Please answer all questions. Clearly note and explain all assumptions. Please organize your answers. Grading will be based on your demonstrated ability to work with finance concepts learned in this course in a team environment.
Please use Yahoo.finance.com, Zacks.com, or other sources of data in the digital library (Standard and Poors, Value Line, etc.).
The paper will be 6-7 pages long total (1.5 line spaced, with at least 11 size fonts, not including appendices).
On a given stock perform following analysis:
1) Brief industry and company description. Graph last 5 years revenue growth rates, profit growth rates, profit margin, dividend (if any) growth and stock price trends (annualized returns and standard deviations). Read the recent earnings call transcript (you can also listen to it) and write summery of business strategy and new growth initiatives to determine how this company will grow next 5 years. Determine capital expenditure plans the company has for next several years.
2) Construct common size financial statements and calculate financial ratios. Make comparisons to the industry or peers in the industry and analyze company’s financial standing. Given the industry leverage ratios and the company’s projected ratios, how would you advise the company to change its leverage? Offer your recommendations and use them in the next step of pro-forma statements to project cash flows.
3) Based on the item 1 and 2 analysis, please construct Base Case scenario of 3 year pro-forma statements (based on the projected growth rates of the sales, profit margin projections, capital expenditures and other estimates and assumptions from common size statements) in order to estimate cash flows from assets (CFFA). After 3 years assume constant long-term growth rate of CFFA.
4) Create two more scenarios of CFFA cash flows with pro-forma statements (Best and Worst cases).
5) Estimate required rate of return with CAPM and also with four factor model (three-factor Fama-French model plus industry risk premium using comparable industry ETF returns). Calculate historical risk premiums for each risk factor, and make adjustments to them as you see it is appropriate for the future investment horizon of 1-2 years. Calculate CAPM beta. Template for the above is in excel file of multi factor models in Sakai.
6) Estimate market value of the debt of the company, or use book value of debt if there are more than 2 bond issues.
7) Estimate Yield to Maturities of its two largest bond issues and use average of them in WACC calculation in the next step.
8) Estimate WACC (weighted average cost of capital) for the company. You will use this in one of the methods of valuation.
9) Calculate CFFA based valuations with WACC for all three scenarios.
10) Calculate per share stock price of the company for all three scenarios.
11) Calculate F-score of the company based on the method described in Piotroski ‘s article posted in Week 6 folder on Sakai.
12) Determine your stock price RANGE AND TARGET (using three different scenarios above) and calculate your expected return given current market prices. Use the form of summary results (as in Midterm). Rate your stock given your team’s expectation of the market return (YOUR TEAM’S EXPECTATION). Include major assumptions on the same page. Summarize your valuation of the stock in terms of the range of intrinsic values and alphas in half a page discussion.
