Analysis of Financial Statements

Nähere Beschreibung des Projekts

Der Lehrveranstaltung „Analysis of Financial Statements ist in folgende Lehreinheiten aufgeteilt (deren Inhalt ist in Originalsprache/Englisch dargestellt):

• 1st Class: Basics of FinStatAna (part I) and Task I & II-HW

- Review of horizontal and vertical analysis of financial statements, common-size financial statements preparation, evaluating financial ratios and other information to make investment decisions

- Task I assignment: Everyone has to choose a company from the EuroStoxx 50 index and download the latest two annual reports. In groups of 2-3 you should compare the dynamics and trends within an industry based on real data, thus, if one person choses the industry leader, the other should take the 2nd or 3rd follower ? benchmarking (industries of interest might be automobiles, pharmaceuticals, chemicals, computer, software – please start with searching for the ranking of the company inside of an industry)

- Task II assignment: In groups: Please perform a basic horizontal and vertical analysis of the obtained financial statements (BS and IS); Prepare common-size financial statements; Perform financial ratio analysis (up to the ROE measure); …. to be continued

• 2nd Class: Student Presentations of Task I & II-HW & Basics of FinStatAna/part (part II)

- Continuation of the review of horizontal and vertical analysis of financial statements, common-size financial statements preparation, evaluating financial ratios and other information to make investment decisions

- Task I & II student presentations

- Task III assignment: In groups: Please complete the financial ratio analysis on investment ratios and EVA to make business decisions; Evaluate all financial ratios and other information like notes comments and financial analysts’ recommendations to prepare investment decisions; Complete your presentation from last time (hint: For the finished tasks I-III you obtain 20-40%).

• 3rd Class: Winfield Case in-class discussion

- Task III student presentations

- Winfield Case Questions – in-class discussion:

• What is the “right” financing decision for Winfield?

• Debt issue versus equity issue

• What are the annual cash outlays in 2013 for each financing decision?

• How would you respond to each director’s assessment of the financing decision?

• How should the acquisition of MPIS be financed, taking into account the issues of control, flexibility, income and risk?

• 4rd Class: Wilson Lumber Case in-class discussion

Your job is to evaluate Mr. Wilson’s loan application for the Northrup National Bank, and ultimately, to decide whether or not to grant a loan.

Part I

Prepare a memo for Mr. Dodge of the Northrup Bank describing Wilson’s business, the reasons Wilson needs more funds, and how his business can be financed:

1. Briefly describe the lumber business and the key factors for success in this line of business.

2. From an operational standpoint (not financial) – how well is the Wilson Lumber Company doing?

3. Briefly describe the company’s financial policy over the previous few years.

4. Why does Mr. Wilson have to borrow money to support his business despite a record of profitable operations?

i. Prepare a Sources and Uses (or Fund Flow) Statement for the period 1982 though the first quarter of 1985. The “Sources and Uses Statement” helps you get a quick (but rough) picture of where cash is coming from (Sources) and where it is going (Uses). To construct the statement:

i. Compare Wilson’s balance sheet in 1982 and 1985-Q1

ii. Classify Assets that have increased as a Use of Funds, and those that have decreased as a Source of Funds.

iii. Classify Liabilities that have increased as a Source of Funds, and those that have decreased as a Use of Funds. What are the Wilson Lumber Company’s main Sources and Uses of funds?

ii. You should also calculate and analyze those financial or operating ratios that you think explain Wilson’s need for funds.

5. What are Wilson’s alternatives to borrowing money from Northrup? How would you evaluate them?

Part II

Now that you have a better understanding of Mr. Wilson’s business, you need to look at the future and forecast his funding needs. Prepare a memo evaluating Mr. Wilson’s claim that he needs more funds.

1. Do you agree with Mr. Wilson’s conclusion that a $325,000 line of credit will be sufficient to meet his foreseeable funding needs? How much will he need to borrow to finance his expected sales over the next few years?

2. As Mr. Wilson’s financial advisor, would you recommend further expansion of his business and more debt financing? Why or why not?

3. As his banker, would you be willing to lend to Mr. Wilson? If so, what conditions might you attach to the loan? If not, explain your reasons.

To answer question 1, assume that sales reach $2.5M in 1985 and construct pro forma income statement and balance sheet projections for 1985 to 1988. Do this for each of the following three scenarios:

1. Sales grow at 25% per year in 1986-1988 and the payment period for Wilson’s Accounts Payable remains at 55 days.

2. Sales grow at 25% per year in 1986-1988 and Mr. Wilson pays his Accounts Payable by the tenth day in order to get the 2% discount.

3. Sales grow at 14% per year in 1986-1988 and Mr. Wilson again pays his Accounts Payable by the tenth day in order to get the 2% discount.

You will need to estimate the size of the bank loan under each scenario. To do this, first forecast the value of Assets using appropriate assumptions. Next, forecast Non-bank Liabilities – including a guess as to the value of the Net Worth. The difference between Assets and Non-bank Liabilities gives you an estimate of the amount that Mr. Wilson needs to borrow from the bank, called the “bank plug”. Use this estimate of the bank loan and calculate Net Income using the required interest payment on the loan. Is Net Worth what you guessed it to be? Iterate until the balance sheet balances. Excel’s Solver or GoalSeek are useful tools for finding the right loan amount. (R.C. Higgins, Analysis for Financial Management, 8th ed., Irvin, McGraw-Hill, Chapters 3 and 4 can be useful.)

Please make sure that your memo clearly states the assumptions you are making!

• 5th Class: Wilson Lumber Case in-class discussion and IBM Case in-class discussion

1. Why did IBM prepare and publicly announce the 2010 EPS Roadmap in May 2007?

2. How would you assess IBM’s financial performance before (from 2004-2006) and after (from 2007-2009) the Roadmap Announcement? Hint: Why and how did the ROE and the cash flow changed in the 10 years?

3. Was the 2010 Roadmap successful?

4. How does the 2015 Roadmap differ from the 2010 Roadmap?

5. Has the Roadmap been successful until May 2014?

6. What should CEO and CFO do as of May 2014?

7. What should Sofia Johnson recommend to her clients – buy, hold, or sell IBM shares?

- Anandam Case assignment for students

• 6th Class: Presentation of Anandam Case Solutions and IBM Case in-class discussions con’t

- Anandam Case Questions answered by students:

1. Prepare and analyze the cash flow statement of the company.

2. Prepare and analyze the common size statement of the company.

3. Compute and analyze the trend analysis of the firm.

4. Perform a standard ratio analysis based on Exhibit 3.

5. Based on these ratios and their comparison to industry benchmarks, would you, as a loan officer, grant the loan request?

6. What areas of improvement can you suggest for the future?

• 7th Class: Review and Exam Preparation

- We review the material covered in the case and solve some advanced exercises from the Harrison et al. 2018 book, chapter 12