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 they create 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 of Kooper Tire & Rubber (ticker symbol: KTR). The information for and analysis of Kooper Tire & Rubber (KTR) was based on the real company Cooper Tire & Rubber (ticker symbol: CTB), and the full Form 10-K of KTR is included in the text. 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 Kooper Tire & Rubber, which we expect will serve as a guide to the reader undertaking the valuation of the company they select.

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 Kooper Tire & Rubber throughout, literally starting with their Form 10-K and ending with an estimation of the equity value. Every step can be followed directly in the valuation spreadsheet for Kooper Tire & Rubber provided with the textbook. The spreadsheet, which covers the entire financial statement analysis and valuation process, further reinforces the flow of the steps along the path to valuation. The spreadsheet 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 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 THIRD EDITION

• Transformation of Focus Company: This edition focuses on a fictional company, Kooper Tire & Rubber, in Year (0) based on Cooper Tire & Rubber in 2020 as the focus of each chapter. The book includes a complete Form 10-K for Kooper Tire & Rubber. This structure values Kooper in Year (+1) based on information from Year (0), while still employing real data. This allows an instructor to build the materials for their class and with information continuing to be viewed as current and having a much smaller effort needed to adjust between editions going forward.
  
• Highlighting of Decision Points: Throughout all chapters of the text, for each decision made the text highlights the issue, considerations, and implications. This supports the idea that valuation requires a wide range of choices and helps students understand their efforts.
  
• Streamlining of Adjustments to Accounting Information: Chapter 5's coverage of potential adjustments to reported information to improve the valuation process has been refocused. for each area, the issue, required adjustment, and an example of the application to Kooper Tire & Rubber is clearly presented. Additionally, the discussion of "prior leasing standards" (ASC 740) has been moved to an appendix to clarify discussion of current standards and adjustments. Finally, a numeric example of the basics of stock option accounting is provided in a new appendix to the chapter for those with less familiarity.
  
• Data Analysis Discussion: The role of data analytics in valuation and where it can benefit the efforts are more clearly presented. Chapter 6, which focuses on DuPont analysis, clearly discusses the role of data analytics in valuation, and highlights both the benefits and the concerns that arise. The spreadsheet for valuation accompanying the text reinforces the importance of data in the process.
  
• Expand Forecasting Development: Chapter 7's presentation of forecasting has been greatly expanded with additional emphasis on sales growth and the use of information from other companies. The role of related companies' information in determining reasonableness of forecasts is emphasized.
  
• Additional Points of Emphasis and Practical Implementation Tips: Based on student experience and feedback, additional practical spreadsheet tips and pointers related to financial statements have been added throughout the text. Additionally, both in the text and in the spreadsheet, additional descriptions have been added. These items look to address the questions that students have as they implement the valuation methodologies and create their own valuation spreadsheet.
  
• Expansion of End-of-Chapter Materials: New assignments, including multiple choice, have been added, and existing assignments have been refreshed.
• Project Guide: A detailed project guide that takes students through the 5-Step Valuation Process allows for the practical application of the textbook's core concepts and techniques. The guide is designed to be implemented throughout the course to reinforce student mastery.
  

AVAILABLE SUPPLEMENTS

• Valuation Spreadsheet: The Excel spreadsheet for Kooper Tire & Rubber central to the textbook is provided, which shows the flow of information and calculations when moving from financial statements to a value estimate. The spreadsheet provides background to the material and can be used in presenting the materials in class.
• 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, multiple choice, exercises, and problems related to each aspect of the text. The Test Bank utilizes real company data throughout either presented directly or used as the basis for the questions.
• PowerPoint: Created by the authors, the PowerPoint slides outline key elements of each chapter.
• Quick Reference Guide: Created by the authors, this is a summary of information, charts, and figures from each chapter that mimics what a student would put together as a note sheet.