Course and Examination Fact Sheet: Autumn Semester 2013 3,152: Fundamental Business Analysis Using Financial Statements ECTS credits: 4 Overview examination/s (binding regulations see below) Decentral ‑ Group examination paper (50%) Decentral ‑ Written examination (25%, 60 mins.) Central ‑ Written examination (25%, 60 mins.)
Attached courses Timetable ‑‑ Language ‑‑ Lecturer 3,152,1.00 Fundamental Business Analysis Using Financial Statements ‑‑ English ‑‑ Gutsche Robert
Course information Course prerequisites I recommend that students who want to attend this class first complete the compulsory accounting course ʺFinancial and Managerial Accountingʺ (ʺControlling und Rechnungslegungʺ).
Course content The financial statements are the primary means of communication of corporate information to investors. At the same time the financial statements are also primary source of information for investors. The information contained in the financial statements are highly relevant for investment decisions. For this reason a competent evaluation and interpretation of financial statements information is of central importance for the allocation of resources. The aim of this course is to enable students to read financial statements, to understand and to be able to derive investment decisions based on this analysis. The course combines the analysis of financial statements and the evaluation of securities from the perspective of an investor. The course has the very practical emphasis on methods for analyzing and valueing firms using financial statements. Several case studies are integrated. By completing this course, students will be student will feel competent in writing a thorough, credible equity research report or investment analysis that meets the highest standards. The course is of interest to those contemplating careers in investment banking (particularly in equities), security analysis, equity hedge funds, private equity, consulting, public accounting, and corporate finance. And it will also help with personal investing. The course is structured as follows: 1. Introduction 1.1. Key Concepts of Investing and Business Analysis 1.2. Financial Statements 1.2.1. Balance Sheet, Income Statement 1.2.2. Statement of Cash Flow 1.2.3. Statement of Equity 1.3. Introductory Example 1.4. Enterprise Book and Market Value 1.5. Identifying Operating, Investing, and Financing Transactions 1.6. Concept Questions (Net Income Concept, Payout to Shareholders, Matching & Timing of Revenues and Expenses) 1.7. Applying Accounting Relations, 1.8. Classifying Accounting Items 1.9 Using Accounting Relations to Check Errors 1.10 Calculating Stock Returns 2. How Financial Statements are Used in the Business Analysis 2.1. Multiple Analysis 2.2. Fundamental Analysis 2.3. Principles of Securities Analysis 2.4. Contrasting Principles of Modern Finance 2.5. Explaining the differences between firms’ price‑to‑sales, price‑to‑ebit, etc. ratios. 2.6. P/E ratios and dividend payouts. 2.7. Stock Repurchases vs. Dividend Payouts 2.8. Influences of Borrowing Costs 2.9. Share Issues and Market Prices: Is Value Generated or Lost by Share Issues? 3. Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation 3.1. Dividend Discount Model Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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3.2. Discounted Cash Flow Model 3.3. Simple Business Analysis/Valuation Models 3.4. The Statement of Cash Flows 3.4.1. CFS Under IFRS 3.4.2. CFS Under US‑GAAP and Swiss Local GAAP 3.5. Free Cash Flow and Forecasting 3.6. Cash Flow, Earnings and Accrual Accounting 3.7. Differences between cash flow from operations and earnings? Is Cash King? 3.8. Identifying Accruals 3.9. Converting Forecasts of Free Cash Flow to a Business Analysis 3.10. Calculating and Comparing Free Cash Flows, Valuation with Negative Free Cash Flows 3.11. Comparing Firms based on Dividends, Free Cash Flow and Earnings Analysis 4. Accrual Accounting and Business Analysis: Pricing Book Values 4.1. The Concept Behind the Price‑to‑Book Ratio 4.2. Prototype Valuations/Business Analysis 4.3. A Model for Anchoring Value on Book Value 4.4. Applying the Model to Equities 4.5. Features of the Residual Earnings Model 4.6. Alternative Measure of Residual Earnings 4.7. Reverse Engineering 4.8. Concept Questions 4.9. Residual Earnings and Off‑Balance Sheet Items such as R&D, Know‑How etc. 4.10. ROCE and Valuation 4.11. Residual Earnings Analysis and Target Prices: Using EPS, DPS and Book Values 4.12. Creating Earnings and Value Created Earnings 4.13. Valuing Dividends or Return on Equity? 4.14. Impairment of Goodwill and Residual Income 5. Accrual Accounting and Business Analysis: Pricing Earnings 5.1. The Concept Behind the Price‑Earnings Ratio 5.2. Prototype Valuation/Business Analysis: Forward, Trailing P/E Ratios 5.3. Normal Earnings and Abnormal Earnings Growth 5.4. A Model for Anchoring Value on Earnings 5.5. Applying the Model to Equities 5.6. Features of the Abnormal Earnings Growth Model 5.7. Reverse Engineering: Implied Earnings Forecasts and Earnings Growth Rates 5.8. P/E‑Screening on Earnings Yield and PEG Ratios 5.9. Concept Questions 5.10. Growth Estimation and Dividend Policy 5.11. Calculating the P/E Ratios (Forward, Trailing) 5.12. Forecasting Earnings Growth and Abnormal Earnings Growth; Target Prices 5.13. Inferring Implied Earnings and EPS Growth Rates 5.14. Abnormal Earnings Growth Analysis and Accounting Methods 6. The Analysis of the Statement of Shareholdersʹ Equity 6.1. Reformulating the Statement of Ownersʹ Equity 6.2. Dirty‑Surplus Accounting 6.3. Payout and Retention Ratios 6.4. Shareholder Profitability 6.5. Growth Ratios 6.6. Hidden Dirty Surplus 6.6.1. Issue of Shares in Operations 6.6.2. Issue of Shares in Financing Activities 6.7. Accounting Quality Issues 6.8. Concept Questions on Dirty Surplus Income 6.9. Comprehensive vs. Net Income: Value lost? 6.10. Influence of Convertibles 6.11. Microsoft and the Share Repurchases 6.12. Reformulation of an Equity Statement and Accounting for the Exercise of Stock Options 7. The Analysis of the Balance Sheet and Income Statement 7.1. Reformulation of the Balance Sheet 7.2. Reformulation of the Income Statement 7.3. Strategic Income Statements 7.4. Comparative Analysis of the Balance Sheet 7.5. Ratio Analysis and Implications 7.6. Concept Questions Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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7.6.1. Why are reformulated statements necessary to discover operating profitability? 7.6.2. Classifying Financial and Operating Assets and Liabilities 7.6.3. Interpreting Minority Interests 7.6.4. Evaluation of Dividend Policy: Value Created or Value destroyed? 7.6.5. Excess of Free Cash Flow over Dividends; Zero FCF and Dividend Payment 7.6.6. Drivers of Free Cash Flow, Dividends, Operating Assets and Financial Obligations 7.7. Reformulation of a Balance Sheet and Income Statement 7.8. Applying the Cash Conservation Equation 8. The Analysis of the Cash Flow Statement 8.1. The and Purposes of Calculation of Free Cash Flow 8.2. Reformulated Cash Flow Statements 8.3. Cash Flow from Operations 8.4. Concept Questions on Purposes of CF‑Calculations, Direct and Indirect Calculation of CF, Liquidation Concept of CF 8.5. GAAP, IFRS and Local Swiss GAAP Adjustments 8.6. Forecasting CFs 8.7. Calculation of Free Cash Flow from the Balance Sheet and Income Statement 8.8. Extracting Information from the Cash Flow Statement with a Reformulation: Microsoft Corporation 9. The Analysis of Profitability 9.1. The Analysis of Return on Common Equity 9.2. First‑Level Breakdown: Distinguishing Financing and Operating Activities and the Effect of Leverage 9.2.1. Financial Leverage 9.2.2. Operating Liability Leverage 9.2.3. Liability Leverage Effects on Shareholder Profitability 9.2.4. Return on Net Operating Assets and Return on Assets 9.2.5. Financial Leverage and Debt‑to‑Equity Ratios 9.3. Second‑Level Breakdown: Drivers of Operating Profitability 9.4. Third‑Level Breakdown 9.4.1. Profit Margin Drivers 9.4.2. Turnover Drivers 9.4.3. Borrowing Cost Drivers 9.5. Concept Questions on Financial Ratios 9.6. Reformulation and Analysis of Financial Statements 9.7. First‑Level Breakdown Exercises 9.8. Second‑Level Breakdown Exercises 9.9. Third‑Level Breakdown Exercises 9.10. What‑if Analysis of Financial Ratios 10. The Analysis of Growth and Sustainable Earnings 10.1. What is Growth? 10.2. Cutting to the Core: Sustainable Earnings 10.2.1. Core Operating Income 10.2.2. Issues in Identifying Core Operating Income 10.2.3. Core Operating Profitability 10.2.4. Core Borrowing Cost 10.3. Analysis of Growth 10.3.1. Growth Through Profitability 10.3.2. Operating Leverage 10.3.3. Analysis of Changes in Financing 10.3.4. Analysis of Growth in Shareholdersʹ Equity 10.4. Growth, Sustainable Earnings, and the Evaluation of P/B Ratios and P/E Ratios 10.4.1. How Price‑to‑Book Ratios and Trailing P/E Ratios Articulate 10.4.2. Trailing Price‑Earnings Ratios and Growth 10.4.3. Trailing Price‑Earnings Ratios and Transitory Earnings 10.4.4. Ratios and the Analysis of Sustainable Earnings 10.5. Concept Questions on Growth and Sustainable Earnings Measures 10.6. Industry Growth Analysis 10.7. Analyzing a Change in Core Operating Profitability 10.8. Analysis of Growth in Common Equity for a Firm with Constant Asset Turnover 10.9. Identification of Core Operating Income and Margins for Starbucks Corporation
11. Forecasting and Business Analysis 11.1. The Value of Operations and the Evaluation of Enterprise Price‑to‑Book Ratios and Price‑Earnings Ratios 11.2. Anchoring on the Financial Statements: Simple Forecasting and Simple Business Analysis/Valuation 11.3. Full‑Information Forecasting, Business Analysis, Valuation, and Business Strategy Analysis 11.4. Concept Questions Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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11.5. Residua! Operating Income and Enterprise Multiples 11.6. Evaluating a Marketing Plan 11.7. Forecasting FreeCash Flows and Residual Operating Income, and Valuing a Firm Outlook: 12. Accounting Analysis and Valuation 12.1. Creating Accounting Value and Economic Value 12.2. Analysis of the Quality of Financial Statements 13. The Analysis of Risk and Return 13.1. The Analysis of Equity Risk and Return 13.2. The Analysis of Credit Risk and Return
Course structure There will be weekly lectures and exercises. The time and room details can be found in the course directory (Stundenplan Online) on the Studynet.
Course literature The course is based on the following text book: Penman, S. H. (2013). Financial statement analysis and security valuation. New York: McGraw‑Hill/Irwin. Other Readings: Bernard, V. L., Palepu, K. G., & Healy, P. M. (2012). Business analysis & valuation : using financial statements. Mason, Ohio; Andover: South‑Western ; Cengage Learning [distributor]. Penman, S. H. (2011). Accounting for value. New York: Columbia University Press. Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio; Andover: South‑Western ; Cengage Learning [distributor]. White, G. I., Fried, D., & Sondhi, A. C. (2003). The analysis and use of financial statements : [CD included]. Hoboken, NJ: Wiley.
Additional course information ‑‑
Examination information Examination part/s 1. Examination part (1/3) Examination time and form Decentral ‑ Group examination paper (50%) Remark ‑‑ Examinationaid rule Term papers Term papers must be written without anyone elseʹs help and in accordance with the known quotation standards, and they must contain a declaration of authorship. The documentation of sources (quotations, bibliography) has to be done throughout and consistently in accordance with the APA or MLA standards. The indications of the sources of information taken over verbatim or in paraphrase (quotations) must be integrated into the text in accordance with the precepts of the applicable quotation standard, while informative and bibliographical notes must be added as footnotes (recommendations and standards can be found, for example, in METZGER, C. (2010), Lern‑ und Arbeitsstrategien (11. Aufl.). Aarau: Sauerländer). For any work written at the HSG, the indication of the page numbers both according to the MLA and the APA standard is never optional. Where there are no page numbers in sources, precise references must be provided in a different way: titles of chapters or sections, section numbers, acts, scenes, verses, etc. For papers in law, the legal standard is recommended (by way of example, cf. FORSTMOSER, P., OGOREK R. und VOGT H. (2008, Juristisches Arbeiten: Eine Anleitung für Studierende (4. Auflage), Zürich: Schulthess, or the recommendations of the Law School). Supplementary aids ‑‑ Examination languages Question language: English Answer language: English Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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2. Examination part (2/3) Examination time and form Decentral ‑ Written examination (25%, 60 mins.) Remark Mid‑term exam. Examinationaid rule Open Book Students are free to choose aids but will have to comply with the following restrictions: At such examinations, all the pocket calculators of the Texas Instruments TI‑30 series are admissible. Any other pocket calculator models are inadmissible. In addition, any type of communication, as well as any electronic devices that can be programmed and are capable of communication such as electronic dictionaries, notebooks, tablets, PDAs, mobile telephones and others, are inadmissible. Students are themselves responsible for the procurement of examination aids. Supplementary aids ‑‑ Examination languages Question language: English Answer language: English
3. Examination part (3/3) Examination time and form Central ‑ Written examination (25%, 60 mins.) Remark Final Exam Examinationaid rule Open Book Students are free to choose aids but will have to comply with the following restrictions: At such examinations, all the pocket calculators of the Texas Instruments TI‑30 series are admissible. Any other pocket calculator models are inadmissible. In addition, any type of communication, as well as any electronic devices that can be programmed and are capable of communication such as electronic dictionaries, notebooks, tablets, PDAs, mobile telephones and others, are inadmissible. Students are themselves responsible for the procurement of examination aids. Supplementary aids ‑‑ Examination languages Question language: English Answer language: English
Examination content The course grade will be calculated as follows: Mid‑term (25%), final exam (25%) and a course project (50%). You will be graded only if you participate in both exams and hand‑in the project on time. Missing one of the exams or not handing in the project on time can be considered as failing the course. If you are unsure about the consequences of not participating in an exam or not handing in the project on time, ask the student office. The midterm exam will take place on October 21, 2013 from 12:30 to 1:30pm in the room of the course lecture (see course directory on the unisg website). Please check the studynet course room website for updates or changes of time and place of the midterm exam. The date when the course project is due will be published on the studynet. The central exam is organized by the university. Guest students are eligible to take their exam prior to the central exam period. The form and content of an exam for guest students can differ from the central exam. If you are unsure whether you are a guest student that is eligible to participate in an antedated exam for guest students or not, please ask the student office. The exams will require the solution of small cases based on the class lectures, exercises and course literature. The project should involve equity analysis and in most cases is presented as an equity research report, using a case study style (there are many examples in the textbook by S. Penman). The course Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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project may be done individually or in groups of up to five people (as a rule of thumb, you should provide at least 3 pages per person. I.e., if you are a group of five, you should provide at least 15 pages.
Examination relevant literature The examination relevant literature is the textbook: Penman, S. H. (2013). Financial statement analysis and security valuation. New York: McGraw‑ Hill/Irwin.
Please note We would like to point out to you that this fact sheet has absolute priority over other information such as StudyNet, faculty members’ personal databases, information provided in lectures, etc. When will the fact sheets become binding? Information about courses and examination time (central/decentral and grading form): from the start of the bidding process on 22 August 2013 Information about decentral examinations (examination‑aid rule, examination content, examination relevant literature): after the 4th semester week on 14 October 2013 Information about central examinations (examination‑aid rule, examination content, examination relevant literature): from the start of the enrolment period for the examinations on 4 November 2013 Please look at the fact sheet once more after these deadlines have expired.
Fact sheet version: 2.0 as of 10/10/2013, valid for Autumn Semester 2013
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