1. The objectives of this project are to:
a. enable you to do a comprehensive financial analysis of a publicly traded corporation; and
b. provide you with substantial information for you to make recommendations regarding investing in this corporation. That is, you must answer the question: “Should I buy this stock?” or, “Should I sell this stock?”
2. The midterm and final report must be written properly.
a. They must include a title page, a table of contents, and a reference page
b. For both midterm and final report, information sources from the web, etc. must be cited properly, using APA style.
i. This means that every table that you cut and pasted or typed from the web must have a source at the bottom of the table AND that citing must also be included in a reference page at the end of the report.
ii. Formatting will be graded.
3. The parts of the report are discussed below. The midterm report (parts a through c) is due in Week 5. The complete report (parts a through g) is due in Week 5. Your project should include:
a. An overview of the corporation. (one page)
i. Provide general information regarding the type of business, products and/or services, location of headquarters, name of CEO, number of employees, and countries of operation, etc.
b. The latest financial statements (no more than three pages, be sure to have three years financials) i.e., one for income, balance sheet and cash flow.
i. Get the income statement, balance sheet, cash flow statement, and the statement of owners’ equity for the past three (3) fiscal year-ends. Cut and paste them in your report. Do not forget to cite the source under each statement.
ii. If you cannot cut and paste the statements, save in pdf and then paste.
c. A summary of each financial statement FOR THE INCOME STATEMENT, THE BALANCE SHEET AND THE CASH FLOW STATEMENT
i. Use a header for “Income Statement Commentary”
1. Tell a story from each of the financial statements. For example, for the income statement, the story starts like, “Total Revenues in 2010 were $10 billion, while Cost of Goods Sold were $8 billion, leaving a gross profit margin of $2 billion, or 20 percent of total revenues….After taking out interest and taxes from EBIT, the net income was $0.5 billion, or 5 percent of total revenues.” Discuss here the changes over the three years: gross profit margin, operating margin and net income margins. Have they all changed, remained the same, declined, improved, etc. The ROA and ROE improved, declined etc. You can discuss by what % for example
ii. Use a header for “Balance Sheet Commentary”.
1. The same with the balance sheet using b/s ratios, the balance sheet improved, declined stayed the same? Supported by liquidity ratios, leverage ratios, asset turnover ratios,
iii. Use a header for “Cash Flow Commentary”.
1. Be sure to total the three years cash flows from operations, financing, investing
2. Sum the three years cash flow in each of the three categories and comment on where the firm generated cash and used cash, as well as financed the business.
iv. You will use your text to find the ratios (five major types of ratios, See Chapter 3). Ratio calculations are to be integrated into the commentaries above (i., ii. & iii.). No commentary on each ratio please, i.e., you do not need to describe how the ratio is calculated. Place your calculations in the appendix. Calculate the ratios from the financial statements in this part c using Excel or your calculator.
d. Discuss stock valuation using the dividend discount model and the free cash flow method with terminal valuation methods.
i. Calculate the dividend growth rate for your company using time value of money tools (use annual dividend payments). Then using the Gordon Constant Dividend growth formula find the value of the firm’s stock and compare to current valuation, i.e. the fiscal year end stock price. Discuss if the stock is over or undervalued based on your calculation compared to you constant growth model valuation.
ii. To use the constant growth model you will need the required return for the company. You will find the required return on equity using the CAPM. Assume the risk free rate is 3.6%, and the Expected return of the market is 11%. You will use the CAPM required return found here in #e below.
e. Calculate the Free Cash Flow for your company for the three annual years’ financials. Calculate forward three years of FCF growth based on the growth for the past three years, and then assume that FCF will grow thereafter at 5% to find the terminal value in year three projection.
i. Find the discounted value of the firm (i.e. this is the entity value).
ii. You will need to calculate the WACC for the firm to calculate the discounted cash flow. Be sure to use the cost of debt for only borrowed money in the WACC calculation, and remember to calculate the capital structure percentages based only on debt, equity & preferred stock, if in your company has preferred. No current liabilities (other than Notes payable) are included in the capital structure. Find the forward cap structure: i.e. the % debt, % preferred stock and % equity. These weights are used in the WACC.
iii. Follow the methodology in your text book about the entity valuation of the firm and equity valuation. (e.g., you will subtract from the entity value the firm and subtract value of borrowed- money debt). This subtraction will give you the value of equity. Now calculate the per share value of the FCF valuation by dividing the equity value by the number of shares outstanding. Assume neither changes in the shares outstanding nor equity issuance for the future.
iv. Compare your FCF valuation of equity per share to the market value per share (at fiscal yearend) and discuss why they may be different? Discuss whether your company is over or undervalued relative to your calculations.
f. Considering the firms’ history of capital expenditures and shareholders’ wants, what is your recommendation for the firm’s dividend policy? Use charts of dividends and share repurchases and debt or equity issuances to justify a policy.
g. Summary and recommendation regarding the future of this stock.
i. Based on your analysis, including the over or undervaluation:
1. Is the stock a good buy, average buy, or a poor buy (implying a good sell)?
2. Include a justification of your recommendation based on your analysis and research.
Do not use equity research in your paper; include only your research in the paper.