PURPOSE

The purpose behind the case study is: (1) to anchor your ability to analyze financial statements; (2) further your awareness of the respectful advantages and disadvantages of corporate valuation models; and (3) broaden your ability to apply theory expounded in CSUN finance courses, in particular:

Forecasting: using ratios in the construction of forecasts

Cost of capital

Enterprise valuation

NPV or other DCF methods

PROCEDURE

1.COMPANY SELECTION. You must select a publicly-traded company for this assignment. There is a sign-up sheet wherein you will find your name. In the column provided, type in the company’s ticker symbol, and, tab to the next column and type in the full name of your company.

YOU MAY SELECT ANY PUBLICLY TRADED COMPANY THAT HAS BEEN IN EXISTANCE AS A PUBLIC COMPANY FOR A MINIMUM OF 5 YEARS.

TEAMS ARE ALLOWED, NOT TO EXCEED FOUR PERSONS UNLESS APPROVED BY THE PROFESSOR. HOWEVER, THE ANALYSIS DONE BY A TEAM IS EXPECTED TO BE MORE THOROUGH AND SOPHISTICATED THAN THAT DONE BY A SINGLE INDIVIDUAL.

2. DATA SELECTION AND EDITING. You will need to gather five years of consolidated financial data from the SEC: https://www.sec.gov/edgar/searchedgar/companysearc…

SEC data is downloadable in CSV or XCL format. If using CSV, be sure to save it in XCL format.

It is not uncommon that financial reports change categories over time. If this is widespread, consider using the CONSOLIDATED BALANCE SHEETS AND INCOME STATEMENTS.

Compile five years of your company’s Balance Sheet, Income Statement, and Statement of Cash Flows.

Calculate annual percentage changes in revenues, gross (operating profits/losses), net operating profits/losses. (Net changes are accomplished by subtracting last year’s result from this year’s result, and then dividing that difference by last year’s result.)

Calculate percent gross margins and net operating margins.

Calculate payout ratio if the company pays a dividend.

Calculate leverage ratios (debt/equity and debt ratio)

Determine what variables you will need when assessing future performance.

3.COMPANY FORECAST . Your Forecast is central to determining firm valuation since the focus of modern financial theory rests with discounted cash flow models (DCF Models). Therefore, as a minimum:

Using data found on annual reports, develop a proforma revenue and EPS forecast for ten years for the firm of choice

You must identify assumed inputs such as revenue growth rate, inflation rate, gross and net margins, taxation rates, and WACC, or any other variable you believe is relevant to valuation process.

Forecast expected changes to the firm, after consideration of specific assumptions about the competitive environment, and economic trends.

Derive a current value for the subject firm.

USE OF THE SAMPLE ANALYSIS SHOWN IN CLASS (3M CORP) IS PERMITTED AND EVEN ADVISED although it may require some customization to accommodate your analysis needs. The analysis has been uploaded to Canvas in a File called STOCK EVALUATION ASSIGNMENT

If employing some economic performance assumptions, it is recommendation that you use a Monte Carlo Simulation, since it is near impossible to rely on guesswork regarding the future with any confidence. (If you have never used the Monte Carlo functions in excel, this is a good time to start.)

You may decide to run one or more sensitivity analyses. Feel free to do so if you feel it will enhance your understanding of the company’s performance and prospects.

4.CONCLUSIONS. After the analysis is complete, a conclusion as to the investment attractiveness of the company’s shares can be made. The conclusion can made when the per-share after-tax earnings (NOI) is determined and a terminal value is calculated. The conclusion is determined by running an NPV of your annual earnings per share numbers and comparing this result with current market price of the company’s stock.

The choice of discount factor may be critical. Certainly, a sensitivity analysis can determine how important it is to your valuation model. If it is, choice of that discount factor looms large. Traditionally, the number is equal to the firm’s WACC, as discussed in class.

Your Narrative

Please write the narrative in paragraph form, no partial sentences and phrases. (Assume you are writing to an investment committee) who will want as much detail as possible and clear, concise language. However, you are limited to no more than four pages of narrative (exclusive of graphs and charts, if used).

Your narrative, when submitted, should contain as a minimum the following:

Contents (typed using no smaller than 11 PICA and no larger than 12 PICA) of indeterminate length):

ANALYSIS/FORECAST:

Explain the rationale for the values of your inputs. Pay particular attention to your assumptions underpinning your revenue growth rate, including costs per year, size of market (US, and if necessary, overseas), and other firm-specific characteristics and attributes.

Explain your method for determining the firm’s terminal value.

Explain current weaknesses and/or strengths of the firm.

VALUATION:

Calculate today’s value of the target firm based on the assumptions and conditions outlined on your analysis. Valuation should be on a per-share basis, as well as cumulative (i.e., the firm’s market capitalization value en toto.)

You may use any valuation method you wish, but typically more than one is used to confirm your model’s performance.

UPLOAD directly to Canvas; paper copies will only be accepted on an emergency basis.

Articulate a RECOMMENDATION for “Strong Buy”, “Buy”, “Hold”, or “Sell” – and describe in detail why the conclusion was made.

RUBRIC FOR GRADING IS AS FOLLOWS – 100 POINTS TOTAL:

DOES NOT MEET MINIMUM – DOESN’T UNDERSTAND AT ALL

GRADE: 50% OR LESS OF MAX PTS ZERO PTS POSSIBLE MEETS MINIMUM – MERELY GETS THE JOB DONE – FOLLOWS INSTRUCTIONS

GRADE: 50 – 65% OF MAX PTS ABOVE AVERAGE – I.E., THINKS

GRADE: 65 – 85% OF MAX PTS OUTSTANDING – I.E., THINKS OUTSIDE THE BOX

85 – 100% OF MAX PTS.

DEGREE OF KNOWLEDGE AND COMPREHENSION OF CLASS MATERIAL, AS EXPRESSED IN THE ANALYSIS AND CONCLUSIONS.

MAXIMUM POINTS: 40 FAILS TO RECOGNIZE THE CASE SUBJECT’S ISSUES AND/OR FAILS TO UNDERSTAND THE NATURE AND PURPOSE OF THE CASE STUDY. DEMONSTRATES AN UNDERSTANDING OF THE PROBLEM ONLY. NO FURTHER RELEVANT ELABORATION DEMONSTRATES A THOROUGH UNDERSTANDING OF THE SUBJECT’S FINANCIAL STRUCTURE AND ITS RAMIFICATIONS. DEMONSTRATES A THOROUGH UNDERSTANDING OF THE SUBJECT’S FINANCIAL STRUCTURE AND ITS RAMIFICATIONS. RELATES THE PROBLEM TO RECENT PRACTICES, AND/OR USES OTHER SOURCES TO EXPLAIN PROBLEM RAMIFICATIONS

ANALYSIS & LOGIC OF ANALYSIS

MAXIMUM POINTS: 20 FAILS TO REACH LOGICAL CONCLUSIONS FROM DATA PRESENTED. REACHES BASIC CONCLUSIONS. REACHES CONCLUSIONS WHICH DEMONSTRATE THOROUGH UNDERSTANDING OF THE ANALYSIS. REACHES CONCLUSIONS WHICH DEMONSTRATE A THOROUGH UNDERSTANDING OF THE ANALYSIS AND THE ABILITY TO PLACE IN HISTORIC OR CURRENT CONDITION CONTEXT.

OFFERED CONCLUSIONS

MAXIMUM POINTS: 20 NONE OFFERED. OFFEREED SOME CONCLUSION, NOT STRONGLY THOUGHT OUT OFFERED CONCLUSION WITH LOGIC AND FORESIGHT. OFFERED CONCLUSION WITH EXCEPTIONAL SOPHISTICATION – THOUGHT “OUTSIDE THE BOX”.

SOPHISTICATION OF PRESENTATION

MAXIMUM POINTS: 20 USES LESS THAN HIGH SCHOOL ENGLISH, SLANG, AND TEXT JARGON. (IN FACT, IS IT REALLY ENGLISH?) USES UNDERGRADUATE-LEVEL LANGUAGE; NOTHING SPECIAL. DEMONSTRATES GOOD VERBAL SKILLS AND A SOPHISTICATED VOCABULARY. DEMONSTRATES OUTSTANDING VERBAL SKILLS AND HIGHLY EFFECTIVE AND SOPHISTICATED VOCABULARY.