Practical Guidance at Every Step

We walk the reader through a detailed analysis of the financial statements including the information reported in the footnotes as she/he creates expanded financial statements capturing all of the obtainable information about the operations of the firm. Armed with a detailed understanding of the components of operating income and the operating assets used to generate that income, the reader sees a demonstration of DuPont ratio analysis and the essential steps in forecasting future payoffs (cash flow and earnings). Next, we detail the estimation of the cost of capital, which is used to discount the expected payoffs to estimate firm value. Finally, we derive and demonstrate the use of cash-flow-based and earnings-based valuation models.

We hope that the textbook will be used as a guidebook. Where possible, we demonstrate each of the steps of financial statement analysis and valuation via an example, General Mills. We encourage readers to undertake a valuation based on financial statements of another firm as they read to enhance their understanding of each of the steps in financial statement analyses and valuation. We provide a detailed spreadsheet analysis of the financial statements and valuation of General Mills, which we expect will serve as a guide to the reader undertaking the valuation of the company they select. As an alternative, readers might choose to follow the spreadsheets that show the financial statement analysis and valuation of Kellogg, Thor Industries, or Winnebago, also provided with the text.

Readability

This textbook is written in a clear and succinct manner, allowing students and instructors to absorb complex concepts quickly and without being distracted by unnecessary materials. Additionally, there is a strong emphasis on covering the practical situations that will be encountered by students and instructors in applications of each of the steps in the process of financial statement analysis and valuation.

Demonstrated Implementation

Students learn from seeing a demonstration of the concepts. The book illustrates every aspect of the valuation process by using General Mills throughout, literally starting with their Form 10-K and ending with an estimation of the equity value. Additionally, in the end of chapter materials, Kellogg’s (a close competitor of General Mills) as well as recreational vehicle manufacturers—Thor Industries and Winnebago are also analyzed, providing further reinforcement of the valuation processes. Every step can be followed directly in the valuation spreadsheets for General Mills, Kellogg’s, Thor Industries, and Winnebago provided with the textbook. These spreadsheets, which cover the entire financial statement analysis and valuation process, further reinforce the flow of the steps along the path to valuation. These spreadsheets and the practical spreadsheet tips in the modules serve as a critical guide to students undertaking independent or group valuation projects. For example:

Multiple Methodologies, One Focused Task

Often, valuation textbooks brush past items or provide a rough approximation rather than tackling issues, Valuation Using Financial Statements provides full explanations and demonstrations of market multiples and discounted cash flows models clearly discussing the costs and benefits and implementation issues of each. Additionally, the relation to accounting models is shown with the residual operating income and abnormal operating income growth models being covered in detail. Requirements for model equivalence and how forecasting relates to the various valuation approaches are clearly presented. Throughout the text, each approach focuses on valuation of the company's operating activities (i.e., valuation of enterprise operations), rather than equity. Not only is this necessary to avoid having to forecast future leverage, but also provides the benefit of a more focused task.

New to the Second Edition

The focus company has changed from Procter & Gamble to General Mills. Using General Mills’ financial statements from May 2018, a value is calculated at May 1, 2019. Additionally, in each chapter, the data is updated to reflect recent information.

• Chapter 1: A discussion of issues around identifying material risks and companies with multiple business environments has been added. Also, an example of a SWOT analysis of General Mills produced by MarketLine is now included.
• Chapter 2: Figures showing the relations between the company, its product / input markets, and suppliers of capital are now included. These figures also demonstrate the relations of operating profits, operating assets, financial items, and cash flows. Additionally, a clearer description is now provided of the operating and financial aspects of the company and ac- counting’s articulation over time.
• Chapter 3: A discussion of issues to be watched when downloading data from sources such as Mergent Online has been added. The discussion of classification of deferred tax assets and liabilities has been adjusted to reflect changes to accounting standards.
• Chapter 4: Effects of beginning with downloaded financial statements are discussed. Additionally, the changes in accounting for pension and other postemployment benefit costs are incorporated. Finally, the effects of changing the statutory tax rate (and its effect in each fiscal year) is addressed.
• Chapter 5: The discussion of operating leases has been completely revised to cover both the old standards and the new standards that require recording of an asset and liability related to operating leases on the balance sheet. Similarly, the discussion of share-based compensation and the calculations in the related spreadsheets have been completely revised to streamline and clarify the issues and steps required.
• Chapter 6: Complete coverage of effects related to 52-53 week years on DuPont analysis is illustrated using General Mills. Discussion of further analyses that may be performed has been expanded throughout the chapter. Finally, the effects of equity deficits on financial analysis are covered.
• Chapter 7: More direct coverage of the effects of an acquisition is added through examination of General Mills' acquisition of Blue Buffalo. Additionally, the adjustments to both the revenue and the operating efficiency forecasting procedures resulting from the 52-53 week year issue are addressed.
• Chapter 8: Discussion on situations in which the use of the market multiples has been expanded. Quotes from Warren Buffet and Charlie Munger related to the merits of using EBITDA in analysis have been added.
• Chapter 9: A discussion of the effects of interest capitalization on estimates of the pretax borrowing rate has been added. Also, additional guidance is provided on how to determine whether a cost of capital estimate is reasonable and steps that can be taken if they are not.
• Chapters 10-12: In the valuation models, the forecasted payoffs from Chapter 7 and the cost of capital for operations from Chapter 9 are used to show the value calculated from both cash-and earnings-based models is identical.
• Chapter 13: The order of the last two chapters has been reversed to allow students to get to equity value sooner. Additionally, a detailed discussion of how the models presented in the text relate to the Discounted Cash Flow and Adjusted Present Value Models presented in finance texts is included. Finally, detailed instruction on performing sensitivity analysis in Excel is shown.
• Chapter 14: Guidance drawn from the Delaware Court of Chancery on acceptable terminal growth rates is shown. This provides concrete evidence of the applicability of the material and justification to the approaches shown in the text.
• End of Chapter Materials: In each chapter, the questions, exercises, and continuing examples have been increased to provide additional items for faculty to draw from and students to practice. This includes coverage of three companies in the continuing examples.
• Test Bank: A test bank has been created that incorporates continuing examples of Procter & Gamble, Kimberly-Clark, Federal Express, and United Parcel Service. Valuation spreadsheets for these companies are also included.
  
  
  
  
  

Available Supplements

To access, go to the Ancillaries tab.

• Valuation Spreadsheets: Excel spreadsheets for General Mills, Kellogg’s, Thor Industries, and Winnebago central to the textbook are provided, which show the flow of information and calculations when moving from financial statements to a value estimate. Two bonus spreadsheets for Cooper Tire & Rubber and Goodyear are also available that can be used in presenting the materials in classes.
• Solutions Manual: Created by the authors, the Solutions Manual contains complete solutions to all assignments.
• Test Bank: Created by the authors, the Test Bank contains a variety of questions, exercises, and problems related to each aspect of the text. The Test Bank utilizes Procter & Gamble, Kimberly-Clark, Federal Express, and United Parcel Service as continuing examples and complete Excel spreadsheets on these companies are also available.
• PowerPoint: Created by the authors, the PowerPoint slides outline key elements of each chapter.