Financial Statement Analysis : Valuation Approach - 03 edition

The collapse of Enron. The bankruptcy of WorldCom. Accounting irregularities at Qwest. These are just a few examples of how all of our lives have been affected by global business practices. These events have brought to our attention more than ever the significance of accounting. Hardly a day goes by that newspaper editorials do not lament the state of accounting and discuss its effect on capital markets. Being an informed user of financial statements was never unimportant. But today the need is more obvious than ever.

This book provides both a sound theoretical framework for financial statement analysis and corporate valuation and a thorough discussion of how valuations are actually done in the real world. It is targeted for people who are in, or intend to enter, investment banking, consulting, accounting, corporate finance, commercial banking, equity analysis or equity research. While of interest to the practitioner, this book is primarily designed for use in an elective MBA course or in a capstone undergraduate course. A draft of this book has been used successfully in the MBA programs at Northwestern University's Kellogg Graduate School of Management, the University of Illinois at Chicago and Dominican University. It has also been used for Masters in Accounting students and undergraduate students at the University of Illinois and in executive education at Kellogg. The book works well either in the accounting or the finance curriculum.

KEY FEATURES

• Rigorous theory matched with a practice oriented approach. The book is rigorous in its coverage of valuation theory, but it is equally concerned with presenting the material in a practical way. Students must understand why valuations are done the way they are, and also be able to use real world information in their analyses. This book discusses the information sources used in building valuation models, financial statement quality issues, interpreting the information in a valuation context, dealing with the imprecision and vagueness that often accompany real disclosures, and avoiding common analysis pitfalls.
• Focus on real financial statements and real business examples. Real world business examples and actual financial statements appear throughout the text and in the end of chapter material, adding realism and providing experience using these documents. It forces students to think critically and make assumptions and estimates when they encounter incomplete information in financial statements. The text explores the subtleties of accounting disclosures and shows how to incorporate this information in a valuation. We use the Starbucks financial statements throughout the book to show how financial statement analysis and valuation are applied to a real company.
• Discussion of financial statement quality issues woven throughout all the chapters. Financial statement quality issues are very important in financial statement analysis and valuations Rather than address these issues separately, earnings quality is discussed throughout the book, as each element of the analysis is developed.
• Blend of accounting, finance and business strategy. This book covers the accounting, finance and business strategy concepts needed to prepare a valuation. These concepts are integrated so students see the connections among them. The book provides a framework for analyzing business strategy and discusses the link between strategy and valuation. Students learn about business strategy and how to relate a firm's strategic position to the assumptions in a valuation.
• Unique and substantial end of chapter material. Each chapter includes a substantial number of review questions and problems. These serve to reinforce the material and allow students to test themselves using many real financial statements and disclosures. This material includes several innovative features, each of which is clearly labeled with an icon:
• To respond to the concern that students do not develop adequate writing skills, we have included a number of questions and problems requiring a writing-intensive response.
• In-class exercises are problems with opportunities for classroom debates and hands-on projects. All of these problems could also be used as regular homework problems.
• Each chapter includes an assignment that is part of a course-long project, called My Case, to analyze and value a company. This allows the student to prepare the appropriate part of his or her project immediately after covering the material for class. By the end of the book, the student has a complete analysis of the company, which can be turned in as a written document and/or presented orally to the class.
• Because students will be using Internet research in their jobs, we have included problems that require the use of common Internet research tools.
• Innovative coverage of pension and employee stock option valuation. The book includes chapters on using financial statement disclosures to value companies with pension plans and companies with employee stock option plans.
• Short sidebars on current topics. Most chapters include one or more short pieces on related topics, including practical information, academic research, and recent news stories. Called "A Closer Look," sample topics for these pieces include the Enron bankruptcy, accounting treatment of losses from the September 11 terrorist attacks, finding industry information, using government data sources, academic research on using multiples to value firms with no earnings, and Regulation FD.
• Comprehensive coverage of all commonly used valuation models. The book covers all of the commonly used valuation models, including five models derived from basic discounted cash flow theory: the dividend discount model, the flows to equity model, the free cash flow model, the adjusted present value model, and the residual income model. The book also provides an unusually rigorous treatment of valuation with multiples.
• Accounting Appendices. Some chapters include more detailed information on the accounting for certain items. For example, we include appendices on accounting for contingencies and accounting for investments.
• Suggested Readings. The suggested readings provide additional resources and/or assignment material. The readings include both classic and recent articles and books. They also include current working papers available on the Social Science Research Network, which are highlighted with the SSRN logo.

Soffer, Leonard : University of Illinois at Chicago

Leonard Soffer is Associate Professor of Accounting at the University of Illinois at Chicago, where he teaches courses in Corporate Valuation and Advanced Accounting to both undergraduate and graduate students. He has also taught graduate students at the Kellogg Graduate School of Management and the University of Chicago Graduate School of Business, as well as executive education students at Kellogg and in an executive education program for a major accounting and consulting firm.

Professor Soffer has a B.S. in Accountancy from the University of Illinois at Urbana-Champaign, an M.B.A. in finance and information systems from the Kellogg Graduate School of Management, and a Ph.D. in Accounting from the University of California at Berkeley. He is a Certified Public Accountant and a winner of the prestigious Elijah Watt Sells Award for his performance on the C.P.A. exam. Professor Soffer is a member of the American Accounting Association, the American Institute of C.PA.s and the Illinois C.P.A. Society. He serves on the Accounting Principles Committee of the Illinois C.PA. Society.

Professor Soffer's research focuses on security analysis, the role of security analysts, and the use of financial statement information. His work has appeared in the Journal of Accounting Research, the Review of Accounting Studies, Contemporary Accounting Research, the Journal of Accounting, Auditing and Finance, Accounting Horizons, Managerial Finance, the Review of Accounting and Finance, and Investor Relations Quarterly. He is a member of the editorial board of the Review of Accounting and Finance. Professor Soffer's research has been cited in Business Week, Crain's Chicago Business, and Worth Magazine. He has appeared on the Chicago CBS television affiliate and on WebFN, a Web-based business news station, to discuss the state of the accounting profession, his research, and regulation of financial disclosures.

Prior to entering academia, Professor Soffer worked in accounting and corporate finance positions, most recently as manager of corporate development for USG Corporation, where he worked on acquisitions, divestitures and corporate strategy issues for the Chicago-based construction products firm. Professor Soffer has served on the board of directors of a not-for-profit corporation providing services to the developmentally disabled. He and his wife/co-author live in the Chicago area with their three children.

Soffer, Robin :

Robin Soffer is a consultant specializing in financial analysis and business strategy. As part of her consulting work, she runs the financial training programs at

I. INTRODUCTION TO SECURITY ANALYSIS.

1. Introduction to Security Analysis.
2. Security Analysis and Efficient Markets.

II. BUSINESS AND FINANCIAL ANALYSIS.

3. Business Analysis.
4. Financial Statements.
5. Financial Statement Analysis.

III. CASH FLOW VALUATION MODELS.

6. The Economic Balance Sheet and an Overview of Cash Flow Based Valuation Models.
7. Discount Rates in Valuation.
8. The Dividend Discount and Flows to Equity Models.
9. Free Cash Flow Model and Analysis.
10. Free Cash Flow Forecasting.
11. The Adjusted Present Value Model.
12. The Residual Income Model.

IV. SPECIAL ISSUES IN VALUATION

13. Understanding the Income Tax Disclosure.
14. Cash Flow Valuation and Employee Stock Options.
15 Cash Flow Valuation and Pension and Other Post-Employment Benefit Plans.

V. MULTIPLES VALUATION.

16. A "Theory" of Multiples.
17. PE Ratios and Earnings Growth.
18. Additional Issues in Multiples Analysis.