Financial Statement Analysis and Valuation

Mini 3 – 2023 – One Year Program

Instructor: Ron Lazer, Ph.D., CPA(Isr.)

Office Hours: TBA
Email: rlazer@runi.ac.il
Phone: 054-984-5994

Teaching Assistant: Gal Ziv

Email: galziv89@gmail.com

Course objectives, content and organization

The objective of the course is to provide students with hands-on experience in financial
statement analysis. Students will be exposed to the theoretical concepts of fundamental
analysis, general tools of financial analysis, and practical valuation issues. By the end of
the course, students should be comfortable with using firms' financial statements (in
conjunction with other information) to develop an understanding of their performance and
to establish a basis for making reasonable valuation estimates. The course does not assume
market efficiency - it develops techniques for challenging traded prices, to assess whether
investments are appropriately priced.
We use an integrated framework that combines strategy, financial reporting, financial
analysis and valuation. Early in the course we develop an accounting-based valuation
framework that requires understanding, organizing and summarizing of financial data.
After establishing the theoretical foundations of our model, we conduct:
• a reporting strategy analysis: assessing a firm's value proposition and identifying
key value drivers and risks; evaluating the degree to which a firm's accounting
policies capture the underlying business reality; assessing a firm's earnings quality;
making accounting adjustments to eliminate GAAP issues and management biases;
and
• performance analysis and valuation: evaluating current performance and its future
sustainability, making forecasts of future profitability and risk, and valuing
businesses using earnings and book value data. Review of the P/E and M/B ratios,
and the information incorporated in prices and challenging these prices

Why you should take this course?

This course is aimed at all students who expect at some point in their careers to use
financial statements to evaluate the performance, prospects, and value of a business. The
primary emphasis will be on the analysis of public companies, but many tools and
techniques utilized are relevant to private enterprise financial analysis as well.
Teaching materials

The required readings for the course are chapters out of Financial Statement Analysis and
Security Valuation, 5th edition (2013), by Stephen H. Penman, Irwin/McGraw-Hill
publishing.
Cases, presentations, and additional materials will be available on the course website.

Class meetings:

We will meet weekly on Mondays @ 8am. All classes will be recorded.

Evaluation

A combination of a group project, presentation, cases, individual assignments, class

discussions/participation, and an exam will be used to evaluate student performance in this
course. Course grades will be computed using the following weighting scheme:

Group Project and Presentation 40%

Class Participation and Attendance 15%
Individual Assignments 0% to 10%
Final Exam 45% to 35%
Total 100%

Group project and presentation

The group project serves as a synthesizing device for the course. It is a project which
requires you to select one publicly traded firm from the retail industry, summarize the
economics, current conditions, key success factors and risks in the industry, evaluate the
strategies each of the firms pursues, identify accounting issues relevant to the analysis,
(optional: perform a reformulation), perform ratio analysis, calculate free cash flows,
revenues and FCF forecasting, and value the common stock using the discounted cash flow
valuation method.
You must notify me and Gal by email regarding which company your group will analyze
no later than the beginning of Week 2. No two groups may pick the same company, and
rights to the companies are first come, first served. The analysis and evaluation of your
company should be treated as a work-in-process throughout the course.
At the end of the mini-semester we will have a group evaluation where you will evaluate
each group member’s contribution to the group assignments. Please note that final grades
for group assignments will depend on your team members’ evaluation of your effort.

2
In order to reduce the amount of work at the end of the course, you can submit the
following parts of the project early for credit (5% each part (15%/40%). You can
alternatively submit the complete project at the end of the course.

Group project mid semester submissions (optional):

Part 1:
Strategy: Please think about the business of the retail company you have chosen and
responses to the following questions:
• Describe the business
• How has the company been performing?
• What are the key risk factors facing your company?
• What are the key opportunities facing your company?
• How well does the accounting reflect the business activities?

Part 2 (optional):
Reformulation of Financial Statements: After watching the optional videos and seeing
how to reformulate the Financial Statements (or reviewing the material from Prof. Segal
course), I would like you to take a crack at doing the same for your company.

Part 3:
Ratios: Compute the profitability and risk ratios for your company as well as the cash to
cash cycle. You can base your work on Prof. Segal course or watch the optional videos.
Calculating the ratios based on reformulated statements is optional.

Final submission (at the last class):

• Parts 1 -3
• Revenue forecast (detailed) and Statistical Revenue forecast for your retail
company.
• Forecasting the free cash flow for your company based on performance
assumptions and
• Using the discounted cash flow model to value the common stock of the company.

During the last class and last tutorial: short presentation of your main findings (details will
be discussed in class). All group members must participate in the presentation.

Class Participation and Attendance

You are being evaluated on the quality of your class participation and not your quantity.
The curriculum requires that students attend their scheduled weekly sessions. Attendance
will be tracked.

3
Tutorial and individual assignments

You will be given several problem-sets during the semester. You can discuss the questions
with your friends; however, the written assignment is individual; each student has to
submit his or her own version of the assignment. Typing the assignments is not required
but encouraged if you feel that your handwriting is not sufficiently clear.
Assignments’ submission is not mandatory but will allow better progress in course and will
reduce the weight of the final exam in the overall course grade. You get a 2.5% course
credit for each individual assignment submitted up to a total of 10% of your final course
grade.
I strongly encourage you to attend all tutorials and to solve all problem sets. It is almost
impossible to master the material without solving problems.

Final exam

The final exam is a closed book & notes exam. The final exam will be comprehensive; it
will cover all topics from the course.

Connection to the core classes

The learning in this course utilizes, builds on and extends concepts related to:
Concepts
Financial • The accounting equation (A=L+OE), and the different financial statements
Accounting (BS, IS, OE and CF)
• Accrual accounting concepts (e.g., realization, matching, conservatism) and
cash based accounting
• Revenue recognition – rules and judgment
• Individual line items (e.g., AR, PPE, Investments)
• Basic financial statement analysis (e.g., ratios)
Corporate Finance • Firm valuation models
• Risk and cost of capital (WACC, CAPM) – we will discuss the parts which
were not covered
• Time value of money
Strategy • Sources of economic value

Students are expected to have knowledge of these concepts and can apply them in different
settings.
Important comment: any concept from prior class will be explained and demonstrated in
this class. I will not expect you to know and remember how to work the finance models
without explaining those again. We would use those mainly in a technical aspect and won’t
focus on the theory behind the WACC and CAPM for example.

4
Tentative Course Schedule
Note: The division of topics into discrete sessions is done for presentation purposes;
by design, some topics will require more or less than the indicated session and may
also vary with discussion dynamics.
Week Date Details
Week 1 Mon. Topics Introduction and Overview
6/March Readings Ch : 1 – 3 . Specific important pages:
Chapter 1: Pages 14 - 17
Chapter 2: Page 39 – Mainly summary 2.1
Pages 42-43 Mainly figure 2.1 and Summary 2.2
Pages 47-49 (Summaries 2.3 & 2.4)
Chapter 3 – Full chapter
Class 2 Wed. Topics Valuation – The Method of Comparable &
8/March Quality of Earnings
Readings & INSEAD Case: The Numbers Game (please
Case read before class)
Preparation Ch.: 18
Project Email Gal and I your company choice
Week 3 Mon. Topics Quality of Earnings (cont.) , Analysis of the
20/March Statement of Cash Flows (SCF) and Calculating
Free Cash Flow
Readings & HBS Case #9-193-103 – Statements of Cash
Case Flows: Three Examples (we will analyse Alpha
Preparation in class, please prepare for class discussion)
Ch.: 11
Project Submit Parts 1&2 (optional)
Week 4 Mon. Topics The Discounted Cash Flow Model and
27/March Introduction to Forecasting
Readings Ch.: 4 & 16
Project Submit Part 3 (optional)
Week 5 Mon. Topics Valuation and Analysing Different Business
3/April Models
Readings & Case: The Ratio Detective Exercise (please
Case prepare for class discussion).
Preparation Ch. 6: Pages 178-186 and 190-193
Week 6 Mon. Topics Project Presentations
17/April
8:00-11:00 & Project Submit your final project and presentation
14:30-16:00
Final exam: 2 / May / 2023 @ 17:30