Accounting 5353-930

Financial Statement Analysis

Spring 2002
Classroom: Nichols Center, Room , Wednesdays 6:30-9:20 p.m.
Professor Frances L. Ayres
Office: 201 Adams Hall
Office Phone: 325-5768
E-mail: Fayres@ou.edu
Office Hours: Tuesday 3:00-5:00 p.m. (Norman), Wednesday, Nichols Center
(5:30-6:30 p.m.) and by appointment

Texts:
Required: Palepu, Healy and Bernard, Business Analysis & Valuation Using
Financial Statements, Second Edition

Optional: White, Sondhi and Fried, The Analysis and Use of Financial
Statements,
Second Edition, Wiley, 1997.

Class web: http://www.ou.edu/class/acct5353

Course Objectives: This course is intended to increase your ability to use and
make decisions using information presented in the financial statements of
publicly traded companies. A number of different decision contexts will be
examined including valuation of potential acquisitions,
investment analyses, credit analyses, managing corporate financing policies
and analyzing business communications. We will consider the role of both
accounting and non-accounting information.

Course conduct: This course is based primarily on a combination of readings,

discussion, and case analyses. The readings and lectures will serve as
background to assist you in analyzing the assigned cases. The cases used in
this course are based on real world situations and many come from the
financial statements of publicly traded companies. By their nature the types of
problems addressed in the cases typically do not fit neatly into a single
category. They reflect a myriad of real world issues typically faced by
management. When you read the cases and think about the problems you
should not confine yourself to accounting issues or too narrowly to the
questions asked at the end of the case (or distributed in class). Rather, you
should try to think broadly about the company and consider issues relating to
management motivations, business risk and strategic planning issues. In other
words, with each case consider the question, “What is really happening in this
company and do the financial statements reflect these events? If not, then
what is really happening?” Active participation by class members is a must for
successful completion of the class. Active participation implies more than just
attending class and reading the materials although these are essential
components. It also means you must be willing to take a position, justify that
position and to share your views with the class. Evaluation of your participation
will be based on the quality of your participation as well as your willingness to
contribute in class.

University Reasonable accommodations: Any student in this course that

has a disability that may prevent him or her for fully demonstrating his or her
ability should contact me personally as soon as possible so that we can discuss
accommodations necessary to ensure full participation and facilitate your
learning opportunity.

Cases: Each team will be responsible for two primary cases through the course
of the semester. For the cases on which you are assigned you are expected to
serve as discussion leader/facilitator for the class discussion of that case. I
expect that we will spend 45-60 minutes on each case. Some cases may take
more time than others. I do not expect you to present the class with a solution
but rather to be able to raise issues and to lead the class discussion of the
case. For cases for which you are a primary presenter your team must turn on
a typed analysis of the cases. The typed analysis should address the questions
raised in the case as well as any additional issues that your team decides are
important and how you addressed these issues. The typed case analyses are
due the week following the case discussion. For cases for which you are not a
primary presenter you should also prepare a short analysis of the case that
includes numerical analysis where appropriate and a summary of key points.
This mini-analysis will normally be 1-2 typed pages and are to be done
individually. Mini-analyses are to be prepared by class time for the class in
which the case is to be discussed. All students must be prepared to discuss
each case regardless of whether it is a primary case, and all students will be
responsible for understanding the concepts utilized in the cases.

Team project: Each team will also be responsible for one major team case
project. Each team is to select a company of their choice and will conduct a
complete analysis and valuation of that company. You are also to present your
analysis to the class and to turn in a page summary of your analysis no more
than 15 pages in length. The company must be a publicly traded company that
is not a bank or insurance company. It also must be a company that you are
not analyzing in another class. You should begin to think about your company
choice as soon as possible and start to gather information on the company.
Your analysis should include the following:
a) complete comparative ratio analysis and common size financial statements
and discussion of key issues suggested from ratio analysis;
b) critical analysis of footnotes and restated ratios/common size statements
based on restated financials. Include discussion of any differences obtained
from those in part a;

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c) computation of z score and discussion of risk default;
d) computation of the estimated value of the company including a detailed
discussion of the assumptions on which your valuation is based. Relative to
current market prices determine if the company you select is under- or over-
valued and by how much.

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Grades:

Mini-analyses 20%
Class participation 10%
Primary cases 20% (10% each)
Midterm exam 5-25%*
Team project 25% (includes peer evaluation)
Final exam 0-20%*
Total 100%

* You do not need to take the final if you are satisfied with your pre-final grade.
If you are not satisfied with your pre-final grade you can take the final exam.
The final will allow you to improve your exam grade. Your grade will be based
on all but the final using the percentages shown, unless you elect to take the
final. If you take the final your midterm exam will be weighted at 5% and the
final at 20%.

Class participation: I will evaluate your class participation based on my

assessment of your overall contributions to class discussions as evidenced by
preparation and willingness to volunteer and contribute to the class. I will
include attendance, but attendance alone is not a basis for an A or B in class
participation. Outstanding class participation means that you are prepared to
discuss the homework and cases, attend class and contribute positively to the
class discussion.

Peer evaluation: There will be a peer evaluation at the end of the semester.
You will be asked to evaluate your team members’ performance throughout the
semester in terms of working together on the assigned homework and
preparing for your sessions as discussion leaders.

Assignment schedule: NOTE: PHB refers to Palepu, Healey and Bernard, and
WSF is White, Sondhi and Fried

January 16 Course Introduction

See first day assignment handout (Use of Dupont Analysis and Rim Model)

January 23 Chapters 1-2 PHB- Framework and Strategy analysis

Background Ch. 1 & 7, WSF

Case: America Online, Inc.

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January 30 Chapter 3, PHB-Accounting Analysis

Background: Ch.8, WSF Ch. 3, WSF, pp. 66-69 WSF, pp. 237-244 WSF

Case: Harnischfeger Corporation –Team 1

February 6 Chapter 4, PHB, Asset Analysis

Background. Ch. 7, Ch. 9 WSF

Case: Boston Chicken, Inc.- Team 2

February 13 Chapter 5, PHB, Liability and Equity Analysis

Background, Ch 11, WS
Case: Manufactured Homes, Inc.-Team 3

February 20 Chapter 6, PHB, Revenue Analysis

Background: Ch. 2, WSF

Case: Oracle Systems, Inc.-Team 4

February 27 Chapter 7, PHB, Expense Analysis

Background: Ch. 7,8 WSF

Case: Pre-Paid Legal Services Inc. –Team 5

March 6 Valuation issues modeling and example

Chapter 11, PHB Valuation Theory and Concepts

Chapter 12, PHB Valuation Implementation

Background: Chapter 19 WSF

Case; TBA

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March 13 Exam 1

March 20 Spring Break

March 27 Chapter 8, 15 PHB Entity Accounting Analysis and

Acquisitions

Background: Ch. 13,14 WSF

Case: Thermo Electron Corporation –Team 1

April 3 Chapter 9, PHB Financial Analysis

Background: Ch. 3, 4 WSF

Case: Home Depot – Team 2

April 10 Cases: Revco D.S., Inc. –Team 3

Schneider and Square D. –Team 4

April 17 Ch. 13 PHB

Background: Ch. 5, WSF

Case: Arch Communications Group, Inc.-Team 5

April 24 Team Presentations of projects

May 1 Final Exam (optional)