Project Requirements -
The primary goal of the project is to find the target share price (determine the appropriate value of the stock) of a selected company. Secondary objectives are to determine the systematic risk, future solvency, and to perform technical analysis on the company stock. The project should be submitted as an 18 to 20 page term paper (plus tables, figures. and appendices) with appropriate bibliography. All data used must be included in the appendices. It should be original, typed and professionally written. Printed copy of the report must he submitted. This is a group project. Each team should have 5 students.
The following are the specific requirements of the project.
Select a non-financial U.S. company that is publicly traded for at least 3 years. Get thoroughly familiar with the company, its structure, product lines, strategic plans, and in particular the financial statements and behavior of stock price. Submit the name of team members (group of 5) and the company selected by the end of the first class.
1. Briefly discuss the profile of the company and its product lines, industry trends, relevant economic trends, how both of these trends will affect the company, and the financial trends (limited to 4 pages).
2. Use the CAPM model to determine whether the stock is under or over performing. You must use at least 50 weekly or monthly observations on both stock and market returns to estimate the stock's systematic risk (beta) from the market model (regression of stock return on the market return). Use the S&P 500 index as proxy for the market return and the yield on 6 month T-bill as the proxy for the risk free rate. Both the stock and market return should be adjusted for dividends. Provide all the raw data and calculations including spreadsheets.
3. Calculate the 5% error VAR for the market value of equity based on estimate or mean and standard deviation of return for the data used above.
4. Next determine the appropriate weighted average cost of capital for the firm. For cost of equity capital you can use the E(R) from the CAPM model. For this purpose you can use Rm-Rr 6%. For cost of debt, find out the coupon rate on various debt issues, the yield if possible, and then get the weighted average of the cost of various debt.
5. Forecast the future expected earnings, or cash flows, or dividends, accounting for future growth. Construct at least 3 year pro forma income and/or cash flow statements and forecast growth rate thereafter.
6. Next perform valuation of the firm and the stock. First, use one or more of the dividend growth, or the earnings/cash flow, or free cash flow model of valuation. Estimate the value of equity. Nest estimate the target price per share or the range of target price. Determine if the stock is under or overvalued and justify your investment recommendations. Perform sensitivity analysis to see how target price (or range) changes with the inputs such as future growth rate, interest rate etc. For all models used explain the methodology used for valuation, the assumptions made, show the calculations, discuss the results, and state the conclusions, and present all raw data and financial statements.
7. Use at least two other valuation models covered in class to estimate the target stock price. Perform sensitivity analysis.
8. Use at least two technical indicators covered in class to determine if the stock will move up or down.
9. Estimate the Z-score of the firm used to predict bankruptcy. Using the score and relevant ratios discuss the financial health of the company.
10. Report should include a section on your conclusions and recommendations.
Please do Question 7 and 8 only.
Assignment Files -
https://www.dropbox.com/s/6z9vhonc2j6biqr/Assignment%20Files.rar?dl=0