QUESTION 1 -
The Module 4 course project assignment let's you get a 'big picture' assessment of a publicly traded company. The requirements of the assignment are as follows:
1. Select a large publicly traded company (such as Microsoft, Google, IBM, Disney, etc.). Your company should have been public for at least 5 years. Prepare a paper which discusses the items below.
a. Company Overview: State what company you have chosen and provide a brief overview of the company, explaining what industry and lines of business it is in and other noteworthy information. (Good sources: The company's annual report, 10K SEC filing, Mergent database, Hoover's database.)
b. Competitive Overview: Identify the company's primary competitors. Show the size in revenues or market cap of the company along with its top competitors. Discuss anything noteworthy related to competition. (Good sources: Yahoo! Finance, Mergent, Hoover's.)
c. Financial Overview: Review the company's recent financial performance. Provide a high level summary of the income statement and balance sheet for the most recent (2 or 3) years available. Provide at least two financial ratios and explain their meaning. Provide a brief analysis of the financial information you have presented. (Good sources: Yahoo! Finance and Google Finance, 10K SEC filing.)
QUESTION 2 -
The Module 5 course project assignment let's you get examine the company's risks, returns and equity costs. The requirements of the assignment are as follows:
1. Use the same company that you analyzed previously. Prepare a paper which discusses the below items.
a. Identify Risks: Identify and discuss some of the primary risks the company faces in the near future. These should be at the company, industry and economy-wide levels. Discuss ways, if any, that the company can mitigate these risks. (Good sources include: the company's annual report, analyst reports, recent news about the company, Yahoo! and Google Finance, Mergent, Hoover's, etc.)
b. Annual Stock Prices and Returns:
i. Create a table showing the stock prices for the past five years (you can either use an average annual price or the ending price at a given date). These data can be found at Yahoo! Finance. Choose "Historical Prices" and then you can select a range of dates by month and download as a table. You will need to convert the monthly data to annual data.
ii. Calculate the annual returns for each year.
iii. Calculate the average stock price, average return and standard deviation over this period.
c. Stock Beta and Cost of Equity:
i. Identify the beta for your company. (You can find this at Yahoo! Finance choosing "Key Statistics" and look for the beta.)
ii. Using the CAPM equation and beta you identified, calculate the company's cost of equity. Note, you will need the risk-free rate and the market risk premium. For the risk free rate you can use the 10 year rate of the US Treasury Bonds (which you can find through a Google search). For the market risk premium use 10.5% minus the risk-free rate.
2. Paper Mechanics should be as follows:
a. The paper should include at least 2 sources, such as the annual report, Yahoo! Finance or Google Finance, the company's web site, etc.
b. The paper should be divided into the sections indicated above (label each section clearly).
Save your assignment as a Microsoft Word document.
QUESTION 3 -
The Module 6 course project assignment let's you explore the company-level valuation, combining many aspects of the entire course into one activity. The requirements of the assignment are as follows:
1. Calculate the Intrinsic Value of Your Company:
You will use the Discounted Cash Flow (DCF) valuation model to calculate the intrinsic value of your chosen company. This model involves three primary steps: i) calculating the company's cost of capital, ii) calculating the free cash flows to the firm, and ii) applying the time-value-of-money concept to discount your projected cash flow values back to the present using the company's cost of capital as the discount rate.
a. Calculating the Cost of Capital:
i. The company's cost of capital can be calculated using the Weighted Average Cost of Capital (WACC) formula: WACC = D/V * eD * (1-Tc) + E/V * rE
ii. There are several WACC calculators which can be found online. You may use one of these calculators or calculate the WACC on your own. If you use a calculator identify the relevant terms from above and calculate the WACC (please show your relevant terms and calculations).
b. Calculating Free Cash Flow to the Firm:
i. Estimate the free cash flows available to the firm ("FCFF"). To do this we can use the below formula:
FCFF = Cash Flow from Operations - Capital Expenditures + Interest * (1 - Tax Rate)
- The Cash Flow from Operations and Capital Expenditures can be found on the Statement of Cash Flows in Yahoo! Finance.
- The Interest expense (if any exists) is on the Income Statement.
- The Tax Rate is the one you used to calculate the WACC, above.
- For additional details on these calculations please refer to this external resource.
c. Calculating Firm Value:
i. You can now combine the two items above to estimate a present value of the firm. To simplify this calculation you should assume a constant growth rate of 3% in the Free Cash Flows to the Firm and apply the constant growth model: Firm Value = FCFF * (1+g) / (WACC - g)
2. Comparison to Market Capitalization:
a. On the Key Statistics page in Yahoo! Finance identify and indicate the Market Capitalization ("market cap"). What does this value represent?
b. Compare the market cap to your calculated value.
i. To compare the market cap from Yahoo! Finance to the firm value you calculated in the previous section above you need to first subtract the value of the debt from your firm value calculation.
ii. How does your intrinsic value (less debt) compare to the market cap of the company on Yahoo! Finance?
iii. What might account for any differences between these two values?