporate Financing Policies, Palapu, Healy, and Bernard Session 26, Monday, April 22 Read: Chapter 17, Management Communications, Palapu, Healy, and Bernard Case: Progressive Insurance: Disclosure Strategy, HBS 102-012 Group Industry Analysis Presentation (1 group) Session 27, Wednesday, April 24 Group Industry Analysis Presentations (3 groups) Session 28, Monday, April 29 Group Industry Analysis Presentations (3 groups) Session 29, Wednesday, May 1 Group Industry Analysis Presentations (3 groups) 7
  8. 8. Appendix Possible industries/firms Feel free to choose your own industry and firms Some of the following categories include five or six firms. You need not include more than two-four firms in your industry analysis. I listed companies that seemed interesting either because of how they operate or because of their accounting practices. The following is a useful link for finding other industries and firms within those industries: 1. Airlines AMR Corp. (American Airlines) Delta Air Lines Inc. Southwest Airlines Inc. UAL Corp. (United Airlines) U.S. Airways Group Inc. 2. Appliance Manufacturers Maytag Corp. Whirlpool Corp. 3. Auto industry Ford Motor Co. General Motors Corp. 4. Biotechnology Applera Corp-Celera Genomics Group Cambridge Antibody Tech Group PLC Celgene Corp. Genentech Inc. Millennium Pharmaceuticals Inc. Vertex Pharmaceuticals Inc. 5. Health food grocery chains Whole Foods Market Inc. Wild Oats Markets Inc. 8
  9. 9. 6. Insurance companies, life Conseco, Inc. John Hancock Financial Services, Inc. Lincoln National Corp. MetLife Inc. Principal Financial Group, Inc. 7. Insurance companies, property and casualty Allstate Corp. American International Group, Inc. Berkshire Hathaway, Inc. Ohio Casualty Corp. Progressive Corp. 8. Investment banks/brokerage firms Goldman Sachs & Company Merrill Lynch & Co., Inc. Morgan Stanley Dean Witter & Co. 9. Money center banks Bank America Corp. Bank One Corp. Citicorp JP Morgan Chase & Co. 10. Personal Computer Manufacturers Dell Computer Corp. Compaq Computer Corp. Gateway Inc. 11. Pharmaceuticals Eli Lily & Co. Johnson & Johnson Inc. Merck & Co Inc. Schering-Plough Corp. 12. Processed foods Campbell Soup Co. General Mills Inc. Hershey Foods Corp Kellogg Co. 9
  10. 10. 13. Restaurant chains Bob Evans Farms, Inc. Darden Restaurants, Inc. (Olive Garden and Red Lobster) Krispy Kreme Doughnuts, Inc. McDonald’s Corp Panera Bread Company Tricon Global Restaurants, Inc. Wendy’s International, Inc. 14. Technology firms, weak financial condition AT&T Corp. Lucent Technologies, Inc. Xerox Corp. 15. Technology firms, strong financial condition IBM Corp. Intel Corp. Microsoft Corp. Oracle Corp. Sun Microsystems, Inc. Group write-ups Banking: Fifth Third Bancorp Group 10 SouthTrust Corp Group 9 SunTrust Banks Group 1 AmSouth Bancorp Group 2 First Union Corp Group 6 Technology Oracle Corp. Group 5 EMC Corp. Group 8 Intel Corp. Group 4 Linear Technology Corp. Group 3 Applied Materials Group 7 10