- 1. The University of Illinois Department of
AccountancyTentative Accy 517 Syllabus Financial Statement
Analysis, spring 2005; TT 12:00-1:50 p.m. Michael J. Sandretto; 225
C DKH244-6410 (office); 352-4832 (home--before 10:30
p.m.)[email protected]; [email protected]
(home)Office hours: Tuesday and Thursday, 2:30-3:30 p.m., and by
appointment Reading Material: Palapu, Krishna G., Paul M. Healy,
and Victor L. Bernard, Business Analysis & Valuation: Using
Financial Statements, 3rd edition, South-Western College Publishing
(Cincinnati, Ohio) 2004.Case packet 1, cases and readings TIS Case
packet 2, chapters 10, and 11 from Advanced AccountingThe
Course:This course is designed to help you understand and interpret
financial statements and to value firms. Although we will use a
textbook, the course focuses on cases we analyze and discuss each
class. If you read the cases and participate in class discussions,
you will be well-prepared for the open-book, open-note, final exam,
which will consist of about four-six essay questions. Much of the
analysis is general but the course focuses on publicly traded U.S.
corporations subject to SEC regulations. We will focus on three
primary areas: (1) Financial accounting information, including
financial statements and footnotes; (2) financial projections, and
(3) valuation models.Within the past fifteen years published
financial 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 companys 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 firms balance sheet.
In such cases, price-to-book ratios may be meaningless. Companies
and their financial structures 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 now 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, acquisitions, 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, 2005
2. Grading:1. Group projection, non-financial firm10%2. Group
bank projection 10%3. Group non-financial firm projection and
valuation or Bank projection and valuation 15%4. Group industry
analysis, valuation, and presentation 25%5. Class
participation10%6. Final exam 30% Grading is strictly on a curve.
The mean grade will be approximately 3.45-3.6 on a 4.0 scale. Group
presentations. You will be assigned to one five-person group for
all four of the 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. I will pass out a list of
the groups on the third or fourth day of class. 1. Write-up:
Non-financial firm projection. Prepare a 5-10 page write-up of your
firm, plus Excelspreadsheets that project the firms income
statement and balance sheet for four or five years.Please do not
exceed 10 pages of text.2. Write-up: Bank projection. Prepare a
5-10 page write-up of your bank, plus Excel spreadsheetsthat
project the banks income statement and balance sheet for four or
five years. Please do notexceed 10 pages of text.3. Write-up:
Non-financial firm or bank projection and valuation. Prepare a 6-15
page write-upof your company, plus Excel spreadsheets to support
your valuation. This should be the same firmor bank from 1 or 2
from above. You may change your financial projections from above,
but ifyou do, please mention why you have made the changes. Please
do not exceed 15 pages of text.4. Write-up and Presentation: Group
industry analysis, valuation, and presentation. Selectan industry
and then analyze and value two companies within that industry. One
of the firmsmay be a firm from the prior assignment. Your write-up
should be 10-20 pages of text. Youshould also include Excel
projected income statements and balance sheets for four or
fiveyears for each firm, and valuation calculations for each firm.
Please do not exceed 20 pages oftext. You should also prepare a
PowerPoint for your presentation and bring handouts of
thePowerPoint presentation for your classmates. Each presentation
should last 15-20 minutes,depending on the number of students in
the class. I have attached as an appendix a list ofpossible
industries and companies for this project but you need not select
from this list. Note:the write-up will be due the last day of class
for all groups.5. Final Exam. The open-book, open-note, final exam
will consist of about four-six essayquestions. Prior to the last
day of class, I will pass out background material for the
finalexamination. At the examination, I will pass out a two-three
page set of essay questionsrelated to the background material.2 3.
Typically, the background material includes one or two footnotes
and financial statementsfrom recent annual reports, two or three
recent Internet articles, and a document from theFASB, PCAOB, or
SEC Web sites. I will have copies of that background material
available atthe examination, but it would be better to make notes
on the copy you receive in class, andbring that copy to the exam.
You may bring any other material to the exam, including acalculator
or computer. However, a calculator or computer is not required
because thequestions require minimal calculations and I do not
count off for math errors unless they are soserious I cannot
understand your answer.Selected Web sites SEC Edgar
Databasewww.pwcglobal.com 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 to arrive at the
following Web page:
http://edgarscan.pwcglobal.com/servlets/edgarscan 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.FASB Web site
http://www.fasb.org/ Two useful sections of the FASB Web site are
the comment letters:http://www.fasb.org/ocl/fasb-selectproject.php
and current Exposure Documents:http://www.fasb.org/draft/ Public
Company Accounting Oversight Board (PCAOB) Web site
http://www.pcaobus.org/ This page of the PCAOB Web site provides
Inspection reports for the four largest CPA
firms:http://www.pcaobus.org/inspections/index.asp Pension Benefit
Guarantee Corporation (PBGC) Web site http://www.pbgc.gov/3 4.
Money Management DatabasesYou can obtain the investment holdings
for individual money management firms by using any Edgar database,
including www.pwcglobal.com. 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 managers Form ADV, available
at:http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearchInit.aspNelsons
Directories provides information about money management firms at:
http://www.nelsons.com/enhanced_listings/listings.aspAnd at the
following free registration site:
http://www.nelsons.com/wbmm/login.asp?DestURL=wbmm/default.asp?
NewPath=true&newPath=true Financial InformationNumerous Web
sites provide a wide range of financial information. Two of the
most relevant for this course are:TheStreet.com at:
http://www.thestreet.com/Yahoo! Finance at:
http://finance.yahoo.com/Yahoo! Finance also provides industry
information at: http://biz.yahoo.com/p/sum_conameu.html 4 5. Course
ScheduleSession 1, Tuesday, January 18 Janet OBrien, CPAClass
handout Cisco Systems, Inc., In-process Research and Development
Expenses Class handoutSession 2, Thursday, January 20 Case: The
Role of Capital Market Intermediaries in the Dot-Com Crash of
2000Ch. 1, pp. 10-33, Palepu Read: Chapter 1, A Framework for
Business Analysis and Valuation Using Financial Statements, Palepu,
Healy, and Bernard Report on 2003 Limited Inspection of Deloitte
& Touche, Issued by the PCAOB.Session 3, Tuesday, January 25
Case: Microsofts Financial Reporting Strategy100-027 Case:
PolyMedica (A)104-023 Read: Chapter 2, Strategy Analysis, Palapu,
Healy, and BernardSession 4, Thursday, January 27 Case: Knowles
Electronics Holdings, Inc. Case packet Read: Chapter 8, Prospective
Analysis: Valuation Implementation, Palepu, Healy, and Bernard Note
on Alternative Methods for Estimating Terminal Value, HBS
298-166Session 5, Tuesday, February 1 Case: Harnischfeger
Corporation Ch. 3, pp. 17-40, Palepu Read: Chapter 3, Overview of
Accounting Analysis, Palapu, Healy, and Bernard The Earnings Game:
Everyone Plays, Nobody Wins, HBR R0106cSession 6, Thursday,
February 3 Case: Standard International100-064 Read: Measuring
Interim Period Performance100-002 Case: Revenue Recognition
Exercises 103-065 Read: Revenue Recognition Guidelines103-066
Chapter 3, Overview of Accounting Analysis, Palepu, Healy, and
Bernard Case: Pre-Paid Legal-Services, Inc.Ch. 4, pp. 46-60, Palepu
Session 7, Tuesday, February 8 Read: Chapter 4, Implementing
Accounting Analysis, Palepu, Healy, and Bernard Mini-lecture:
Pension footnotesSession 8, Thursday, February 10 Case: IBM (B)
100-033 Read: Retiree Benefits197-021 Mini-lecture: Projected
pension expenses and cash flows 5 6. Session 9, Tuesday, February
15 Case: UAL Retirement Plans Class handout Required: Projected UAL
pension expenses and cash flowsSession 10, Thursday, February 17
Case: Deferred Taxes and the Valuation Allowance at Lucent
Technologies, Inc. (A)103-064Bethlehem Steel Corp.Class handout
Read: Accounting for Income taxes 100-035 Mini-lecture: Employee
stock option footnotes. Handouts on direct charges to owners
equity.Session 11, Tuesday, February 22 Case: eBay Inc.: Internet
Success or Fairy Tale?104-049Cisco Systems, Inc. Non-qualified
Employee Stock Options Class handout Read: FASB and Employee Stock
Options 196-137 Read: Chapter 4, Implementing Accounting Analysis,
Palepu, Healy, and BernardSession 12, Thursday, February 24 Case:
Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc101-011 Chapter 5,
Financial Analysis, Palepu, Healy, and Bernard.Session 13, Tuesday,
March 1 Case: Olympic Financial Ltd. 197-081 Read: Chapter 5,
Financial Analysis, Palepu, Healy, and Bernard.Session 14,
Thursday, March 3 Case: Harley Davidson, Inc.: Motercycle
Manufacturer or Financing Company? 105-027Session 15, Tuesday,
March 8 Case: Hicorp, Inc. 198-014 Chapter 6, Financial Analysis,
Palepu, Healy, and Bernard. Mini-lecture: Cash flow
projectionsSession 16, Thursday, March 10 Case: Amazon.com
Valuation Exercise800-441 Case: Amazon.com Cash Flow Projections
Class handout Case: Financial Projections for a StartupClass
handout Read: Chapter 6, Prospective Analysis: Forecasting, Palepu,
Healy, and BernardSession 17, Tuesday, March 15 Case: Banc One
Corporation (A) 195-207 Read: Chapter 6, Prospective Analysis:
Forecasting, Palepu, Healy, and Bernard Turn in: Technology
Financial projectionsSession 18, Thursday, March 17 Case: Valuation
Ratios in the Airline Industry Ch. 7, pp. 21-30, Palepu Read:
Chapter 7, Prospective Analysis: Value Theory, Palapu, Healy, and
Bernard6 7. Short class: time to prepare Bank Financial Projections
due Tuesday, March 29Spring Break: Saturday, March 19-- Sunday,
March 27Session 19, Tuesday, March 29 Case: Merck & Company:
Evaluating a Drug Licensing Opportunity 201-023 Read: Chapter 8,
Prospective Analysis: Valuation Implementation, Palepu, Healy, and
Bernard Download: Cash-flow projection Excel spreadsheet from
Sandretto Web page Turn in: Bank Financial Projections 7 8. Session
20, Thursday, March 31 Case: Accounting Fraud at WorldCom104-071
Read: Chapter 9, Equity Security Analysis, Palepu. Read: Selected
portions of the Sarbanes-Oxley ActSession 21, Tuesday, April 5
Case: Warnaco Group, Inc. (A)101-068 Read: Chapter 9, Equity
Security Analysis, Palepu Short class: time to prepare:
Non-financial firm or bank Projections and Valuations dueTuesday,
April 12Session 22, Thursday, April 7 Case: The Great Atlantic
& Pacific Tea Company, Inc.104-070 Read: Bond Ratings104-060
Read: Chapter 10, Credit Analysis and Distress Prediction,
PalepuSession 23, Tuesday, April 12 Case: Machinery International
(A) 100-012 Read: Chapter 11, Mergers and acquisitions,
PalepuChapter 11, Translation of Foreign Financial Statements (case
packet 2). Turn in: Non-financial firm or bank Projections and
ValuationsSession 24, Thursday, April 14 Case: Machinery
International (B) 101-061 Read: Chapter 10, Foreign Currency
Transactions (case packet 2).Session 25, Tuesday, April 19 Case:
Enron Corporation: May 6, 2001 Sell Recommendation104-075 Read:
Chapter 13, Communication and Governance, Palepu, Healy, and
BernardSession 26, Thursday, April 21 No Class: Prepare for Group
Presentations Note: I will be in my office all day for office
hours. Session 27, Tuesday, April 26 Group Industry Analysis
Presentations (3 groups) Session 28, Thursday, April 28 Group
Industry Analysis Presentations (3 groups) Session 29, Tuesday, May
2 Group Industry Analysis Presentations (3 groups)Final Exams:
Friday, May 6-Friday, May 13 8 9. Appendix Possible
industries/firmsFeel 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 or three 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:http://biz.yahoo.com/p/s_conameu.html 1.
AirlinesAMR Corp. (American Airlines)Delta Air Lines Inc.Southwest
Airlines Inc.UAL Corp. (United Airlines)U.S. Airways Group Inc. 2.
Appliance ManufacturersMaytag Corp.Whirlpool Corp. 3. Auto
industryFord Motor Co.General Motors Corp. 4. BiotechnologyApplera
Corp-Celera Genomics GroupCambridge Antibody Tech Group PLCCelgene
Corp.Genentech Inc.Millennium Pharmaceuticals Inc.Vertex
Pharmaceuticals Inc. 5. Health food grocery chainsWhole Foods
Market Inc.Wild Oats Markets Inc. 9 10. 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 banksBank America Corp.Bank
One Corp.CiticorpJP Morgan Chase & Co.10. Regional banks Fifth
Third Bancorp SouthTrust Corp SunTrust Banks AmSouth Bancorp First
Union Corp 11. Personal Computer Manufacturers Note: Because three
groups chose to analyze Dell and HP in Fall 2004, this section is
not available for Spring 2005. Dell Computer Corp. Hewlett Packard
Company Gateway Inc. 12. Pharmaceuticals Eli Lily & Co. Johnson
& Johnson Inc.10 11. Merck & Co Inc. Schering-Plough
Corp.13. Processed foods Campbell Soup Co. General Mills Inc.
Hershey Foods Corp Kellogg Co.14. Restaurant chains Bob Evans
Farms, Inc. Darden Restaurants, Inc. (Olive Garden and Red Lobster)
Krispy Kreme Doughnuts, Inc. McDonalds Corp Panera Bread Company
Tricon Global Restaurants, Inc. Wendys International, Inc. 15.
Large Technology firms, weak financial condition AT&T Corp.
Lucent Technologies, Inc. Xerox Corp. Sun Microsystems, Inc. 16.
Large Technology firms, strong financial condition IBM Corp. Intel
Corp. Microsoft Corp. Oracle Corp. 17. Medium-size technology firms
EMC Corp. Linear Technology Corp. Applied Materials 11
