The objective of this project is to familiarize you with the investment analysis of a publicly traded stock. You will assume the role of a financial analyst. Your task is to value the common stock of a public company and issue a recommendation to investors whether to buy, sell or hold the stock.
SELECTING A COMPANY:
Your first task is to select a company for your project. The company must be listed in a stock exchange and paying dividends. You are not allowed to select a service provider, such as a bank, an insurance company, etc.
ECONOMIC ANALYSIS: Your second task is to conduct an economic analysis.
• What is the state of the overall economy?
• Describe key economic measures such as GDP, interest rate, inflation, consumer spending, etc.
INDUSTRY ANALYSIS: Your third task is to conduct an industry analysis.
• What is the nature of the industry?
• Who are the major competitors in the industry?
• How important are technological developments?
• Which economic forces have the most impact on the industry?
COMPANY ANALYSIS: Your fourth task is to conduct a company analysis.
Collect the income statements and balance sheets of the company and a major competitor.
• Calculate the liquidity, efficiency, financial leverage and profitability ratios for the company for 2011 and 2012 and the competitor for 2012.
• Evaluate the financial condition and operating results of the company using both time-series and cross-sectional analysis.
ESTIMATING BETA: Your fifth task is to collect the monthly stock prices of the company and the market index between January 2008 and December 2012.
• Enter the data into Excel.
• Calculate the monthly return of the stock and the market index between January 2008 and December 2012.
• Estimate the beta of the stock using regression analysis.
ESTIMATING THE INTRINSIC VALUE OF THE STOCK: Your sixth task is to estimate the intrinsic value of the stock.
• Collect the dividend per share paid by the company in 2012.
• Estimate the constant dividend growth rate of the stock for the foreseeable future. You need to justify this rate based on your economic, industry and company analyses.
• Determine the required rate of return on the stock using the Capital Asset Pricing Model. You may use 13% as the market return and 8% as the risk-free rate.
• Estimate the intrinsic value of the stock using the constant growth dividend valuation model.
CONCLUSION AND RECOMMENDATION: Your final task is to make a recommendation.
• Provide a summary of your economic, industry and company analyses which should shed some lights on the future prospects of the company.
• Compare the intrinsic value calculated above to the market price (the stock price on 31 December 2012) and determine whether the stock is undervalued or overvalued.
• State your recommendation to buy, sell or hold the stock.