Course Syllabus:
Financial Reporting and Statement Analysis

Faculty

Professor Robert J. Resutek

Objectives

Financial Reporting and Statement Analysis is designed to prepare you to analyze, interpret and use financial statements effectively, both from a general manager and investor perspective. A central theme is “value creation” – how a manager may use financial statements to guide value creating behavior and how investors use financial statements to identify value-creating opportunities.

The course will review and extend some of the financial accounting topics introduced in FMAR, the first-year core course, and examine additional topics not covered in that course. It will also consider extensions and modifications to the accounting and financial (ratio) analyses developed in that course to achieve a value creation emphasis.

The course will utilize a framework for financial statement analysis consisting of four key components, (1) business strategy analysis, (2) accounting analysis, (3) financial (ratio and cash flow) analysis and (4) prospective (forecasting and valuation) analysis. Primary emphasis will be placed on financial and prospective analysis.

The framework will be applied to a number of specific situations, including young, high growth, high tech, mature, and troubled businesses, among others. Cases will be used to develop hands-on experience in applying business analysis concepts.

The most effective means for developing the interpretative and assessment skills is working through the numbers on your own. This takes time and effort. This is a course where you will get out of it what you put in to it. Your study group or partners on the industry/company analysis can help in explaining how they interpret data, but you need to get to the point where you can do this effectively and efficiently on your own.

This course should be helpful in integrating much of the material covered at Tuck, particularly in accounting, finance, economics, and strategy. The industry/company analysis, in particular, will permit you to integrate these elements for a specific company in an assigned industry.

Requirements

Overview

Readings, problems, and/or cases are assigned for classes 1-14. You should come to class prepared to discuss the material assigned. Regular class participation is important to the learning process for you and your classmates. Absences will affect your class participation grade.

Homework assignments to be handed in for class sessions #2, #4, #5, #10, #12, #13, and #14 are due in class. Occasionally, assignments will not be collected.

Optional problems may be listed for some classes. These problems generally involve similar accounting issues and analyses as the assigned readings and cases. You may find it helpful, and efficient, to study the optional problems and their solutions (available in the course folder). Alternatively, you may use the optional problems to cement your understanding of a topic once it is covered in class.

There will be a “take home” mid-term examination distributed on Thursday, October 8, 2009 and due on Wednesday, October 14, 2009. The exam will be open book and open notes.

The last four class sessions will focus on four different industries, and three-four specific companies in each industry. Students will be assigned to industries, companies, and teams.

Industry/Company Analysis

As indicated, the last four classes of the course will focus on four different industries (retailing, manufacturing, service, and financial) and four companies within each industry. Each class will focus on one industry and the designated companies in it. Teams of four students will be responsible for each company.

The content of the analysis should include:



Brief Introduction to Industry (perhaps using Michael Porter's 5 Forces Model or comparable framework).


The Specific Company's Strategic Position in the Industry and its (Unique) Business Model.


Assessment of Recent Financial Results.


Projections for the Future.


Determination of Whether You Would Buy, Hold, or Sell the Stock at this Time.


A Brief Discussion of Any Important Accounting Issue(s)Which Impact the Industry Generally or Particular Company.


Each team will be expected to post a two-page summary of their analysis in the Course Folder on the P (Public) Drive by 8 AM of the day of class, for their classmates.

During class, each team will make a 12-minute PowerPoint presentation of its analysis to the class. The time limit will be enforced. A hard copy of the presentation should be available for Professor Howell at the beginning of the presentation. A copy should also be posted to the course folder.

Finally, the team will submit a hard copy of the completed analysis by 5 PM of the day following its class presentation. The Company Report should probably be in the order of 15 pages in length, plus financial analysis and exhibits. A copy should also be posted to the course folder.

Following the 12-minute presentations, the industry/company analyses will be open for discussion for the remaining time. You should take away from these discussions an understanding of the industry and the unique accounting and reporting characteristics of each industry. To assure a wider classroom participation than just the "presenters," every other student in the class will be assigned the study of one of the companies being presented. Those students should, at a minimum, familiarize themselves with the industry and analyze the company's most recent annual report and quarterly results. In that way, everyone in the class could be expected to make a contribution to the class discussion.

In summary, then, four industries and four companies in each for a total of 16 companies. Each presenting team must post a brief two-page summary by 8 AM of the day of class for the benefit of their classmates, make a 12-minute presentation in class, then submit a final report by 5 PM of the day following class. Non-presenting students are expected to study one of the four companies (assigned) in the industry and be prepared to discuss it.

Outside Speaker and Guests

Outside speakers may be included in the schedule. As well, invitations will be extended to the CFOs of each of the companies being studied and reported upon to attend that session. In the past, some CFOs, or their representatives, have attended class.

Materials

Required Materials

Text:
(a) Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective. 6th Edition (Clyde Stickney, Paul R. Brown, and James M. Wahlen, South-Western Publishing, 2006).

Course Packet:
This packet will contain cases and readings from the financial press and other sources. Articles marked with an asterisk in the syllabus are available as a link on TuckStreams and can be downloaded. Additional materials may be distributed as the term progresses.

Course Folder:
The syllabus on TuckStreams contains links to background information on the industries and specific companies to be analyzed, which has been prepared by Feldberg Library. Feldberg has also created Financial Analysis: A Resource Guide* which lists many resources you will find helpful during the course. Solutions to optional problems are also found in the course folder. Useful References

Palepu, Healy, and Bernard, Business Analysis and Valuation Using Financial Statements, South Western Publishing Co., 4th Ed. 2007 (paperback).

Subramanyam, Wild and Halsey, Financial Statement Analysis, 10th Ed., McGraw-Hill/Irwin, New York, 2008.

Rappaport, Creating Shareholder Value: A Guide for Managers and Investors, The Free Press, 1997.

Rappaport and Mauboussin, Expectations Investing, HBS Press, 2001.

Damodaran, Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, 2nd Edition, Wiley and Sons, New York, 2006.

Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies, 4th Ed. Wiley and Sons, New York, 2005.

Madden, CFROI Valuation, Butterworth Heinemann, 1999.

Ross, Westerfield and Jaffe, Corporate Finance, 8th Ed. McGraw-Hill/Irwin, New York, 2006.

Bodie, Kane, and Marcus, Investments, 8th Ed. R.D. McGraw-Hill/Irwin, 2008.

Useful Websites


A number of Internet websites may be useful to you at some point in the course:



"Filings with Securities and Exchange Commission"


"Pronouncements of the Financial Accounting Standards Board"


"Pronouncements of the International Accounting Standards Board"


Sites which (purport to) offer investment suggestions, and other ideas such as: http://www.reuters.com


Individual companies' sites.

Tuck Honor Code

Some of the assignments may have been used in prior semesters in courses taught by your professor, or may, in fact, be used in the parallel course to this one, Financial Statement Interpretation and Analysis, this semester. Solutions may be posted on the TuckStreams. Talking with other students outside this course before the material is covered (in both courses) or accessing these solutions prior to class is a violation of the Tuck Honor Code. Referring to work done by students in FSIA or FRSA in previous terms, or any specific material distributed previously, is also a violation of the honor code.

You are encouraged to form study groups, or work with other students, to prepare the assigned materials for each day. On those days when industry/company analyses are being made by other classmates, you are expected to familiarize yourself with the industry and one of the companies being analyzed.

The industry/company analysis and presentation is a major element of your learning process and course grade. It is expected that each team member will make a comparable contribution to both the written product and presentation.

Grading

Homework Assignments and Class Participation 30%

Mid Term Examination 35%

Company Analysis 35%

Your grade for the course will reflect your performance in all aspects of the course: class preparation and participation, midterm exam, and the company investment analysis you will complete.

Schedule

Thursday, September 17, 2009
Overview of Course: Economic and Strategic Factors, Financial Statement Relationships, and Value Creation

Learning Objectives



Understand the links between industry economic characteristics, strategies of a firm, its financial statements and notes, assessments of its current and forecasted performance and risk, and its market value.


Review the purpose, underlying concepts, and format of the balance sheet, the income statement, and the statement of cash flows.

FRSA Chapter 1

Prepare:
Cases:
(a) 1.2 Nike: Somewhere between a Swoosh and a Slam Dunk (in Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective textbook)

(b) Nike, Inc. 2009 Consolidated Financial Statements (in course packet)

The study questions are included with the Case 1.2. You should apply the questions to Nike's 2009 Results. In those questions which refer to "Year 4," you should substitute "2009."



Consider all of the questions raised for Nike’s Income Statement, Balance Sheet, and Statement of Cash Flows. Which three questions are most difficult for you?


Make the calculations required for those questions pertaining to Relations Between Financial Statement Items.


Particularly focus on the questions pertaining to Interpreting Financial Statement Relationships. Which three questions are most difficult for you?

Optional: Optional Problems (solutions to Optional Problems are in the Course Folder)
Chapter 1
#1.11 Effects of Industry Characteristics on Financial Statement Relationships
#1.14 Value Chain Analysis and Financial Statement Relationships

Friday, September 18, 2009
Profitability and Risk Analysis

Learning Objectives



Review the primary measures of profitability studied in the first year FMAR course, Return on Assets (ROA) and Return on Common Shareholders’ Equity (ROCE), their underlying components (“drivers”), and the relationship of ROA and ROCE to the firm’s “cost of capital” and the shareholders' expectations, respectively.


Review the primary measures of risk studied in FMAR, short-term liquidity risk and long-term credit risk, their underlying drivers, and the relationship of these measures to effective working capital and capital structure management.


Consider whether traditional measures of profitability and risk are adequate for assessing firm value creation, and what additional measures would be useful.

FRSA Chapter 4 & 5 (pp. 284-299)

Prepare:
Case: Procter & Gamble: 2008 (A) (PDF available in course folder)

The study questions are included with the case.

Homework for Class #2, Due in Class



Calculate P&G's ROA and its components, Return on Sales (ROS) and Asset Turnover. Show your calculations.


Calculate P&G's ROIC (see Study Questions with the case).


Calculate P&G's ROCE, and its components ROS, Asset Turnover and Leverage Ratio.


Calculate P&G's Current Ratio.


Calculate P&G's Debt/Capital Ratio.

Optional: Optional Problems
Chapter 4
#4.11 Analyzing Operating Profitability
#4.16 Calculating and Interpreting the Rate of Return on Common Shareholders’ Equity and its Components
#4.19 Calculating and Interpreting Profitability Ratios

Chapter 5
#5.11 Calculating and Interpreting Risk Ratios

Wednesday, September 23, 2009
Financial Statements Which Drive Value Creation

Learning Objectives



Consider the relative importance of net income and cash flows in the context of a value creation orientation.


Learn how the accrual accounting model for cash flows may be modified to relate cash flows to value creation.


Understand the pattern of cash flows for firms in various stages of their life cycles.

FRSA Chapter 3
Howell, Robert A. "Fixing Financial Reporting: Financial Statement Overhaul," Financial Executive, March 2002.*

Howell, Robert A., "Improving Financial Reporting," Financial Executive, April 2008.*


Prepare:



Case: Warren E. Buffett 2005 (UVA-F-1483)
Berkshire Hathaway, Inc., 2008 Annual Report.

Bary, Andrew, Barron's, December 17, 2007.*"Sorry, Warren, Your Stock's Too Pricey,"

Bary, Andrew, Barron's, July 13, 2009* For Buffett Fans, the Price is Right,"

Focus on Buffett’s “Investment Philosophy” described in the case (at this stage of the course, we are less interested in the specific “economics” of the PacifiCorp transaction); his views regarding traditional accounting, financial analysis measures, and the idea of “intrinsic value,” and, finally, his emphasis on cash flows in his investment practices. Read his "Letter to Shareholders" and the section entitled "An Owner's Manual" in the Annual Report, carefully.

In class, the ideas described in the Financial Executive article will be developed in more detail.

Optional: Nicholas Varchaver, "What Warren Thinks..." Fortune," April 28, 2008.*

Optional: Optional Problems
Chapter 3
#3.14 Interpreting the Statement of Cash Flows
#3.21 Preparing a Statement of Cash Flows from Balance Sheets and Income Statements

Thursday, September 24, 2009
Financial (Cash Flows) Forecasting

Learning Objectives



Develop the skills to build future cash flow forecasts, which may be used (later) in valuation models to estimate the firm¡¦s share value.


Understanding the difference(s) between forecasting traditional financial statements and forecasting cash flows for valuation.


Understand how critical business and strategic factors affect financial forecasts.


Understand how and when to use shortcut forecasting techniques.


Develop your own financial (cash flow) forecasting model which may be applied to different businesses.


a. FRSA Chapter 10, "Forecasting Financial Statements."

Prepare:
Case:
a. Procter & Gamble: 2008 (B) (PDF available in course folder)

Rather than the study questions at the end of the case, focus on P&G’s definition of "free cash flows" (operating cash flows less capital spending). Because it is simplified, it has several technical errors.

Homework for Class #4, Due in Class

a. P&G indicates that its "free cash flows" were $12.8B. What adjustments need to be made to their number to determine the "free cash flows available to creditors and shareholders"? Show your adjustments.
b. Why do you think P & G uses it's simplified definition of free cash flows?
c. P & G uses a "free cash flow productivity" metric to relate it's definition of free cash flow to net income. What assumptions must P & G make to assure that free cash flows >90% of net income? Be specific.



b. Proctor & Gamble: 2008 (C) "Common Size" Financial Statements.

Quickly review these schedules. How might they be used to project P & G's "future cash flows"?

You may access a P & G Financial Forecasting Template on the Course Folder and begin to make some projections.

Optional Problems
Chapter 10
#10.9 Store Driven Forecasts
#10.12 Identifying the cost structure
#10.10 Projecting P P &E

Wednesday, September 30, 2009
Valuations Based on Cash Flows/Creating Additional Value

Learning Objectives



Understand how cash flow based valuations work, and their conceptual and practical strengths and weaknesses.

Develop practical valuation techniques to deal with the many difficult issues involved in estimating firm value using the present value of expected future cash flows.

Applying the present value of future cash flows valuations model.


Assessing the sensitivity of firm value estimates to key valuations parameters such as expected long-term growth rates and discount rates.




a. FRSA Chapter 11, (skim), Chapter 12
b.Howell, Robert A. "Tying Free Cash Flows to Market Valuations," Financial Executive, May 2002.*
c.Revell, Janice, "Forget About Earnings" Fortune June 11, 2001.*

Prepare:
Cases:
a. Proctor & Gamble 2008 (D) "Calculating the Cost of Capital." The study questions are included with the case.
(b.) Procter & Gamble: 2008 (E) "Valuation Template." You will have access to a P & G Valuation Template on the Course Folder.

Homework for Class #5, Due in Class

1. Based on the "Common Size Financial Statements" and your understanding of P & G and it's business environment, what assumptions would you make regarding P & G's future? Specifically for:
a. Sales Growth
b. Cost of Goods Sold
c. S G & A Expenses
d. Other Income Statement Items
e. Working Capital Requirements
f. Capital Expenditures

2. Using the "Valuation Template" provided, make an initial estimate of P & G's value, as of 6/30/2008 (end of FY 2008).
3. P & G's market value on 6/30/2008 was 184B. What is your reaction?

Additional Study Questions, Not to be handed in
4. What actions might P & G's management take to increase the firm's intrinsic value? Specifically:
a. Revenue Related Actions
b. Cost Related Actions
c. Investment Related Actions
d. Financing Related Actions
5. What would be your suggested priorities?

Thursday, October 1, 2009
Measurement Systems for Value Creation

Learning Objectives

1. Consider how various approaches to performance measurement motivate managers and relate to value creation:
a. Traditional performance metrics such as ROA, ROIC, and ROE, and measures of liquidity and solvency.
b. Economic Value Added (EVA) (also called "Residual Income" and occasionally, Market Value Added).
c. Free Cash Flow based metrics,
2. Consider the pros and cons and ease of utilization of each approach.

Harper, David, "Understanding Economic Value Added," Investopedia.com, 2005.

Prepare:
Cases:
a. McCormick & Company 2003 Annual Report (pages 34-36) and accompanying Economic Value Added (EVA) and Return on Invested Capital (ROIC) calculations.
b. Procter & Gamble: 2008 (A)
Study Questions:
1. Trace McCormick's EVA calculation for 2003 to their financial statements. Is McCormick creating value according to this metric? How does EVA motivate McCormick's managers?
2. Do the same for McCormick's ROIC calculation. What is your reaction? How does ROIC motivate McCormick's managers?
3. Calculate and contrast ROIC, EVA, and free cash flows as potential metrics for value creation. What would you recommend?

Wednesday, October 7, 2009
Valuations Based on Market Multiples and Accrual Earnings

Learning Objectives

1. Understand the practical advantages and disadvantages of using market multiples in valuation.
2. Understand earnings based valuation, and its relationship to dividends and cash flows.
3. Understand the conceptual and practical strengths and weaknesses of the residual income (popularly referred to as economic value added, or EVA) valuations method.

FRSA Chapter 14, Chapter 13 (skim)

Prepare:
Cases: (a) Revco D.S., Inc. (in course packet) (Primary focus of class discussion).

Complete the following table, based on information in the Revco case: (table included in course pack)

Optional: Optional Problems
Chapter 14
#14.17 Using Market Multiples to Assess Values and Market Prices
#14.18 Interpreting Market-to-Book Ratios
Chapter 13
#13.17 Equity Valuation Using the Residual Income and Dividend Discount Model
#13.18 Equity Valuation Using the Residual Income, Free Cash Flows, and Dividend Discount Models

Thursday, October 8, 2009
Reinforcing Financial Analysis for Valuation

Learning Objectives:

1. To reinforce the sequence of steps necessary to value a firm:
a. Recasting financial statements
b. Forecast future results
c. Calculating WACC
d. Valuing the firm
e. To consider the relationship between the determined valuation and market valuation, if different.
f. To consider ways to increase the firm's value.

Review:
All prior assignments

Prepare:
Case: Johnson & Johnson 2008 (A)
The study questions are included in the case.

Note: "Take home" mid-term examination to be distributed)

Wednesday, October 14, 2009
The Security Analyst’s Use of Financial Reporting and Statement Analysis.

Read:
a)Bennett and Perone, "Citi $licker Goes to the Mat," New York Post November 3, 2007.*
(b) Davis, "Meredith Whitney's Out on a Limb with this Citi Bashing," Seeking Alpha (www.seekingalpha.com), posted March 31, 2008.*
(c) Blodget, "Meredith Whitney Trashes Citi (C), Fannie (FNM), Freddie (FRE): The Complete Maria Bartiromo/CNBC Interview," www.clusterstock.com, July 31, 2008.*
(d) Birger, "The Woman Who Called Wall Street's Meltdown and What She Sees Next," Fortune, August 18, 2008.*


Guest Speaker: To Be Announced.

(Note: “Take Home” Mid-Term Examination due at the beginning of class.)

Thursday, October 15
Valuing Companies in Different Stages of Growth and Condition: The Young, High Growth, Internet Centric Company

Learning Objectives



Understand the differences in cash flow patterns between young, high growth, “asset light” companies and (more traditional) older, slower growth, more asset intense companies.


Consider the applicability of “business model design” on cash flow patterns and value creation.


Consider other possible approaches to startup company valuations than cash flows, earnings, and market multiples.


(a) Mauboussin, Michael J. and Hiler, Bob, “Cashflow.com: Cash Economics in the New Economy,” Credit Suisse First Boston, February 26, 1999.*
(b) Desmet, Driek, et al. “Valuing dot-coms”, The McKinsey Quarterly, 2000, No. 1.*


Prepare:
Case: Google Inc. 2006: Creating More Wealth, Faster, than Any Company in History (PDF available in course folder)

The study questions are included with the case.

Homework for Class #10, Due in Class

Recast Google's Consolidated Financial Statements into a "free cash flow" format for 2004, 2005, and 2006. Reactions?


Using Google's 2006 UFCF's, value Google's equity. (Use an equity beta of 1.18). How does your valuation compare to the market's valuation as of year end 2006? Reactions?



Wednesday, October 28, 2009
Current Financial Reporting Issues

Learning Objectives



Understand the difference between measuring assets and liabilities using historical versus current values, and the relation between the valuation of assets and liabilities on the balance sheet and the measurement of net income on the income statement.


Understand the concept of quality of accounting information, including the attributes of economic content and earnings sustainability.


Develop the ability to know when and how to adjust reported income and asset values to better evaluate performance and predict future results.


Consider other approaches to earnings measurement and asset valuation, which may reduce the ability to “manage” reported results.


Begin to develop a personal framework for analyzing financial statements, with an eye toward identifying suspicious reporting.


Skim FRSA Chapters 2 and 6

Background Articles:
(a) Introducing The 2002 Sustainability Reporting Guidelines, October 2002.*
(b) SEC Final Rule: Conditions for Use of Non-GAAP Measures (Regulation G), January 22, 2003.*
(c) SEC Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations, December 19, 2003.*
(d) George, Bill, “Why It’s Hard to Do What’s Right,” Fortune, Sept. 29, 2003.*
(e) "Breaking the Short-Term Cycle," CFA Centre for Financial Market Integrity and Business Roundtable Institute for Corporate Ethics, July 2006.*
(f) Heffes, Ellen M., "Top Financial Reporting and Audit Concerns for Preparers at Private and Public Companies," Financial Executive, June 2008.*



Prepare:
Case: PepsiCo 2008

The study questions are included with the cases.

PepsiCo 2008 Annual Report*

There is, obviously, a lot of material associated with this assignment. The ultimate objective is to consider how companies might make their overall reporting more comprehensive and understandable.


Optional: Optional Problems
Chapter 2
#2.8 Effect of Valuation Method for Non-Monetary Asset on Balance Sheet and Income Statement
#2.9 Effect of Valuation Method for Monetary Asset on Balance Sheet and Income Statement

Chapter 6
#6.10 Adjusting for Unusual Income Statement and Classification Items
#6.13 Adjustments for Peripheral Gains, Charges, and Other Unusual Items


(Note: "Take Home" Mid-Term Examination due at beginning of class)

Thursday, October 29, 2009
Valuing Companies in Different Stages of Growth and Condition: The Acquisition Oriented, High Tech Company

Learning Objectives

1. Review issues of revenue and expense recognition, and issues of inventory, fixed assets, and intangible assets valuations.

2. Consider how an acquisition should be valued, especially by the buyer's shareholders.

(a)FRSA Chapter 9 (pages 630-637)

(b) Mauboussin, Michael J. and Hiler, Bob, “Let’s Make a Deal: A Practical Framework for Assessing M&A Activity,” Credit Suisse First Boston, April 27, 1998.*


Prepare:

Case: Kraft Foods – Cadbury PLC Merger Proposal
The study questions are included with the case.

Homework for Class 12, Due in Class

1. Value Kraft Foods per share stock price as of September 4, 2009. Is Kraft over/undervalued on that date?

2. Calculate the synergistic value of the Kraft-Cadbury consolidation predicated on Kraft's estimates.

3. What is the new Kraft stock value, assuming the deal is completed on the terms offered on September 7, 2009 and the synergistic benefits are realized? Is the proposed deal a good one one for Kraft Shareholders?

Optional: Optional Problems
Chapter 9
#9.10 Effect of the Purchase Method on the Balance Sheet
#9.12 Analysis of Corporate Acquisition

Wednesday, November 4, 2009
Valuing Companies in Different Stages of Growth and Condition: A Leading Company in a Cyclical (Homebuilding) Industry

Learning Objectives



Review the criteria for the recognition of an accounting liability and apply those criteria to various obligations of the firm, including financing arrangements structured to keep debt off of the balance sheet.


Understanding the use of derivative financial instruments for hedging risks and the effects of fair value hedges and cash flow hedges on the financial statements.


Understand the accounting for pensions, for both the sponsor and the plan itself. Adjust the financial statements of the sponsor to incorporate information from the accounting records of the retirement plan with respect to any unrecognized obligation.


Understand the various uses of reserve accounts and their potential for managing earnings over time.


Consider the implications of liability adjustments on firm valuation.


Skim: FRSA Chapter 8 (pp. 522-545, 561-575)

Read (for background):
(a) “The Evolving Homebuilding Industry & Implications for Consumers,” Joint Center for Housing Studies of Harvard University, 2006.*
(b) “Staying Competitive in Today’s Homebuilding Industry,” Deloitte and McGraw Hill Construction, 2006.
(c) Der Hovanesian, Mara, “Bonfire of the Builders,” Business Week, August 13, 2007.*
(d) Benner, Katie, "Bob Shiller Didn't Kill the Housing Market," Fortune, July 20, 2009.*

Prepare:
Case: Pulte Homes, Inc. 2009

The study questions are included with the case. You should be prepared to defend your position as to whether Pulte Homes, Inc. is at high risk or well positioned in early 2009.

Homework for Class #13, Due in Class



Compare and contrast Pulte Home's Net Income (loss) with its UFCF's for the period 2008-2009:

(a)As reported.
(b)Assuming no change in inventories (land purchases). What is your reaction?



What arguments would you make that Pulte Homes is a "buy"? "hold"? "sell"? List 3-4 arguments for each position.



Optional: Optional Problems
Chapter 8
#8.10 Achieving Off-Balance Sheet Financing


Thursday, November 5, 2009
Analyzing and Valuing Financial Service Firms

Learning Objectives



Understand the characteristics of financial service firms' financial statements.


Learn the key ratios for analyzing financial service firms.


Value a financial service firm on the basis of cash flows to equity, dividends, and excess returns.


Consider the risks associated with a financial service firm's balance sheet.


Damodaran, Aswath, Chapter 21, "Valuing Financial Service Firms," Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, John Wiley & Sons Inc., 2006.

Prepare:
(a) Case: U.S. Bancorp 2008

The study questions are included with the case.

Homework for Class #14, due in class.



One way to value a financial institution is to use its "cash flows to equity" and equity cost of capital, by starting with the change in cash and cash equivalents and adjusting for the various equity transactions.

(a) Calculate US Bancorp's cash flow to equity.
(b) On this basis, what is your valuation of US Bancorp?
(c) If US Bancorp (or any financial institution increased its "leverage," what effect would that have on your answers in (a) and (b) above?



Value US Bancorp on the basis of dividends.



Wednesday, November 11, 2009
Industry: Retailers: Grocery

During the next four sessions, the class will focus on four different industries (retailing, manufacturing, services, and financials) and four companies within each industry. Although specific teams will be responsible for making presentations on the designated companies, all students will be expected to familiarize themselves with the industry and one of the companies in the industry.

Industry: Retail (Grocery)
Industry: Retail (Drugs)


The Kroger Co. (NYSE: KR)

Safeway Inc. (NYSE: SWY)

CVS Caremark Corporation (NYSE: CVS)

Walgreen Company (NYSE: WAG)



Thursday, November 12, 2009
Industry: Manufacturing: Metals

Industry: Metal Mining
Industry: Iron and Steel
Industry: Gold and Silver


Alcoa Inc. (NYSE: AA)

ArcelorMittal (NYSE: MT)

United States Steel Corporation (U. S. Steel) (NYSE: X)

Freeport-McMoran Copper & Gold Inc. (NYSE: FCX)



Wednesday, November 18, 2009
Industry: Services: Transportation & Shipping

Industry: Railroads
Industry: Air Courier


Union Pacific Corporation (NYSE: UNP)

Burlington Northern Santa Fe Corporation (NYSE: BNI)

FedEx Corporation (NYSE: FDX)

United Parcel Service, Inc. (NYSE: UPS)



Thursday, November 19, 2009
Industry: Regional Banks

Industry: Commercial Banks


Comerica Incorporated (NYSE: CMA)

M&T Bank Corporation (NYSE: MTB)

Regions Financial Corporation (NYSE: RF)

State Street Corporation (NYSE: STT)