Company Financial Valuation

In this project you are asked to choose and value a publicly traded, non-financial U.S. company within the same industry as members of your group and give a recommendation to investors about the company’s stock. Financial companies, as an industry, are prohibited based on large differences in their financial statements. You should use a U.S. company rather than a foreign company so that the (consolidated) financial statements will be in dollars, not in foreign currencies.

In valuing any business, the perspective from which the business is valued is quite important. Your viewpoint is that of the stockholders, the holders of residual claims to the firm’s earnings and assets. By doing this project you should also learn how to translate assumptions about the business into numbers.

The primary valuation models of modern finance view a business as the sum of future cash flows available to the owners (i.e. stockholders for publicly traded companies). This does not mean that non-financial considerations play no role in the valuation, but these considerations should be seen in terms of their impact on cash flows. For example, a good marketing plan should be translatable into higher cash flows that can be valued (as well as measured against the costs of the plan.)  A basic (but elegant) valuation model uses the operating cash flows of the company available to the stockholders and compares it to the invested capital in the company using appropriate discount rates. The attraction of such an approach is that the valuation of the whole firm can be approached in a manner similar to that of capital budgeting. The capital budgeting process is very relevant to managerial decision-making and a valuation model using operating cash flows allows explicit consideration of various managerial strategies. Computation of a firm’s value in this manner also allows us to explicitly understand what drives this value and how this value can be changed.

This project will provide a first look into the fundamental methods of valuation. You should gain a familiarity with the tools used as well as an appreciation for how different business disciplines and the concepts in this course are integrated in application.

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Project Part I Guidelines

Please make sure that all of your sources are footnoted and cited properly.  Include a bibliography with your report.  Use APA or MLA citations.  For APA referencing guidelines.

The first step is to choose an industry as group and then each student select a unique firm within that industry (please consult with group members before beginning work to avoid duplicate firms).  We are a very diverse class from many disciplines, so please try to compromise regarding your industry.  You are free to choose (almost) any firm, but you are responsible for making sure that your firm meets the following criteria:

Your firm:

• must be a US firm (so consolidated statements are in U.S. dollars)
• must have publicly traded bonds (verify here – http://finra-markets.morningstar.com/MarketData/CompanyInfo/default.jsp)
• must have publicly traded equity shares for the last 5 consecutive years
• cannot be a bank or another financial institution (financial institutions have different financial statements and ratios)
• cannot be Amazon, Ford, Netflix, Nike, Telsa, or Walmart

At a minimum, you will require the following data to complete all three parts of the project:

• 61 consecutive months (most recent) of adjusted closing prices for your firm and the S&P 500 stock index
• 60 months of returns (most recent) for your firm and the S&P 500 stock index
• Amount outstanding, YTM, and prices for most outstanding bonds of your firm (try to choose a firm with a manageable number of bonds)
• Three years of balance sheets and income statements for your firm (with common size adjustments)
• Industry measurements for the ratios you use in your project (try Reuters.com for industry comparison ratios)

Part 1 will consist of the below components.  The goal of part 1 is to develop your credible scenario for the company’s future performance.  In other words, you should have a decent idea regarding the corporate strategic direction of the firm and its current position/trend as compared to its industry.

Please do not forget a cover page and a table of contents!  

1) Introduction

• Your report needs to have an introductory section with general company information. This is primarily non-financial information. In the process of gathering this information you should acquire an understanding of the company’s current operations and future prospects. One component of the company information is its history. Additionally you also need to have information on its competitors, the health of its industry, and future goals. This information should help you and the reader understand the company’s competitive position.
  • A great place to look for this information is in the companies’ annual reports on their websites. Moreover, Mergent Online and LexisNexis (both available via the WCU library website under “databases”) are excellent sources for financial & company info as well.
• Please include a subsection on recent financial developments. On which stock market does the stock trade?  Have there been any major financial changes to the company?  This could be in the form of a stock split, managerial change, lawsuit, mergers/acquisitions, and major projects.

2) Ratio Analysis – In this section, you will get a better idea regarding the financial position and trend of your firm using financial statements, and make comparisons to its industry.

•  You need to analyze your firm’s balance sheet and income statement to tell a story.  You should include 1 ratio from each class of ratios and make comparisons to the industry and analyze the trend over the last three years.  When including ratios in your report, be sure to include the individual components in your tables as well, so you can determine why a change in a ratio occurred.  For example, if the current ratio declined from the previous fiscal year, you will be able to see if this was due to a decline in current assets or increase in current liabilities.  Each scenario is different and will help you tell your story!  You must make observations regarding:
  • Liquidity
  • Debt Management
  • Asset Management
  • Profitability
  • Valuation
• Conduct a DuPont analysis for your firm.  How has your firm changed in terms of revenue generation, cost efficiency and capital structure?  Compare to the industry in the most recent year.  Be sure to use graphs when applicable!

Recommended length is approximately 5 pages, excluding tables, graphs, and appendices.

Please include an appendix at the end including:

• 3 years of the most recent balance sheets for your firm with and without common size adjustments
• 3 years of the most recent income statements for your firm with  and without common size adjustments