Financial statements are the basis for a wide range of business analysis. Managers use them to monitor and judge their firms' performance relative to competitors, to communicate with external investors, to help judge what financial policies they should pursue, and to evaluate potential new businesses to acquire as part of their investment strategy. Securities analysts use financial statements to rate and value companies they recommend to clients. Bankers use them in deciding whether to extend a loan to a client and to determine the loan's terms.

Part 1 FRAMEWORK

A Framework for Business Analysis and Valuation Using Financial Statements

The Role of Financial Reporting in Capital Markets

From Business Activities to Financial Statements

From Financial Statements to Business Analysis

Summary

Discussion Questions

CASE: The Role of Capital Market Intermediaries in the Dot-Corn Crash of 2000

Part 2 BUSINESS ANALYSIS AND VALUATION TOOLS

Strategy Analysis

Industry Analysis

Applying Industry Analysis: The Personal Computer Industry

Competitive Strategy Analysis

Corporate Strategy Analysis

Summary

Discussion Questions

CASE: America Online, Inc.

Overview of Accounting Analysis

The Institutional Framework for Financial Reporting

Factors Influencing Accounting Quality

Steps in Doing Accounting Analysis

Accounting Analysis Pitfalls

Value of Accounting Data and Accounting Analysis

Summary

Discussion Questions

CASE: Harnischfeger Corporation

 4  Implementing Accounting Analysis

Recasting Financial Statements

Asset Distortions

Overstated Assets

Understated Assets

Liability Distortions

Equity Distortions

Summary

Discussion Questions

Appendix: Recasting Financial Statements Into Standardized Templates

CASE: Pre-Paid Legal Services, Inc.

 5  Financial Analysis

Ratio Analysis

Cash Flow Analysis

Summary

Discussion Questions

Appendix: Part A: Nordstrom, Inc. Financial Statements

Part B: The TJX Companies, Inc. Financial Statements

CASE: The Home Depot, Inc.

 6  Prospective Analysis: Forecasting

Relation of Forecasting to Other Analyses

The Techniques of Forecasting

Making Forecasts

Sensitivity Analysis

Summary

Discussion Questions

Appendix: The Behavior of Components of ROE

CASE: Krispy Kreme Doughnuts

 7 Prospective Analysis: Valuation Theory and Concepts

Defining Value for Shareholders

The Discounted Abnormal Earnings Valuation Method

Valuation Using Price Multiples

Shortcut Forms of Earnings-Based Valuation

The Discounted Cash Flow Model

Comparing Valuation Methods

Summary

Discussion Questions

Appendix: Reconciling the Discounted Dividends and Discounted

Abnormal Earnings Models

CASE: Valuation Ratios in the Airline Industry

Prospective Analysis: Valuation Implementation

Detailed Forecasts of Performance

Computing a Discount Rate

Terminal Values

Computing Estimated Values

Summary

Discussion Questions

CASE: Home Depot, Inc. in the New Millennium

Part 3 BUSINESS ANALYSIS AND VALUATION APPLICATIONS

 9 Equity Security Analysis

Investor Objectives

Equity Security Analysis and Market Efficiency

Approaches to Fund Management and Securities Analysis

The Process of a Comprehensive Security Analysis

Performance of Security Analysts and Fund Managers

Summary

Discussion Questions

CASE: United Parcel Service's IPO

 10 Credit Analysis and Distress Prediction

The Market for Credit

The Credit Analysis Process

Financial Statement Analysis and Public Debt

Prediction of Distress and Turnaround

Summary

Discussion Questions

CASE: Amazon.com in the Year 2000

 11 Mergers and Acquisitions

Motivation for Merger or Acquisition

Acquisition Pricing

Acquisition Financing

Acquisition Outcome

Summary

Discussion Questions

CASE: Schneider and Square D

 12 Corporate Financing Policies

Factors That Determine Firms' Debt Policies

The Optimal Long-Term Mix of Debt and Equity

The Financing of New Projects

Factors That Determine Dividend Policies

Summary

Discussion Questions

CASE: CUC International, Inc. (A)

 13 Communication and Governance

Governance Overview

Management Communication with Investors

Communication Through Financial Reporting

Other Forms of Communicating with Investors

Auditor Analysis

Audit Committee Reviews

Summary

Discussion Questions

CASE: Computer Associates International, Inc.: Governance and Investor

Communication Challenge

Part 4 ADDITIONAL CASES

Anacomp, Inc.

Arch Communications Group Inc.

Boston Chicken, Inc.

Brierley Investments Limited

The City of New York

Comdisco, Inc. (A)

Comdisco, Inc. (B)

Korea Stock Exchange 1998

Manufactured Homes, Inc.

Maxwell Shoe Company, Inc.

The Murray Ohio Manufacturing Company

Oracle Systems Corporation

Sensormatic Electronics Corporation-1995

Thermo Electron Corporation

The Upjohn Company: The Upjohn-Pharmacia Merger

Index

Author Index