Project
Identify a publicly traded company (listed on NYSE or NASDAQ), either a large cap or a mid-cap concern (minimum market capitalization of $5 billion) preferably one that pays a cash dividend (but not a requirement), to analyze and value. It is highly recommended that a large company operating in multiple industries (such as GE) NOT be chosen. The completed project will be due on the last day of class. If you do not turn it in on time, but turn it in at the final exam, there will be a 5 point penalty.
For the serious minded student, who has strong interest in equity valuation, a CFA book entitled Equity Valuation, 2nd edition by Jerald E. Pinto, Elaine Henry, Thomas R. Robinson and John D. Stowe is good resource. Two other recommended sources are Corporate Valuation, as easy guide to measuring value, by D. Frykman and J. Tolleryd and/or Corporate Valuation, a guide for Managers and Investors, by Daves, Ehrhardt and Shrieves. In addition, another publication of potential value is Valuation: measuring and managing the value of companies by Koller et al can be used as a guide for this project.
The primary purpose for this semester project is twofold:
1. Academic: to further the student's knowledge of valuation analysis.
2. Professional: to provide concrete evidence of student's ability to apply classroom study and theory to a "real world" example.
Papers should be at least 5 pages and no longer than 10 pages (double-spaced, one-inch margins), excluding spreadsheets and financial statements. The company chosen, as well as the primary industry in which it operates, can impact the length of each paper. Use bullet points as much as possible.
Each report will be evaluated both on the basis of the quality of the analysis. The highest academic standards are expected when citing sources and failure to do so will result in a failing grade for the respective project. There is no excuse for misspelled words due to the availability of spell check in all-current versions of software packages.
LOOK AT THE VALUATION SAMPLES IN THE PROJECTS SECTION, ESPECIALLY RACKSPACE, WHICH IS IN THE FORMAT USED BY CFA INSTITUTE FOR ITS STUDENT COMPETITION. These reports are to be used for educational purposes only and are intended to serve as supplemental resources. Any questions that arise should be directed to the instructor.
STUDENTS ARE ENCOURAGED TO BECOME FAMILIAR WITH BLOOMBERG AND CAPITAL IQ DATA PROVIDERS. Terminals are located in the Bloomberg lab, located on the first floor of the new building, across from Jason's Deli.
An outline of the required elements of the report can be found on the following page.
PROJECT OUTLINE
1. Company description and background.
a. Business summary.
b. Primary and secondary markets/products (foreign and domestic).
c. Business risks/outstanding litigation.
2. Business model.
a. SWOT analysis-bulleted lists are preferred
b. Include revenue and expense drivers
3. Analysis of the company's recent financial performance.
a. Brief discussion of major trends for most recent quarter, year and five years.
c. Previous five years' income statement, balance sheet and cash flow statement.
4. Peer group analysis.
a. Comparative data such as product differentiation, market share and etc.
b. Porter's five forces
c. Ratio analysis, company versus peers.Can use industry or a reasonable set of peers.
5. Analysis of the company's future performance.
a. List major assumptions.
b. Projected income statement, balance sheet and cash flow statement.
c. Minimum forecast of next five years (in most cases, beyond five years).
6. Analysis of the company's weighted average cost of capital.
a. Book value can be used for debt weighting (assuming book equates to market).
b. Use market capitalization for common equity weighting.
c. CAPM should be used to estimate required return on common equity
d. Comment on the capital structure, including whether you think it is optimal.
7. Valuation of the company's common shares. Use a five-year projected holding period.
a. Discounted cash flow, including the forecast for terminal or horizon value.
b. Free Cash Flow to Equity or Dividend discount model.
c. Relative P/E's includes use of PEG's.
8. A conclusion in which you make a recommendation.
a. The company's common shares over-, under-or fairly valued?
b. Decision must be supported by fundamental analysis.
9. Tables & spreadsheets, including projected financial statements.
10. Properly cited sources, including bibliography.