Business Valuation and

Analysis Using Financial

Statements
(15.535)
Who?
Professor Peter Wysocki Peter
Office Hours:
Anytime Make appointment by e-mail.
When?
Section A
Section B
Attending Other Sections:
Check with me first . Usually No
Problem
What?
Primary Objectives
Provide knowledge to help you get a great job.
Provide information for job interview questions.
Promote you as MIT students website.
Learn how to use financial information to Value
and Analyzefirms.
Apply your economics/accounting/finance skills to
issues in todays news to help understand:
Whatis contained in financial reports
Whyfirms report certain information
Howto be a sophisticated user of this information.
What My objectives
My objective is not to make your life
miserable.
My objective is not to overload you with
irrelevant assignments or make-work tasks.
My objective is to make this class relevant,
useful, stimulating, fun and enjoyable.
You have many commitments But, the lowest-
cost, lowest effort approach to benefit from and
cruise through this class is to attend class.
Basically, I am serving it to you on silver platter.
Why?
Provide up-to-date appliedknowledge of:
Fundamental valuation techniques
Pitfalls of accounting reports
Reading between-the-lines of financial reports.
Very useful for your career as:
Financial analyst, I-banker, consultant, etc.
Discuss up-to-date and hot topics that
companies face today.
This information will be extremely useful for your
job interviews and your job.
How?
Coursepack
There is no required coursepack! I will provide
handouts and lecture notes during each class.
Lecture Notes & Class Handouts
Also accessible through the class server prior to
each class. If you are missing material for a
particular class, please obtain them from the Web
to make sure you do not fall behind.
How Prep for Class
Short reading assignments from the text and
handouts will be provided at the end of each
class.
The textbook chapters to be covered in the
next class will be listed in the class handouts.
We will not cover every part of each chapter
in the text! Concentrate your efforts on the
short assigned readings.
How Grading
6 "e-assignments" (count best 5) 50 pts
2 Quizzes (in class) 200 pts
Analyst Reports/Presentation (Team) 150 pts
Class Contribution (Particip/other) 100 pts
Total 500 pts
How Assignments
These short applied assignments will be
assigned about 1 week before each due
date.
You may work alone or in a team of up
to 4 students.
Be prepared to discuss and defend your
(or your teams) analysis during the
class discussion on the due date!
How Analyst Reports
Student teams (up to 4 students) will be
responsible for creating and presenting an
analyst report on a company of their choice.
This comprehensive analysis is similar to the
reports generated by Wall Street analysts.
How Classroom Approach
The classes will be casual, fun and informal.
I think the best way to learn is through
numerous examples. Therefore, we will
examine many interesting cases from the
todays financial press on topics of current
importance.
To keep things lively, I will ask questions and
get your input during class. My questions are
not intended to put you on the spot I am a
very easygoing and forgiving person -!
Financial Statement Information
Used extensively by internal users
Management at various levels
Performance evaluation
Competitive analysis
Investment decisions
Valuation of targets
Current and future employees
Is this firm going to meet its payroll and will the
stock options be worth anything?
Financial Statement Information
Used primarily by external users
Financial intermediaries (analysts)
Stock recommendations
Lenders
Loan decisions
Monitoring
Investment bankers
Valuation for M&A and IPO
Top management performance evaluation
Financial Statement Analysis
Financial statement analysis and business
analysis applications
Focus is more than a mechanical analysis of
financial statements.
Draw heavily on your understanding of finance,
economics, marketing, and strategy.
Combine that understanding with financial statement
information to diagnose problems and come up with
solutions/recommendations
What the course is NOT about
Extreme details of financial reporting rules
and financial statement preparation.
T-accounts and journal entries.
Market Efficiency and the Role of
Financial Statement Analysis
Implications of stock market efficiency:
Many profit-maximizing, actively competing traders
Information almost freely available to all participants
Competition means that the full effects of new information
Stock prices rapidly adjust to new information such that
the new price promises only a normal rate of return to an
investor
If markets are efficient, then whats the use of
Fundamental Analysis and Valuation?
on intrinsic values are reflected instantaneously in prices
Market Efficiency and the Role of
Financial Statement Analysis
Conflicting evidence on market efficiency
Markets are Efficient:
Markets reaction to news events is instantaneous.
Mutual funds have on average been unable to outperform
broad indexes; in fact, generally under-performed.
Why publish secrets instead of making money
yourself?.
Markets are Inefficient:
Growing evidence of easy ways to beat market.
Greater acceptance of Behavioral Explanations for
stock market fluctuations.
Market Efficiency: What is My View?
I am not dogmatic about efficiency.
Let the evidence accumulate and speak for itself.
Then you can decide.
On the other hand, financial (stock) markets are very
competitive.
It is not easy to make money above the expected rate for
return for a given level of (beta) risk.
Trading strategies are not free of risk (Long Term Capital).
Regardless of your allegiance, knowing state-of-the-
art techniques and lingo from the The Street (post-
earnings announcement drift, PEG ratio, B/M effect)
will certainly help get you a great job!
Where Next? .. Prep for next week
1) Make sure you register on class server!
2) Form teams for assignments and the Analyst
Project (maximum of 4 people). Submit the
names of your team members (and e-mails)
to me on a piece of paper by end of Next
Class.
3) Next Class Valuation Basics.
- Preparation: Review your Finance Notes on DCF
(or skim section in Brealy and Myers)