business analysis and valuation - using financial statements

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Licensedto: Licensedto:BusinessAnalysisandValuation-UsingFinancial©2010CengageLearningAustraliaPtyLimitedStatements1stEditionCopyrightNoticeKrishnaG.PalepuThisWorkiscopyright.NopartofthisWorkmaybereproduced,storedinaPaulM.Healyretrievalsystem,ortransmittedinanyformorbyanymeanswithoutpriorVictorL.BernardwrittenpermissionofthePublisher.ExceptaspermittedundertheSueWrightCopyrightAct1968,forexampleanyfairdealingforthepurposesofprivateMichaelBradburystudy,research,criticismorreview,subjecttocertainlimitations.ThesePhilipLeelimitationsinclude:Restrictingthecopyingtoamaximumofonechapteror10%ofthisbook,whicheverisgreater;providinganappropriatenoticeandPublishingmanager:AlisonGreenwarningwiththecopiesoftheWorkdisseminated;takingallreasonablePublishingeditor:GregStuddertstepstolimitaccesstothesecopiestopeopleauthorisedtoreceivetheseSeniorprojecteditor:NathanKatzcopies;ensuringyouholdtheappropriateLicencesissuedbytheDevelopmentaleditor:KylieMcInnesCopyrightAgencyLimited(CAL),supplyaremunerationnoticetoCALTextdesign:PierVidoDesignandpayanyrequiredfees.FordetailsofCALlicencesandremunerationProductioncontroller:PenelopeAnalytisnoticespleasecontactCALatLevel15,233CastlereaghStreet,Permissionsresearch:CorrinaTauschkeSydneyNSW2000,Tel:(02)93947600,Fax:(02)93947601Editor:FrancesWadeEmail:info@copyright.com.auIndexer:RussellBrooksWebsite:www.copyright.com.auProofreader:CraigMcKenzieCover:Design-OlgaLavecchiaForproductinformationandtechnologyassistance,TypesetbyKnowledgeWorksGlobalLimited(KGL)inAustraliacall1300790853;inNewZealandcall0800449725AnyURLscontainedinthispublicationwerecheckedforForpermissiontousematerialfromthistextorproduct,pleaseemailcurrencyduringtheproductionprocess.Note,however,aust.permissions@cengage.comthatthepublishercannotvouchfortheongoingcurrencyofURLs.NationalLibraryofAustraliaCataloguing-in-PublicationDataTitle:Businessanalysisandvaluation:usingfinancialstatements/SueFourtheditionofBusinessAnalysis&Valuation:UsingWright...[etal.].FinancialStatements,publishedbySouth-Western,aEdition:1sted.divisionofCengageLearningin2008ISBN:9780170135092(pbk.)Notes:Includesindex.ThisfirstAsiaPacificeditionpublishedin2010Subjects:Businessenterprises--Valuation--AsiaPacific.Financialstatements--Australasia.OtherAuthors/Contributors:Wright,Sue(SueJoy),1958-DeweyNumber:658.15CengageLearningAustraliaLevel7,80DorcasStreetSouthMelbourne,VictoriaAustralia3205CengageLearningNewZealandUnit4BRosedaleOfficePark331RosedaleRoad,Albany,NorthShore0632,NZForlearningsolutions,visitcengage.com.auPrintedinChinaby1010PrintingInternationalLimited.12345671413121110Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit.185x255 Licensedto:CHAPTER1AFRAMEWORKFORBUSINESSANALYSISANDVALUATIONUSINGFINANCIALSTATEMENTSThischapteroutlinesacomprehensiveframeworkforfinancialstatementanalysis.Becausefinancialstatementsprovidethemostinvestorsandotherstakeholdersrelyonfinancialreportstoassessacquirethisorganisation?Howcanwefinancetheacquisition?’usingfinancialstatements,asshowninthefollowingexamples:sfinancialthesefinancialreportscommunicatethecurrentstatusandsignificantrisksoftheAloanofficermayneedtoask:‘Whatisthecreditriskinvolvedinsfinancinganddividendpolicies?’financialCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1AFRAMEWORKFORBUSINESSANALYSISANDVALUATIONUSINGFINANCIALSTATEMENTS3ounderstandthecontributionthatfinancialstatementanalysistheroleoffinancialreportingthatshapefinancialstatements.Thereforewepresentfirstabrieftouncover‘insideinformation’fromanalysingfinancialstatementfromfinancialstatementsandprovidevaluableforecasts.THEROLEOFFINANCIALREPORTINGINCAPITALMARKETSAcriticalchallengeforanyeconomyistheallocationofsavingstoinvestmentopportunities.Economiesthatdothiswellcanexploitnewbusinessideastospurinnovationandcreatejobsandwealthatarapidpace.Incontrast,economiesthatmanagethisprocesspoorlydissipatetheirwealthandfailtosupportbusinessopportunities.Figure1.1providesaschematicrepresentationofhowcapitalmarketstypicallywork.Savingsinanyeconomyarewidelydistributedamonghouseholds.Thereareusuallymanynewentrepreneursandexistingcompaniesthatwouldliketoattractthesesavingstofundtheirbusinessideas.Whilebothsaversandentrepreneurswouldliketodobusinesswitheachother,matchingsavingstobusinessinvestmentopportunitiesiscomplicatedforatleasttworeasons.First,entrepreneurstypicallyhavebetterinformationthansaversonthevalueofbusinessinvestmentopportunities.Second,communicationbyentrepreneurstoinvestorsisnotcompletelycrediblebecauseinvestorsknowentrepreneurshaveanincentivetoinflatethevalueoftheirideas.Theseinformationandincentiveproblemsleadtowhateconomistscallthe‘lemons’problem,whichcanpotentiallybreakdownthefunctioningofthecapitalmarket.1Itworkslikethis.ConsiderasituationSavingsFinancialInformationIntermediariesIntermediariesBusinessIdeasFigure1.1Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:4PART1FRAMEWORKwherehalfthebusinessideasare‘good’andtheotherhalfare‘bad’.Ifinvestorscannotdistinguishbetweenthetwotypesofbusinessideas,entrepreneurswith‘bad’ideaswilltrytoclaimthattheirideasareasvaluableasthe‘good’ideas.Recognisingthispossibility,investorsvaluebothgoodandbadideasatanaveragelevel.Unfortunately,thispenalisesgoodideas,andentrepreneurswithgoodideasfindthetermsonwhichtheycangetfinancingtobeunattractive.Astheseentrepreneursleavethecapitalmarket,theproportionofbadideasinthemarketincreases.Overtime,badideascrowdoutgoodideasandinvestorsloseconfidenceinthismarket.Theemergenceofintermediariescanpreventsuchamarketbreakdown.Anintermediaryislikeacarmechanicwhoprovidesanindependentcertificationofausedcar’squalitytohelpabuyerandselleragreeonaprice.Therearetwotypesofintermediariesinthecapitalmarkets.Financialintermediaries,suchasventurecapitalorganisations,banks,superannuationfunds,managedfundsandinsurancecompanies,focusonaggregatingfundsfromindividualinvestorsandanalysingdifferentinvestmentalternativestomakeinvestmentdecisions.Informationintermediaries,suchasauditors,financialanalysts,credit-ratingagenciesandthefinancialpress,focusonprovidinginformationtoinvestors(andtofinancialintermediarieswhorepresentthem)onthequalityofvariousbusinessinvestmentopportunities.Bothtypesofintermediariesaddvaluebyhelpinginvestorsdistinguishbetween‘good’investmentopportunitiesand‘bad’ones.Financialreportingplaysacriticalroleinthefunctioningofboththeinformationintermediariesandthefinancialintermediaries.Informationintermediariesaddvalueeitherbyenhancingthecredibilityoffinancialreports(asauditorsdo)orbyanalysingtheinformationinthefinancialstatements(asanalystsandtheratingagenciesdo).Financialintermediariesrelyontheinformationinthefinancialstatementstoanalyseinvestmentopportunities,andsupplementthisinformationwithothersourcesofinformation.Inthefollowingsection,wediscusskeyaspectsofthefinancialreportingsystemdesignthatenableittoeffectivelyplaythisvitalroleinthefunctioningofthecapitalmarkets.FROMBUSINESSACTIVITIESTOFINANCIALSTATEMENTSCorporatemanagersareresponsibleforacquiringphysicalandfinancialresourcesfromtheorganisation’senvironmentandusingthemtocreatevaluefortheorganisation’sinvestors.Valueiscreatedwhentheorganisationearnsareturnonitsinvestmentinexcessofthecostofcapital.Managersformulatebusinessstrategiestoachievethisgoal,andtheyimplementthemthroughbusinessactivities.Anorganisation’sbusinessactivitiesareinfluencedbyitseconomicenvironmentanditsownbusinessstrategy.Theeconomicenvironmentincludestheorganisation’sindustry,itsinputandoutputmarkets,andtheregulationsunderwhichitoperates.Theorganisation’sbusinessstrategydetermineshowitpositionsitselfinitsenvironmenttoachieveacompetitiveadvantage.AsshowninFigure1.2,anorganisation’sfinancialstatementssummarisetheeconomicconsequencesofitsbusinessactivities.Theorganisation’sbusinessactivitiesinanytimeperiodaretoonumeroustobereportedindividuallytooutsiders.Further,someoftheactivitiesundertakenbytheorganisationareproprietaryinnature,anddisclosingtheseactivitiesindetailcouldbedetrimentaltotheorganisation’scompetitiveposition.Theorganisation’saccountingsystemprovidesamechanismthroughwhichbusinessactivitiesareselected,measuredandaggregatedintofinancialstatementdata.Intermediariesusingfinancialstatementdatatodobusinessanalysishavetobeawarethatfinancialreportsareinfluencedbothbytheorganisation’sbusinessactivitiesandbyitsaccountingsystem.Akeyaspectoffinancialstatementanalysis,therefore,involvesunderstandingtheinfluenceoftheaccountingCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1AFRAMEWORKFORBUSINESSANALYSISANDVALUATIONUSINGFINANCIALSTATEMENTS5systemonthequalityofthefinancialstatementdatabeingusedintheanalysis.Theinstitutionalfeaturesofaccountingsystemsdiscussedbelowdeterminetheextentofthatinfluence.AccountingSystemFeature1:AccrualAccountingOneofthefundamentalfeaturesofcorporatefinancialreportsisthattheyarepreparedusingaccrualratherthancashaccounting.Unlikecashaccounting,accrualaccountingdistinguishesbetweentherecordingofcostsandbenefitsassociatedwitheconomicactivitiesandtheactualpaymentandreceiptofcash.Profitistheprimaryperiodicperformanceindexunderaccrualaccounting.Tocomputeprofit,theeffectsofeconomictransactionsarerecordedonthebasisofexpected,notnecessarilyactual,cashreceiptsandpayments.Expectedcashreceiptsfromthedeliveryofproductsorservicesarerecognisedasrevenues,andexpectedcashoutflowsassociatedwiththeserevenuesarerecognisedasexpenses.Theneedforaccrualaccountingarisesfrominvestors’demandforfinancialreportsonaperiodicbasis.Becauseorganisationsundertakeeconomictransactionscontinually,thearbitraryclosingofaccountingbooksattheendofareportingperiodleadstoafundamentalmeasurementproblem.Sincecashaccountingdoesnotreportthefulleconomicconsequenceofthetransactionsundertakeninagivenperiod,accrualaccountingisdesignedtoprovidemorecompleteinformationaboutanorganisation’speriodicperformance.BusinessEnvironmentBusinessStrategyLabourmarketsScopeofbusiness:CapitalmarketsDegreeofdiversificationProductmarkets:TypeofdiversificationSuppliersCompetitivepositioning:CustomersBusinessActivitiesCostleadershipCompetitorsOperatingactivitiesDifferentiationBusinessregulationsInvestmentactivitiesKeysuccessfactorsandFinancingactivitiesrisksAccountingEnvironmentAccountingStrategyCapitalmarketstructureChoiceofaccountingAccountingSystemContractingandpoliciesMeasureandreportgovernanceChoiceofaccountingeconomicAccountingconventionsestimatesconsequencesofandregulationsChoiceofreportingformatbusinessactivities.TaxandfinancialChoiceofsupplementaryaccountinglinkagesdisclosuresThird-partyauditingLegalsystemforaccountingdisputesFinancialStatementsManagers’superiorinformationonbusinessactivitiesEstimationerrorsDistortionsfromFigure1.2managers’accountingchoicesCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:6PART1FRAMEWORKAccountingSystemFeature2:AccountingStandardsandAuditingTheuseofaccrualaccountingliesatthecentreofmanyimportantcomplexitiesincorporatefinancialreporting.Becauseaccrualaccountingdealswithexpectationsoffuturecashconsequencesofcurrentevents,itissubjectiveandreliesonavarietyofassumptions.Whoshouldbechargedwiththeprimaryresponsibilityofmakingtheseassumptions?Anorganisation’smanagersareentrustedwiththetaskofmakingtheappropriateestimatesandassumptionstopreparethefinancialstatementsbecausetheyhaveintimateknowledgeoftheirorganisation’sbusiness.Theaccountingdiscretiongrantedtomanagersispotentiallyvaluablebecauseitallowsthemtoreflectinsideinformationinreportedfinancialstatements.However,sinceinvestorsviewprofitsasameasureofmanagers’performance,managershaveincentivestousetheiraccountingdiscretiontodistortreportedprofitsbymakingbiasedassumptions.Further,theuseofaccountingnumbersincontractsbetweentheorganisationandoutsidersprovidesanothermotivationformanagementmanipulationofaccountingnumbers.Incomemanagementdistortsfinancialaccountingdata,makingthemlessvaluabletoexternalusersoffinancialstatements.Therefore,thedelegationoffinancialreportingdecisionstocorporatemanagershasbothcostsandbenefits.Anumberofaccountingconventionshaveevolvedtoensurethatmanagersusetheiraccountingflexibilitytosummarisetheirknowledgeoftheorganisation’sbusinessactivities,andnottodisguiserealityforself-servingpurposes.Forexample,themeasurabilityandconservatismconventionsareaccountingresponsestoconcernsaboutdistortionsfrommanagers’potentiallyoptimisticbias.Boththeseconventionsattempttolimitmanagers’optimisticbiasbyimposingtheirownpessimisticbias.Accountingstandardsalsolimitpotentialdistortionsthatmanagerscanintroduceintoreportednumbers.Uniformaccountingstandardsattempttoreducetheirabilitytorecordsimilareconomictransactionsindissimilarways,eitherovertimeoracrossorganisations.Inthepast,accountingstandardshavebeensetbynationalstandard-settingbodies,suchastheAustralianAccountingStandardsBoard(AASB)inAustraliaandtheFinancialReportingStandardsBoard(FRSB)inNewZealand.Recentlymorethan70countriesworldwide,includingAustraliaandNewZealand,haveadoptedInternationalFinancialReportingStandards(IFRS)promulgatedbytheInternationalAccountingStandardsBoard(IASB).Increaseduniformityfromaccountingstandards,however,comesattheexpenseofreducedflexibilityformanagerstoreflectgenuinebusinessdifferencesintheirorganisation’sfinancialstatements.Rigidaccountingstandardsworkbestforeconomictransactionswhoseaccountingtreatmentisnotpredicatedonmanagers’proprietaryinformation.However,whenthereissignificantbusinessjudgementinvolvedinassessingatransaction’seconomicconsequences,rigidstandardsthatpreventmanagersfromusingtheirsuperiorbusinessknowledgewouldbedysfunctional.Further,ifaccountingstandardsaretoorigid,theymayinducemanagerstoexpendeconomicresourcestorestructurebusinesstransactionstoachieveadesiredaccountingresult.Auditing,broadlydefinedasaverificationoftheintegrityofthereportedfinancialstatementsbysomeoneotherthanthepreparer,ensuresthatmanagersuseaccountingrulesandconventionsconsistentlyovertime,andthattheiraccountingestimatesarereasonable.Thereforeauditingimprovesthequalityofaccountingdata.Third-partyauditingmayalsoreducethequalityoffinancialreportingbecauseitconstrainsthekindsofaccountingrulesandconventionsthatevolveovertime.Forexample,theIASBconsiderstheviewsofauditorsinthestandard-settingprocess.Auditorsarelikelytoargueagainstaccountingstandardsproducingnumbersthataredifficulttoaudit,eveniftheproposedrulesproducerelevantinformationforinvestors.Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1AFRAMEWORKFORBUSINESSANALYSISANDVALUATIONUSINGFINANCIALSTATEMENTS7Thelegalenvironmentinwhichaccountingdisputesbetweenmanagers,auditorsandinvestorsareadjudicatedcanalsohaveasignificanteffectonthequalityofreportednumbers.Thethreatoflawsuitsandresultingpenaltieshasthebeneficialeffectofimprovingtheaccuracyofdisclosure.However,thepotentialforasignificantlegalliabilitymayalsodiscouragemanagersandauditorsfromsupportingaccountingproposalsthatrequireriskyforecasts,suchasforward-lookingdisclosures.AccountingSystemFeature3:Managers’ReportingStrategyBecausethemechanismsthatlimitmanagers’abilitytodistortaccountingdataaddnoise,itisnotoptimaltouseaccountingregulationtoeliminatemanagerialflexibilitycompletely.Thereforereal-worldaccountingsystemsleaveconsiderableroomformanagerstoinfluencefinancialstatementdata.Anorganisation’sreportingstrategy–thatis,themannerinwhichmanagersusetheiraccountingdiscretion–hasanimportantinfluenceontheorganisation’sfinancialstatements.Corporatemanagerscanchooseaccountinganddisclosurepoliciesthatmakeitmoreorlessdifficultforexternalusersoffinancialreportstounderstandthetrueeconomicpictureoftheirbusinesses.Accountingrulesoftenprovideabroadsetofalternativesfromwhichmanagerscanchoose.Further,managersareentrustedwithmakingarangeofestimatesinimplementingtheseaccountingpolicies.Accountingregulationsusuallyprescribeminimumdisclosurerequirements,buttheydonotrestrictmanagersfromvoluntarilyprovidingadditionaldisclosures.Asuperiordisclosurestrategywillenablemanagerstocommunicatetheunderlyingbusinessrealitytooutsideinvestors.Oneimportantconstraintonanorganisation’sdisclosurestrategyisthecompetitivedynamicsinproductmarkets.Disclosureofproprietaryinformationaboutbusinessstrategiesandtheirexpectedeconomicconsequencesmayhurttheorganisation’scompetitiveposition.Subjecttothisconstraint,managerscanusefinancialstatementstoprovideinformationusefultoinvestorsinassessingtheirorganisation’strueeconomicperformance.Reportingoncorporateenvironmentalandsocialeffectsundertheheadingof‘sustainability’isoneexampleofavoluntarydisclosurethathasemergedinthepastdecade.Managerscanalsousefinancialreportingstrategiestomanipulateinvestors’perceptions.Usingthediscretiongrantedtothem,managerscanmakeitdifficultforinvestorstoidentifypoorperformanceonatimelybasis.Forexample,managerscanchooseaccountingpoliciesandestimatestoprovideanoptimisticassessmentoftheorganisation’strueperformance.Theycanalsomakeitcostlyforinvestorstounderstandthetrueperformancebycontrollingtheextentofinformationthatisdisclosedvoluntarily.Theextenttowhichfinancialstatementsareinformativeabouttheunderlyingbusinessrealityvariesacrossorganisationsandacrosstimeforagivenorganisation.Thisvariationinaccountingqualityprovidesbothanimportantopportunityandachallengeindoingbusinessanalysis.Theprocessthroughwhichanalystscanseparatenoisefrominformationinfinancialstatements,andgainvaluablebusinessinsightsfromfinancialstatementanalysis,isdiscussednext.FROMFINANCIALSTATEMENTSTOBUSINESSANALYSISBecausemanagers’insiderknowledgeisasourcebothofvalueandofdistortioninaccountingdata,itisdifficultforoutsideusersoffinancialstatementstoseparatetrueinformationfromdistortionandnoise.Notbeingabletoundoaccountingdistortionscompletely,investors‘discount’anorganisation’sreportedCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:8PART1FRAMEWORKaccountingperformance.Indoingso,theymakeaprobabilisticassessmentoftheextenttowhichanorganisation’sreportednumbersreflecteconomicreality.Asaresult,investorscanhaveonlyanimpreciseassessmentofanindividualorganisation’sperformance.Financialandinformationintermediariescanaddvaluebyimprovinginvestors’understandingofanorganisation’scurrentperformanceanditsfutureprospects.Effectivefinancialstatementanalysisisvaluablebecauseitattemptstogetatmanagers’insideinformationfrompublicfinancialstatementdata.Becauseintermediariesdonothavedirectorcompleteaccesstothisinformation,theyrelyontheirknowledgeoftheorganisation’sindustryanditscompetitivestrategiestointerpretfinancialstatements.Successfulintermediarieshaveatleastasgoodanunderstandingoftheindustryeconomicsasdotheorganisation’smanagersaswellasareasonablygoodunderstandingoftheorganisation’scompetitivestrategy.Althoughoutsideanalystshaveaninformationdisadvantagerelativetotheorganisation’smanagers,theyaremoreobjectiveinevaluatingtheeconomicconsequencesoftheorganisation’sinvestmentandoperatingdecisions.Figure1.3providesaschematicoverviewofhowbusinessintermediariesusefinancialstatementstoaccomplishfourkeysteps:(1)businessstrategyanalysis,(2)accountinganalysis,(3)financialanalysisand(4)prospectiveanalysis.Togetherthesefourstepsformastructuredbusinessanalysismethodology.FinancialStatementsBusinessApplicationContextManagers’superiorinformationCreditanalysisonbusinessactivitiesSecuritiesanalysisNoisefromestimationerrorsMergersandacquisitionsanalysisDistortionfrommanagers’Debt/dividendanalysisaccountingchoicesCorporatecommunicationOtherPublicDatastrategyanalysisGeneralbusinessanalysisIndustryandfirmdataOutsidefinancialstatementsANALYSISTOOLSBusinessStrategyAnalysisGenerateperformanceexpectationsthroughindustryanalysisandcompetitivestrategyanalysis.AccountingAnalysisFinancialAnalysisProspectiveAnalysisEvaluateaccountingEvaluateperformanceMakeforecastsandqualitybyassessingusingratiosandcashvaluebusiness.accountingpoliciesandflowanalysis.Figure1.3estimates.Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1AFRAMEWORKFORBUSINESSANALYSISANDVALUATIONUSINGFINANCIALSTATEMENTS9AnalysisStep1:BusinessStrategyAnalysisThepurposeofbusinessstrategyanalysisistoidentifykeyprofitdriversandbusinessrisks,andtoassesstheorganisation’sprofitpotentialataqualitativelevel.Businessstrategyanalysisinvolvesanalysinganorganisation’sindustryanditsstrategytocreateasustainablecompetitiveadvantage.ThisqualitativeanalysisisanessentialfirststepinaStructuredBusinessAnalysisbecauseitenablestheanalysttoframethesubsequentaccountingandfinancialanalysisbetter.Forexample,identifyingthekeysuccessfactorsandkeybusinessrisksallowstheidentificationofkeyaccountingpolicies.Assessmentofanorganisation’scompetitivestrategyfacilitatesevaluatingwhethercurrentprofitabilityissustainable.Finally,businessanalysisenablestheanalysttomakesoundassumptionsinforecastinganorganisation’sfutureperformance.AnalysisStep2:AccountingAnalysisThepurposeofaccountinganalysisistoevaluatethedegreetowhichanorganisation’saccountingcapturestheunderlyingbusinessreality.Byidentifyingplaceswherethereisaccountingflexibility,andbyevaluatingtheappropriatenessoftheorganisation’saccountingpoliciesandestimates,analystscanassessthedegreeofdistortioninanorganisation’saccountingnumbers.Anotherimportantstepinaccountinganalysisisto‘undo’anyaccountingdistortionsbyrecastinganorganisation’saccountingnumberstocreateunbiasedaccountingdata.Soundaccountinganalysisimprovesthereliabilityofconclusionsfromfinancialanalysis,thenextstepinaStructuredBusinessAnalysis.AnalysisStep3:FinancialAnalysisThegoaloffinancialanalysisistousefinancialdatatoevaluatethecurrentandpastperformanceofanorganisationandtoassessitssustainability.Therearetwoimportantskillsrelatedtofinancialanalysis.First,theanalysisshouldbesystematicandefficient.Second,theanalysisshouldallowtheanalysttousefinancialdatatoexplorebusinessissues.Ratioanalysisandcashflowanalysisarethetwomostcommonlyusedfinancialtools.Ratioanalysisfocusesonevaluatinganorganisation’sproductmarketperformanceandfinancialpolicies;cashflowanalysisfocusesonanorganisation’sliquidityandfinancialflexibility.AnalysisStep4:ProspectiveAnalysisProspectiveanalysis,whichfocusesonforecastinganorganisation’sfuture,isthefinalstepinaStructuredBusinessAnalysis.Twocommonlyusedtechniquesinprospectiveanalysisarefinancialstatementforecastingandvaluation.Boththesetoolsallowthesynthesisoftheinsightsfrombusinessanalysis,accountinganalysisandfinancialanalysissothatpredictionscanbemadeaboutanorganisation’sfuture.Whilethevalueofanorganisationisafunctionofitsfuturecashflowperformance,itisalsopossibletoassessanorganisation’svaluebasedonitscurrentbookvalueofequity,anditsfuturereturnonequity(ROE)andgrowth.Strategyanalysis,accountinganalysisandfinancialanalysis,thefirstthreestepsintheframeworkdiscussedhere,provideanexcellentfoundationforestimatinganorganisation’sintrinsicvalue.Strategyanalysis,inadditiontoenablingsoundaccountingandfinancialanalysis,alsohelpsinassessingpotentialchangesinanorganisation’scompetitiveadvantageandtheirimplicationsfortheorganisation’sfutureROEandgrowth.Accountinganalysisprovidesanunbiasedestimateofanorganisation’scurrentbookvalueandROE.Financialanalysisfacilitatesanin-depthunderstandingofwhatdrivestheorganisation’scurrentROE.ThepredictionsfromasoundStructuredBusinessAnalysisareusefultoavarietyofpartiesandcanbeappliedinvariouscontexts.Theexactnatureoftheanalysiswilldependonthecontext.Thecontextsthatwewillexamineincludesecuritiesanalysis,creditevaluation,mergersandacquisitions,evaluationofCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:10PART1FRAMEWORKdebtanddividendpolicies,andassessingcorporatecommunicationstrategies.Thefouranalyticalstepsdescribedaboveareusefulineachofthesecontexts.Appropriateuseofthesetools,however,requiresafamiliaritywiththeeconomictheoriesandinstitutionalfactorsrelevanttothecontext.Thereareseveralwaysinwhichfinancialstatementanalysiscanaddvalue,evenwhencapitalmarketsarereasonablyefficient.First,therearemanyapplicationsoffinancialstatementanalysiswhosefocusisoutsidethecapitalmarketcontext–creditanalysis,competitivebenchmarking,analysisofmergersandacquisitions,tonameafew.Second,marketsbecomeefficientpreciselybecausesomemarketparticipantsrelyonanalyticaltoolssuchastheoneswediscussinthisbooktoanalyseinformationandmakeinformedinvestmentdecisions.SUMMARY3andvaluationusingfinancialstatementsisnotveryuseful,unlessyouareinterestedinbecomingafinancialanalyst.’4accountingdatainfinancial(strategyanalysis,accountinganalysis,financialanalysis,andafinancialanalyst,explainwhyeach5theoffice:financialkeysteps:businessstrategyanalysis,accountinganalysis,financialDISCUSSIONQUESTIONS1Qian,whohasjustcompletedhisfirstfinancecourse,isbeforemakingthisdecision,andwheremightyoufindthatandvaluationusingfinancialstatementsbecausehebelievesthatfinancialanalysisaddslittlevalue,giventheefficiencyofcapitalmarkets.ExplaintoQianwhenfinancialanalysiscanENDNOTEaddvalue,evenifcapitalmarketsareefficient.2Accountingstatementsrarelyreportfinancialperformance1QuarterlyJournalofEconomicsfinancialreporting.Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200011THEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF2000TheRiseandFalloftheInternetConsultantsCASESTUDYfirms,financialanalysts,andmoneymanagementcompanieswereExhibit3Exhibit1Context:TheTechnologyBullMarketenhanceproductivityandefficiencythroughthecomputerizationandtomanyoftheotherblue-chiptechnologyfirmssuchasIntelandDellExhibit4Exhibit2Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:12PART1FRAMEWORK,film,boundless,andtheywereglobalinscale.ThebenefitsoftheInternetCASESTUDYones(exemplifiedbycompaniesintraditionalmanufacturing,retail,TheWallStreetJournalbecauseofthebenefitsofnetworkeffects.Inaddition,alargecustomerbasewasneededtocoverthehighfixedcostsoftenassociatedwithwasoneofthefirstofmanyInternetcompaniestogopublicwithoutraditionalcompanies,findingtheirwhichwouldpresumablytranslateatalaterpointintoprofitabilityExhibit5ScientCorporationincludedseveralleadingfirmssuchasSequioaCapitalandBenchmarkExhibit3industrialera,sothefirmsthatpreyonthepassionandfeedCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200013Exhibit7Exhibit8Exhibit6.Analystswroteglowinglyaboutthefirm’firmsflounderedinthesingledigits,theyreceivedincreasingattentionCASESTUDYNowtheyarediscoveringthattherelationshipsfirmlyestablishedstocksarenowhigh-techwhippingboys.Evenfinancialanalysts,who....Manyofthesefirmswerebuiltonthebackwillbedifficulttomaintaintop-tiertalentinthecurrentmarketandcompanyspecificenvironment.PerformanceoftheNasdaqCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:14PART1FRAMEWORKfirms.oncehigh-flyingcoms,operatingatlossesandstarvedforcash,filedforbankruptcyorExhibit9atanypointintime.Accountantsauditthefinancialstatementsoffirms.theconfidencetomakedecisionsbasedonthesefinancialdocuments.CASESTUDYTheRoleofIntermediariesconfidencesystem.Withoutthisconfidence,theywouldnotploughtheirmoneybackinaWell-FunctioningMarkettheywanttoinvest,andcompaniesneedcapitaltofinanceandgrowWhatHappenedDuringtheDot-ComBubble?efficientlyBusinessWeekstopfinancialfirmsFortuneallStreetfirmshadledinvestorsandcompaniesastraymanagementfirms,andeventhemedia(seeExhibit10contributortothesharpdropinconsumerconfidencethattookplacefullyalignedinaccordancewiththeirfiduciaryresponsibilitythatcouldhavebeenmoreefficientlyallocatedwithintheeconomypeoplewhoworkedatfailedInternetfirmscouldhavespenttheirtimebenefitedcouldbearguedthattherewerebenefitsaswell,andthatthelargeCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200015TheIntermediariesVentureCapitalistsacompanythathasnotrackrecord,profitabilityInvestmentBankUnderwritersCASESTUDYThepartnersinaVCfirmtypicallyhadasubstantialpercentageofInvestmentbanksprovidedadvisoryfinancialservices,helpedtheSeveralblue-chipfirmswereinvolvedinthecapital-Exhibit3JustWhoBroughtThoseDudstoMarket?NewYorkTimesfirmsprofitsforatleastthreequarters.pointingfingersattheventurecapitaliststhathadinvestedinmanyofthefaileddot-coms.TheyblamedthemforbeingundulyinfluencedSell-SideAnalystsaventurecapitalfirmthatinvestedinoneoftheInternetconsultingexpectationsofhighstockmarketvaluations,VCfirmsinvestedinveryinfluentialCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:16PART1FRAMEWORKvalueofcashfloworearnings,itisequaltowhatsomeoneisilliquidstocksandsteepgrowthcurvesthataredifficulttobankingrevenuetheyhelpthefirmtogeneratethroughtheirresearch.CASESTUDYTheWallStreetJournalforbeingtooheavilyinfluencedbythepossibilityofbankingdealsForbesFinancialTimesgotsignificantfeesfromthetradingrevenuetheygeneratedandthe,hedidnotethatthepotentialdealflowcouldflyingfirms,stated:oftheInternetconsultingfirms,lookingbackbeforethecorrectionbubble.AccordingtofinancialinformationcompanyFirstCall,morefinancialsforBuy-SideAnalystsandPortfolioManagersCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200017TheRoleofInformationTheAccountingProfessionIndependentaccountantsauditedthefinancialstatementsofpublicreasonablysatisfied,theyprovidedanunqualifiedopinionstatementspublicfilings.Ifauditorswerenotfullysatisfied,thisisnotedaswell.InvestorsusuallytookheedofCASESTUDYwasdominatedbyfivemajoraccountingfirms,collectivelyreferredtoDuringtheaftermathofthedot-comcrash,thesefirmscameWhythen,didsomaybuy-sidefirmsbuyandholdontothetheprecariousfinancialpositionofsomeofthecompanies.TheWallInternetconsultingfirmsduringthemarketbubble?DidtheyreallyStreetJournalfinancing,ratherthanmoneygeneratedbytheirownoperations,tostayafloat.Yreasonableprice.AtfirstthegeneralimpressioninthefirmwasInternetfirmswouldblowirrationalandunjustifiablewhetheritwasanauditoratthefirmbegantorecommendcompaniessimplybecausefinancialresearchorganization,Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:18PART1FRAMEWORKthattheaccountingrulescausedInternetfirmstoappearunprofitablefirmswereallowedtocapitalizetheirmajorinvestmentssuchasFASB–ARegulatorCASESTUDYoffinancialaccountingandusersoffinancialinformation.’financialreportingofpubliccompaniesintheUnitedStates.TheaccountingpracticesofsomeneweconomyfirmsposedSpecificexamplesincludedthetreatmentofbarterrevenuesinRetailInvestorsInc.)GiventhatthevaluationsofmanyInternetfirmsweredrivenbyhowquicklytheygrewrevenues,therewasalotofincentivetoinflatemanydot-comfirmsreallybegan...whenitquietlyissuedneworeininwhatitsawasanalarmingtrendininflatedrevenuechargedbytraditionalbrokeragefirms.Thesecompaniesweredot-practicestorestatefinancialresultsbytheendoftheirnextfiscalfinancialresults....ThefinancialpressalsobecameincreasinglyvisibleduringthisBarronsTheWallStreetJournalhadalwaysbeenveryinfluentialinthefinancialcommunityCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200019TheBlameGamefaultitwasthatthewholebubbleoccurredinthefirstplace.AsManyoftheretailinvestorsdidnotknowmuchaboutfinanceorheavilyinfluencedbysomeoftheintermediariespreviouslydescribed,especiallythefinancialpress,andthesell-sideanalyststhatpubliclyCASESTUDYWallStreetJournalandventurecapitalistshavesteppeduptheirfingerTheCompaniesThemselvesTheInternetstockmarketbubblewascertainlynotthefirstonetoObviouslythereweremanybenefitstohavingahighstockbeapartofthefirm,partlybecausethestockwasdoingsowell.system?Ifso,coulditbefixedsothatthissortofthingdidnothappenWhenaskedabouthisthoughtsonhisfirm’QUESTIONSconsultingfirmswerefacingrenewedcompetitionfromcompanies1.likeIBM,theBigFiveaccountingfirmsandthestrategyconsultingfirms.Overall,thoughtheriseand2.3.4.Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:20PART1FRAMEWORKEXHIBIT1TimelineoftheInternetconsultants–FoundingandIPO198419901991199219931994199519961997199819992000LNTEUSITRAZFVIANSCNTfoundedfoundedIIXLfoundedXPDRfoundedfounded19992000CASESTUDYJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarRAZFSCNTVIANUSITXPDRLNTEIPOIPOIIXLIPOIPOIPOIPOsSource:EXHIBIT2Internetconsultants–stockpricehighsandlowsCompanyIPOPriceaPeakChangeDateofPriceatEnd%Change%PriceIPOtoPeakofFeb2001fromPeakPeaka.b.Source:Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200021Continued%InstitutionalOwnershipcfloat)float)float)float)IPOUnderwritingFee($M)CASESTUDYbIPOAmountRaised($M)VentureFunding($M)SelectedInstitutionalHoldersAnalystCoverageaAuditorsInvestmentBankUnderwritersVentureCapitalStageInvestorsEXHIBIT3Intermediariesinthecapital-raisingprocessoftheInternetconsultantsCompanyCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:22PART1FRAMEWORK%InstitutionalOwnershipcfloat)float)float)CASESTUDYIPOUnderwritingFee($M)bIPOAmountRaised($M)VentureFunding($M)SelectedInstitutionalHoldersAnalystCoverageaAuditorsInvestmentBankUnderwritersVentureCapitalStageInvestorsSafeguardScientific,Companya.b.c.Source:Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200023EXHIBIT4Marketcapitalizationofmajortechnologycompanies,January2000CompanyMarketCapitalizationStockPrice($billions)a(January3,2000)CASESTUDYa.Sources:EXHIBIT5Marketvaluationsgiventoloss-makingdot-comsCompanyNetIncome(’99/’00)aMarketCapitalizationStockPrice($millions)($billions)b(January3,2000)a.b.Sources:Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:24PART1FRAMEWORKEXHIBIT6Scient–ConsolidatedfinancialstatementsIncomeStatement(inthousandsexceptper-shareamounts)November7,1997(inception)YearEndedMarch31,throughMarch31,199819992000CASESTUDYCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200025BalanceSheet(inthousandsexceptper-shareamounts)March31,19992000AssetsCASESTUDYLiabilitiesandStockholders’EquityAccruedcompensationandbenefitsAccumulateddeficitSources:http://www.freedgar.comCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:26PART1FRAMEWORKEXHIBIT7AnalystdowngradesoftheInternetconsultantsCompanyNumberofAnalyststhatDowngradedduringAugust30–September8,2000CASESTUDYAnalystdowngradesofScientCorporation,August30–September8,2000InstitutionPreviousNewRecommendationDateofDowngradeRecommendationSource:EXHIBIT8SelectedinstitutionalholdersofScientCorporation,1999–2000QuarterEnded:InstitutionJune1999SeptemberDecemberMarch2000June2000SeptemberDecember1999199920002000Source:Copyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. Licensedto:CHAPTER1CASESTUDYTHEROLEOFCAPITALMARKETINTERMEDIARIESINTHEDOT-COMCRASHOF200027EXHIBIT9Dot-comsthatfiledforbankruptcyorclosedoperations(SelectedList)August2000November2000January2000CASESTUDYSeptember2000Affinia.comOctober2000December2000HotOffice.comSources:WallStreetJournalInfoworldCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit. 28PART1FRAMEWORKEXHIBIT10CapitalflowsfrominvestorstocompaniesPrivateEquityVentureCapitalists&OtherPEEntitiesNeedHaveMoneyInvestmentInvestorsCompaniesCapitalCapitalManagersBanksCASESTUDYPublicProfitMarketsRepatriationSupportingBrokersPortfolioSell-sideInvestmentAccountantsIntermediaries:ManagersAnalystsBankersAuditorsFinancialPlannersBuy-sideSalesForceLawyersTheMediaAnalystsTradersRegulators:SEC,FASB,etc.Source:Endnotes117182TheWallStreetJournal19Fortune320FinancialTimesTheWallStreetJournal21422Severalfinancialjournalspublishedanalystrankings.Themostprominent56influentialintheanalystandinvestmentcommunity23Money24725TheCPAJournal26827TheWallStreetJournal928unusualoraggressiveaccountingpracticestocamouflagesuchproblems.10293031BusinessWeek11firmsreapedbillionsfromtheNetboomwhileinvestorsgotburned,”32StrategicFinance12Fortune33shiddenprofits,”Fortune1334firmsreapedbillionsfromtheNetboomwhileinvestorsgotburned,”BusinessWeek35Forbes14VentureCapital36Journal3715TheWallStreetJournalcapitalfirmitselfusuallyservesasthegeneralpartner3816TheWallStreetJournalCopyright2010CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart.Duetoelectronicrights,somethirdpartycontentmaybesuppressedfromtheeBookand/oreChapter(s).Editorialreviewhasdeemedthatanysuppressedcontentdoesnotmateriallyaffecttheoveralllearningexperience.CengageLearningreservestherighttoremoveadditionalcontentatanytimeifsubsequentrightsrestrictionsrequireit.