Assignment -
Complete a research topic and prepare a write-up, and a presentation.
SECTION A: Financial Analysis and Pricing
Select a portfolio of five firms from the industry of your choice. Please then see me for approval to ensure the firms are suitable for the project. You will then complete a thorough analysis of these firms that includes the following:
Part 1 - Extract and Summarize Data on Company Performance
Extract the price and return data for each company. An important way to learn how the financial world works is by gathering and analyzing data. There are many data sources, such as at the Federal Reserve, Bloomberg and Yahoo Finance. Be sure to discuss with me whether the data you use are appropriate for your project.
Document the raw data. There should be at least one page describing the data and its source. For example, you could include and explain summary statistics such as the mean, correlations, and a graph. This is important, as in an applied project someone else must be easily able to replicate what you did. It will give your work credibility.
Provide an overview of the industry that includes: history, size, profitability, macroeconomic data, trends and key information regarding future expected performance
Part 2 - Compute Returns and Risk Measures
Compute their monthly and annual returns, and other relevant measures of firm performance from class.
Construct equal-weighted and size-weighted portfolio returns for the industry.
Extract a market-based measure of beta, and other risk measures you feel to be relevant such as liquidity.
Part 3 - Estimate Model and Summarize Results
Estimate the key parts of CAPM for each firm, including β and α
Does the CAPM appear to work? If not, what do you think is the main driver of returns?
If you could talk to the firms' senior management, what information would you request to improve your analysis?
Part 4 - Extensions to CAPM: Liquidity
Extract data on liquidity for each company. Use measures that we discussed in class, or see me for approval.
Document the raw data as before, including a page of summary statistics.
Include a measure of liquidity in the CAPM. What is the effect on your results from Part 3? Why do you think this is the case?
SECTION B: Fundamental Analysis and Valuation
You are required to present a succinct analysis of your portfolio of companies to the class. Your written solution must follow the format outlined below. Components of this section are as follows:
Part 1 - Fundamental Analysis of Industry
Your task is to provide an overview of the industry that comprises:
Industry summary including history, industry size and profitability, macroeconomic data, and trends.
Analysis of consumers and key drivers of demand as well as key supply issues/factors.
Discussion of sources of risk in the industry.
Part 2 - Financial Analysis
Create an excel spreadsheet to include: the balance sheet, income statement and statement of cash flows for three years.
Compute and analyze key financial measures and ratios. How do the firms compare to each other, and to the industry average? Describe the firms' relative strengths and weaknesses.
Do the firms have similar capital structures?
How and why has profitability changed over the three year period?
What significant changes in cash flows do you notice? Interpret this.
Do you expect the firms to be more profitable over the next three years? Why? Do you think the firms will generate more cash flow? Why?
Part 3 - Financial Projection
Use published financial statement information to project financials for the firms you selected. Your analysis must include the following.
Identify the key drivers for creating a five year financial projection for the firms.
Use the historical financial statements to create key forecast assumptions.
In your write-up explain the basis of your forecast assumptions.
Project the balance sheet, income statement and statement of cash flows for the five year period.
Change key assumptions and discuss the impact on the projection
Part 4 - Firm Valuation
In this part, you are to use the information from Parts 1-3, and other relevant sources, to value the firm. Determine measures of value that you feel relevant, such as WACC and enterprise value. Detail those assumptions that are most critical to the analysis and summarize your conclusions.
Part 5 - Extension to Account for Firm Efficiency
Use data from Compustat or company filings to obtain company costs including wages, R&D and other important costs for each year, in each firm.
Compute how cost efficient each firm is, using either a cost function approach or some other quantitative comparison.
Which company is more efficient? Why do you think this is so?
If you were to include the efficiency estimates in Part 4, what would happen to your estimate of firm value? Why?
Detail those assumptions that are most critical to the analysis and summarize your conclusions.
Attachment:- Assignment Files.rar