1. Course Title:
Financial Statement Analysis
Course Code:
MGT-537
Course Instructor:
Dr. Hafiz Muhammad Ishaq
Total Lectures: 32

2. Previous Lecture Summary
Analysis for the Investor
Price/Earnings Ratios,
Percentage of Retained Earnings,
Dividend-Payout,
Dividend Yield,
Rights,
Options,
Warrants
Practical Exercises

3. Today's Lecture Topics Analysis for the Investor Book value per share,
Stock Options
Restricted Stock
Stock Appreciation Rights
Practical Exercises

4. Book Value per Share
An accounting term that measures the intrinsic value of a single share of a company’s stock.
Book value is calculated by totalling the company’s assets, subtracting all debts, liabilities, and the liquidation price of preferred stock, then dividing the result by the number of outstanding shares of common stock.
Preferred equity should be measured at liquidation value, if available
Market value vis-à-vis book value
Book value reflects past unrecovered asset costs
Market value reflects the potential of the firm

5. Stock Options
A program within a company whereby employees are allowed to buy a specific number of stock options in the company for a specified amount of time.
The options usually have an exercise price equal to the market price at the time the options were given.
Stock option fair value
Expensing is required per SFAS 123R
Allocate option fair value to the service period
Date of grant through vesting date
Non compensatory plans
Encourage widespread ownership by employees
Slight discount from fair value
No compensation expense is recognized

6. Impact of Stock Option Expense

7. Restricted Stock
Shares of stock given to an employee with certain stipulations that limit the employee's rights regarding the shares until he or she has been employed by the company for a certain amount of time.
Employees possessing restricted stock may also be awarded certain rights associated with the shares, such as dividend payments and voting rights, but it may take several years for an employee to be granted all the rights provided to stockholders.

8. Restricted Stock
Sometimes offered to employees in lieu of stock option plans
Restrictions
Employee cannot sell stock for a specified period of time.
Employee may forfeit the shares if they leave employer
Awards may be linked to financial goals

9. Stock Appreciation Rights
Employee receives compensation in cash or stock
Difference between option price and market price
Expense is a function of market price
Year-end spread is measured
Current expense is spread minus prior recognition

10. Stock-Based Compensation
May be awarded through the use of
Stock options
Restricted stock
Stock appreciation rights
Firms vary in their use of these methods of granting stock-based compensation
Select a single method
Use two of the three methods
Use all three in combination

11. Practical Exercise
According to the financial statements for Samson Electronics, Inc., the firm has total assets valued at $220 million. It also has total liabilities of $140 million. Company records indicate that the firm has issued 2 million shares of stock.
a. Based on the above information, calculate the book value for a share of Samson Electronics.
b. If a share of Samson Electronics, Inc. currently has a market value of $50 a share, what is the market-to-book ratio?

13. Practical Exercise
For four years, Mary Nations invested $4,000 each year in America Bank stock. The stock was selling for $34 in 2007, for $48 in 2008, for $37 in 2009, and $52 in 2010.
a. What is Ms. Nation’s total investment in America Bank?
b. After four years, how many shares does Ms. Nations own?
c. What is the average cost per share of Ms. Nation’s investment?

15. Practical Exercise
Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $9 million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of common stock.
a. Calculate the earnings per share of Bozo Oil’s common stock.
b. Assuming that a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s price-earnings ratio?
c. Calculate the book value of a share of Bozo Oil’s common stock.

17. Practical Exercise Required: Compute the following for 2003,2002,2001:
The following information was in the annual report of XYZ Company
Earnings per share $1.12 $1.20 $1.27
Cash dividend per share
(Common) $.90 $.85 $.82
Market price per share $ $ $16.30
Total common dividends $21,700,000 $19,500,000 $18,360,000
Shares outstanding end
of year 24,280,000 3,100, ,500,000
Total assets $1,280,100,000 $1,267,200, $1,260,400,000
Total liabilities $ 800,400,000 $ 808,500,000 $ 799,200,000
Nonredeemable
Preferred stock $ 15,300,000 $ 15,300,000 $ ,300,000
Preferred dividends $ ,000 $ ,000 $ ,000
Net income $ 31,200,000 $ 30,600,000 $ ,800,000
Required:
Compute the following for 2003,2002,2001:
Book Value per share

20. Practical Exercise
ABC is primarily engaged in the worldwide production, processing, distribution, and marketing of food products. The following information is extracted from its 2003 annual report:
Earnings per share $1.08 $ 1.14
Cash dividends per common share $ .80 $ .76
Marketing price per common share $ $15.19
Common shares outstanding ,380, ,316,000
Total assets $1,264,086,000 $1,173,924,000
Total liabilities $ 823,758,000 $ 742,499,000
Nonredeemable
preferred stock $ ,600,000 $ ,600,000
Preferred dividends $ ,567,000 $ ,000
Net Income $ ,094,000 $ ,049,000
Required:
Based on these data, compute the following for and 2002
Book Value per share

22. Practical Exercise
Jazzy Juniors, a retail clothing manufacturer, reported the following profit figures in its 2010 annual report.
2010
2009
Earnings Before Extraordinary Items
$1,726,010 
$1,646,117
Extraordinary Loss, Net of Tax
 (346,106)
        —
(Note 1)
Net Income
$1,379,904 
Basic Earnings Per Share:
Before Extraordinary Items
$     3.13 
$     2.99
     (0.63)
$     2.50

23. Practical Exercise (Cont’d)
Required:
Note 1:
On September 3, the firm experienced a substantial fire loss. The uninsured portion of the loss was $547,910. This loss reduced income taxes by $201,804. a.
You have been asked to project 2011 earnings for Jazzy Juniors. Your research indicates that a 12% rise in earnings is reasonable. Compute the estimated earnings and basic earnings per share. Explain your answer. b.
Compute the number of shares of common stock outstanding in 2010, using net income and basic earnings per share of $2.50.
Note: There is no preferred stock outstanding. c.
Why are the taxes on the casualty loss presented with the loss rather than with income taxes.

25. Lecture Summary Analysis for the Investor Book value per share,
Stock Options
Restricted Stock
Stock appreciation rights
Practical Exercise