BUSINESS ANALYSIS &VALUATION

1 BUSINESS ANALYSIS &VALUATIONUSING financial STATEMENTSC opyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

2 Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require ANALYSIS &VALUATIONUSING financial STATEMENTS5eKRISHNA G. PALEPU, PhDRoss Graham Walker Professor of BUSINESS AdministrationHarvard UniversityPAUL M. HEALY, PhD, ACAJ ames R. Williston Professor of BUSINESS AdministrationHarvard UniversityAustralia Brazil Japan Korea Mexico Singapore Spain United Kingdom United StatesCopyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

3 Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4 This is an electronic version of the print textbook. Due to electronic rights restrictions,some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. Forvaluable information on pricing, previous editions, changes to current editions, and alternate formats, please visit to search by ISBN#, author, title, or keyword for materials in your areas of ANALYSIS & Valuation: UsingFinancial Statements,5th editionKrishna G. Palepu and Paul M. HealySenior Vice President, LRS/Acquisitions &Solutions Planning: Jack W.

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7 Locate your localoffice Learning products are represented in Canada byNelson Education, your course and learning solutions, any of our products at your local college store or at ourpreferred online in the United States of America12345671615141312 Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require statements are the basis for a wide range of BUSINESS ANALYSIS .

8 Managersuse them to monitor and judge their firms performance relative to competitors,to communicate with external investors, to help judge what financial policies theyshould pursue, and to evaluate potential new businesses to acquire as part of their invest-ment strategy. Securities analysts use financial statements to rate and value companiesthey recommend to clients. Bankers use them in deciding whether to extend a loan to aclient and to determine the terms of the loan. Investment bankers use them as a basis forvaluing and analyzing prospective buyouts, mergers, and acquisitions. And consultantsuse them as a basis for competitive ANALYSIS for their surprisingly, therefore, we find that there is a strong demand among BUSINESS stu-dents for a course that provides a framework for using financial statement data in a vari-ety of BUSINESS ANALYSIS and valuation contexts.

9 The purpose of this book is to providesuch a framework for BUSINESS students and practitioners. The first four editions of thisbook have succeeded far beyond our expectations in equipping readers with this usefulframework, and the book has gained proponents in accounting and finance departmentsin BUSINESS schools in the United States and around the FROM THE FOURTH EDITIONIn response to suggestions and comments from colleagues, students, and reviewers, wehave incorporated the following changes in the fifth edition: Data, analyses, and issues have been thoroughly updated. Where appropriate, lessons have been drawn from current events such as theglobal financial crisis of 2008 and the ongoing European debt crisis.

10 The financial ANALYSIS and valuation chapters (Chapters 6 8) have been updatedwith a focus on firms in the retail department store sector, primarily TJX andNordstrom. In addition, we have provided a more cohesive overall discussion ofthe four key components of effective financial statement ANALYSIS that this bookexamines by introducing these companies in our discussion of strategy analysisin Chapter 2 and staying with them through the accounting, financial , andprospective analyses that follow. We have provided a greatly expanded examination of the impact of accountingadjustments (introduced in Chapter 4) on company ANALYSIS by analyzing bothunadjusted and adjusted financial ratio and cash flow measures for TJX andNordstrom in Chapter 5, and by then using adjusted numbers for TJX in theprospective ANALYSIS of Chapters 6 8.