Assignment: Security analysis and valuation
Objectives:
1. Study the financial characteristics of the company relative to its major competitor(s) in the same industry.
2. Conduct stock valuations employing statistic models covered in the class. For example, Single-index market model, and discounted dividend model (DDM).
3. Make investment decisions based on the results.
To help you jump start the project, your advisor, Melinda provides you a short list of guideline. She's suggested that you start with the analysis on firm's financial characteristics, focusing on some important financial ratios. It is always helpful to compare the financial strengths or weaknesses of targeted company to the industry average or the major competitor in the same field.
You realize that financial ratio analysis provides you a preliminary examination on firm's past financial performance but not necessarily sheds light on performance of the firm into the future. Therefore, you need some tools in helping you assess/model the growth potentials of your company's stock. You recalled there were few things you've learned in the investment class back in college about assessing firm's value. You remember Beta coefficient, Market model, (covered in chapters 6 and 7) and finally the DDM (covered in chapter 13) to figure out the intrinsic value of the company's stock.
Fortunately, you still have the investment book (you did not sell it back to the bookstore!) and you know you buried it somewhere in the storage room. Now it is time to dig the book out of the box!
Useful database:
1. www.sec.gov for annual/quarterly financial reports
2. Company's official website for financial reports
3. Finance.yahoo.com for price data and financial characteristics.
4. Kenneth French's website for the three factor used in the Fama-French three factor model.https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
Questions to ponder:
1. What is the approximate stock price using financial ratios (multiples) like P/E, P/B, etc...?
2. What is your estimate of firm's growth rate over a certain period of time (say, 5-year)? What would be the dividend payment schedule like for the next 5 year for your company? Please be advised that you need to go over a series of estimation to figure out an appropriate rate for the company. A randomly given number out of your mind is not a scientific way to start such a rigorous analysis.
3. What is the beta coefficient of the stock in response to market index? What should be the expected rate of return of the stock based on single-index market model?
4. What is the likely intrinsic value of the company's stock using DDM if the expected rate of return from market model is used as discount rate?
5. Discuss the results obtained from questions 1 and 4? Are they different? If so, why? Which result is more reliable?
Tips:
1. Tabulating the results and then making any insightful interpretationsout of them make the report more professional and easier for your readers.
2. Graphical illustrations and explanations/interpretations alongside them help better connect with readers of your report.
3. The report should be about 5-page long and double-spaced, not counting those graphs and tables.