Page 1 X 433.02 Management (4 units) Security Analysis (Online) Course Description: This course examines companies and industries using a fundamental and classical approach first developed by Benjamin Graham in 1934. Instruction focuses on the examination of equities and bonds by taking an in-depth look at the financial statements concentrated on the income statement (especially quality of earnings), balance sheet, cash flow statement, and financial notes. The tools and techniques used are as relevant today as they were when Graham first developed the basis for value investing. Through case study analysis of actual companies, students learn the tenets of value investing, financial ratio analysis, and industry analysis. Also covered in the course are the basic investment portfolio management theories / practices and financial derivatives / option valuations. Course Objectives The course is designed to provide students with a thorough foundation in securities analysis. After some introductory coverage, we will study and learn to conduct value analyses for common stocks and bonds. An understanding of accounting is essential for this course. Also we cover basic investment portfolio management theories / practices and financial option valuations. The only formal requirement is introductory or intermediate financial accounting. The class provides some relevant course work for those students who are planning to sit for the CFA Exam. The general objectives of the course include: To solidify and build upon the material presented in the student s introductory investment and financial management courses To acquaint the student with additional topics central to an understanding of security analysis and investment management To prepare the student for advanced study in investment analysis and management To prepare the student for entry level positions in security analysis and portfolio management as investment associates, security analysis, or quantitative analyst. Required Textbook: Bodie, Kane and Marcus, Essentials of Investments. 9th Edition, 2014. McGraw-Hill/Irwin. ISBN: 0078034698. ISBN-13:9780078034695 Other Reference Books (recommended but not required) Goldman Sachs: Introducing GS Sustain, 2007 http://www.unglobalcompact.org/docs/summit2007/gs_esg_embargoed_until030707pdf.pdf Benjamin Graham: Security Analysis http://www.focusinvestor.com/graham1.pdf White, Sohndi and Fried: The Analysis of and Use of Financial Statements, Wiley.
Page 2 CFA Institute & Wall Street Brokerage Firms: Selected Readings on Security Analysis (posted on the course website). Calculator or MS-Excel Requirements You need to have a financial calculator by the second week. You can use any financial calculator as long as it has all the functions we use in class, including PV, FV, cash flow calculations (models: HP10B, HP 12C, HP 17B, TI BA II, etc.). Alternatively, you need to have access to a PC with MS-Excel applications. Class Expectations Class participation is important and can favorably affect your grade. Minimum acceptable participation is regular participations in online discussions and completion of the specific assignments. Selected end-of-chapter problems will be assigned each week. Course Procedure You will have assigned reading to be done prior to each class. Between classes you will practice on the selected end-of-chapter questions. You will also be expected to complete the midterm & the final exams as well as the research project. Course Evaluations & Grading Policy The Exam will be combinations of multiple choice and essay questions and problems. Exam / Participation / Individual Weight Grade Tentative Range Research Project Midterm Self-evaluation (Keys provided) 0% A 92 or above Final Exit Exam (Comprehensive) 40% A - 90 91 Security Analysis Project 35% B + 86--89 Discussions & Participation 25% B 82--85 Total 100% B- 80--81 C+ 76--79 C 70--75 C- 66--69 D / F 55 65; Below 55 Teaching Style Lectures, discussion, problem solving, homework assignments, individual project. Incompletes: The interim grade Incomplete may be assigned when a student's work is of passing quality, but a small portion of the course requirements is incomplete for good cause (e.g. illness or other serious problem). It is the student s responsibility to discuss with the instructor the possibility of receiving an I grade as opposed to a non-passing grade. The student is entitled to replace this grade by a passing grade and to receive unit credit provided they complete the remaining coursework satisfactorily, under the supervision of and in a time frame determined by the instructor in charge, but in no case later than the end of the next academic quarter. At that time, the Registrar will cause all remaining Incompletes to lapse to the grade "F". Note: Receiving an I does not entitle a student to retake all or any part of the course at a later date.
Page 3 Student Behavior involving cheating, copying other s work, and plagiarism is not tolerated and will result in disciplinary action. Students are responsible for being familiar with the information on Student Conduct in the General Information Section of the UCLA Extension Catalog or on the website at www.uclaextension.edu Course Outline and Individual Project Week 1 Course Introduction; Elements of Investments (Financial Markets & Financial Securities) Week 2 Security Analysts Reports: Structure & Contents Buy-side & sell- side of equity research Analyzing equity analyst s investment recommendations Fixed income research reports Week 3 Fixed Income (Part 1) Bond valuations; Term Structure of Interest Rates Bond durations Week 4 Fixed Income (Part 2) Bond portfolio management Bond risk management: Immunization Portfolio insurance; swaps. Week 5 Equity Security Analysis (Part 1): Industry Analysis; Equity Valuations Week 6 Equity Security Analysis (Part 2): Financial Statement Analysis; Quality of Corporate Earnings Week 7 Week 8 Week 9 Week 10 Midterm Quiz: Self-assessment Test (note: the test contains some materials essential to the understanding of the portfolio risk management to be covered in greater details during the 2 nd half of the course). So some test questions may need to be re-visited later. Portfolio Management Theory & Practices (1): Risk & Return; Efficient Diversification; Portfolio Management Theory & Practices (2): CAPM; Investment Performance Evaluations. Introductions to Derivatives & Option Valuations; Final Exam (comprehensive) posted Chapters 1-2 Sample equity and bond research reports posted on the course website. Chapter 10 Chapter 11 Chapters 12-13 Chapter 14 All Above Chapter 5-6 Chapters 7-8; 18 Chapters 15-16
Page 4 SECURITY ANALYSIS PROJECT (Individual Research Project) Each student should select a single company (e.g. General Electric, Johnson & Johnson, Intel, Apple Computer) with easily accessible public information concerning its financial statements as well as information on its business overviews, financial statements, common stock, bonds. Provide a one-page brief description and history of the company, and analyze its competitive position and growth opportunities. Business Description: o Provide a brief description of the firm s business (two lines). o Identify the business segment within the industry (i.e., telecommunications equipment, semiconductor, software) o o Identify whether the subject firm is producing end-product or component. Identify the primary revenue sources for the firm (i.e., license fees, products sales, service revenue). Industry Analysis: o Provide an overview of the industry drivers, including key risk factors and key success traits. o Industry risk factors are generally those out of the direct control of management. For example: high threat of new entrants, significant buyer power, increasing government regulation, rapidly changing technology. o Analyze your firm s competitive position and growth opportunities. Historic Financial Analysis o Analyze quarter-to-quarter performance that reflects the operating trends. o Does the firm s historic financial performance support management s future goals and strategies for the business? o Has the financial statement changed as a result of planned goals and strategies or for other reasons? o Is the firm s historic financial performance in line with the industry norms? Analyzing your firm s financial statements for the most recent three years. Compute your firm s Current Ratio, Quick Ratio, Account Receivables Turnover, Total Asset Turnover, Inventory Turnover, Fixed Assets Turnover, Gross Profit Margin, Operating Profit Margin, Net Profit Margin, Return on Total Assets, Return on Common Equity, Debt to Equity Ratio, and Interest Coverage. For the same years, use ratios from either the industry or a similar firm as a benchmark for comparison. Bond Valuation: Prepare a brief description of at least one bond for your company, including such factors as its credit rating, bond s call feature (if applied), collateral, interest dates, sinking fund provisions, and refunding provisions. Note: bond information can be found on yahoo finance (bond), E-trade. Also you can try NASD website for bond information: http://www.nasdbondinfo.com/asp/bond_search.asp. Barnes & Noble bookstores also has corporate bond book for all major companies. Bond Valuation: Using current price and information on coupon interest and maturity date, compute a yield to maturity (YTM) for your company s bond. Compute the duration for your company s bond. For your firm s common stock, collect the Friday closing price for the last 12 months and compute the weekly percentage price changes (ignoring dividends) and the standard deviation () of these weekly rates of return. Do the same for a market index, e.g., the Standard & Poors 500 index, QQQ, or DASDAQ. Plot the computed returns on a
Page 5 graph and use least-squares regression to construct a line of best fit. The slope of this line is an estimate of the beta for the stock. Discuss / describe how the firm achieves consistent revenue and earning growth through the uses of financial options / derivative tools / off-balance sheet financing (e.g. foreign exchange hedging, interest rate risk management, and off-balance sheet financing like joint partnership). Off-balance sheet exposure may be substantial for certain technology companies (including high-tech and bio-tech firms) due to standby letters of credit or synthetic leases. Identify off-balance sheet exposure and identify impact to leverage and repayment. Hint: See Annual Report of the firm (under Financial Risk Management or Risk Hedging ). Prepare a typed group report (< = 15 pages) including all of the items listed above. Summarize and organize your data so that it is easy to follow. The deliverable is due 10 th session, the same time you turn in the final take-home exam. Please see the course website for sample deliverable for format.