Case study: 1. Purpose: The purpose of this case study is to allow students to take some of the main concepts introduced throughout the course and provide a framework for applying them to a company of their choosing. One of the best ways of learning corporate finance is to apply the models and theories we encounter to real-world contexts and problems. However, while much if not all theory can be applied to actual companies and not just abstract examples, we necessarily need to compromise and make assumptions in this process given the available information. For this reason, it may not be possible for you to address all aspects of this case study fully.
2. Context: Select one of the top 100companies in the world by market capitalisation (available via Learning@Griffith - Other Resources) and address the questions using the framework for analysis given under Section 6. You may select the same or different companies for Case Studies II and III. At the outset, you should ensure that you are able to obtain at least the four most-recent annual reports or equivalent (i.e. from an electronic database) as a source of financial statement information and corresponding stock price data over a comparable period. You may include your own calculations and calculations from company information providers (incl. details of source).
Potential publicly available sources of information include the company and its website, financial and other publications, Yahoo Finance (financials, stock prices, profiles, etc.), the Australian Securities Exchange (ASX), the New York Stock Exchange (NYE), the NASDAQ and various other stock markets.
Useful databases available via the university library include ABI/INFORM Complete (ProQuest), Business Source Complete, Factiva, Informit Search (multiple databases), Annual Reports Collection, Aspect Annual Reports, Aspect Fin Analysis, Company360, Hoover's Company Records (via ProQuest), Morningstar DataAnalysis, and OSIRIS. The Department of AFE's trading room has access to Bloomberg and DataStream.
Assistance in answering case studies, writing reports and referencing is available under GBS Resources Bank on the course Learning@Griffith site.
3. Timing: Students should begin the case study as soon as it comes available. This will avoid the requirement to complete a substantial amount of work immediately before the due date. Formal progress reports are not required, but students are encouraged to discuss any problems or concerns encountered with the case study with the convenor when they first arise.
4. Structure: The case comprises objectives that focus on selected topic areas by providing a framework for analysis and key questions to address. You should respond to each objective and the key questions in their own section using the framework for analysis as a guide. Do not merely answer each of the framework questions (this may also not be possible depending on the company you have chosen). Students are strongly encouraged to use financial ratio analysis and other appropriate analytical techniques to support their arguments throughout, even if not covered explicitly in this course but elsewhere in your program. This is a group assessment piece with each group-requiringminimum 4 and maximum 6 students. There is a maximum word limit of 2,500 words excluding references, tables, figures, and appendices. Only one student from each group must submit the report electronically as a single document through the course website.
5. Submission: One student is to submit the completed case study as a single document (.pdf, doc, docx) via the upload link for ‘Case Study I' under ‘Assessment' by 7th August 2017. The case study will be marked in accordance with the rubric accompanying the submission point (copy below).
6. Requirements:
|
Topic
|
Objective
|
Key Questions
|
Framework for analysis
|
|
Corporate governance
|
To analyse the corporate governance structure of the firm and assess where the power in the firm lies and the potential for conflicts of interest at the firm.
|
1. Is this a company where there is a separation between management and ownership? If so, how responsive is management to stockholders?
2. Is there a potential conflict between stockholders and lenders to the firm? If so, how is it managed?
3. How does this firm interact with financial markets? How do markets get information about the firm?
4. How does this firm view its social obligations and manage its image in society?
|
The Chief Executive Officer
- Who is the CEO of the company? How long has he/she been CEO?
- If it is a ''family-run'' company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? (Did he/she come from within the organization or from outside?)
- How much did the CEO make last year? What form did the compensation take (salary, bonus, options)?
- How much equity in the company does the CEO own, and in what form(s)?
The Board of Directors
- Who are on the board of directors of the company? How long have they served as directors? What is their remuneration?
- How many of the directors have other connections to the firm (as suppliers, clients, customers, etc.)? How many of the directors are CEOs of other companies? Do any of the directors have large stockholdings?
Financial Market Considerations
- How widely held and traded is the stock? Does it appear as if many analysts follow the firm?
- How much trading volume is there in this stock?
? Graph and discuss the recent performance of the firm's stock.
Societal Constraints
- What does the firm say about its social responsibilities?
- Does the firm have a particularly good or bad reputation as a corporate citizen? If it does, how has it earned this reputation?
- If the firm has been a recent target of social criticism, how has it responded?
|
|
Risk and return
|
To develop a risk profile for your company, estimate its risk parameters,
and use these parameters to estimate costs of equity and capital for the firm.
|
1. What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from [market, firm, industry, or currency]? How is the risk profile changing?)
2. What is the performance profile of an investment in this company? What return would you have earned investing in this company's stock? Would you have under- or outperformed the market? How much of the performance can be attributed to management?
3. How risky is this company's equity? Why? What is its cost of equity?
4. How risky is this company's debt? What is its cost of debt?
5. What is the mix of debt and equity used by this firm to fund its investments?
6. What is this company's current cost of capital?
|
Estimating Historical Risk Parameters
- Run a regression of returns on your firm's stock against returns on a market index using monthly data and at least five years of observations.
- What is the intercept of the regression? What does it tell you about the performance of this company's stock during the period of the regression?
- What is the slope of the regression? What does it tell you about the risk of the stock? How precise is this estimate of risk?
- What portion of this firm's risk can be attributed to market factors? What portion to firm-specific factors? Why is this important?
- How much of the ''risk'' for this firm is due to business factors? How much of it is due to financial leverage?
- Using this beta, estimate the expected return on an equity investment in this company?
- As a manager in this firm, how would you use this expected return?
Estimating Default Risk and Cost of Debt
• If your firm's debt is rated, what is the most recent rating for the firm?
? Using financial ratio analysis, comment on the changes in the firm's liquidity, debt servicing and debt levels over time.
- What is the company's marginal tax rate?
- If your company is not rated, does it have any other recent borrowings? If so, what interest rate did the company pay on these borrowings?
Estimating Cost of Capital
- What is the market value of equity?
- Estimate a market value for debt. (To do this, you might have to collect information on the average maturity of the debt, the interest expenses in the most recent period, and the book value of the debt.)
- What are the weights of debt and equity in the firm?
- What is the cost of capital for the firm?
|