Lecture 1 Introduction

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ACCG350 Financial Statement Analysis
Semester 1, 2013 Lecture Notes Week 1 Introduction, Management Communication and Corporate Governance (Chapter 1 & 12) By Charlene Chen 1

Lecture Outline
• Introduction: Unit Guide
– Assessment – How to study

• Overview of Financial Statement Analysis (FSA) • Communication with Investors • Introduction of Corporate Governance

2

Unit Guide
• Textbook
– Business Analysis and Valuation, 1st AsiaPacific edition, by Palepu, Healy, Bernard, Wright, Bradbury and Lee

• Teaching Staff
– – – – – – Unit Convenor/Lecturer: Charlene Chen Lecturer: Meiting Lu Lecturer: Philip Sinnadurai Tutor: Brian Millanta Tutor: Guillaume Babille Tutor: Ka Wai (Stanley) Choi

• Enquiries: sent to ACCG350@mq.edu.au ONLY

3

Unit Guide (cont’d)
• Assessments:
– Assessed coursework 15%
• 10% weekly tutorial assignment (2.5%*4’, randomly collect) • 5% in-class exercises (5%*2’, the best result counts)

– Group Assignment 25%
• 5% presentation (week 8 & 9) • 20% report (due by 4 pm Thursday, 23rd May)

– Final Exam 60%
• 3 hours duration, both calculative and theory questions

• For further information, please refer to Unit Guide and Assessment Guide

4

Introductory comments on how to study
• Read Unit Guide for details of assessment regime. • Lecture Notes are only a guide. • Focus is often on process (interpretation and argumentation), rather than a “correct answer”. • Much of delivery is directed at the major assignment, as well as final exam.

5

Introductory comments on how to study [cont’d]
• Revision from AFIN253/252. The most important topics to revise are as follows: – – – – – Risk and return Valuation of equity Cost of capital and WACC Capital market efficiency You will need to revise capital market efficiency for yourselves.

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Key Points this week
• • • • Role of Financial Statement Process of Business Analysis Channels of Management Communication Corporate Governance Mechanism

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How Capital Markets Function

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Overview of Financial Statement Analysis
-- Role of Financial Reporting • Why Financial Statements are Important? – Major source of information to outside investors – Summarise the economic consequences of business activities – Reflect management forecasts of future – Evaluate investment opportunities

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Takes viewpoint of sell-side analysts (information intermediaries) Four key components of financial statement www analysis Recommendation

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Process of Financial Statement Analysis

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Communication with Investors -- Forms of Communication
• • • • Through Financial Reporting Analyst Meetings Voluntary Disclosure Financial Policies – – – – Dividend Payout Policies Share Buybacks (Repurchases) Financing Choices Hedging

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Communication with Investors --Financial Reporting
• Source: Annual Report • Any Problem?
– management optimism (positive bias) – Possible reasons: • manager’s career concerns; • positive picture before new equity issues, etc.

– Most common effect is on reporting of earnings – Ways to mitigate this problem • Corporate Governance (discuss later) • E.g. Accounting Standards, auditing, monitoring by financial analysts 12

Communication with Investors --Alternative Forms of Information • Analyst meetings:
– Regular meetings with analysts releases information to these intermediaries – Material information released to analysts must also be publicly disclosed.

• Voluntary disclosure:
– Management has the discretion to voluntarily disclose information, though there are constraints on this type of disclosure.

13

Communication with Investors --Financial Policies
• Dividend payout policies
– Dividend policies convey management’s expectation of current and future earnings.

• Share repurchases
– A way for management to communicate to the market that it believes the firm is undervalued – Share repurchases are costly because of fees and price premiums involved.

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