Description of Project -
The assignment is to perform a financial and business analysis of a large, publicly-traded U.S. retailer. The firms that you may choose from are listed below. There are several reasons that I am limiting your choices to a small group of large U.S. retailers. First, the operations of retailers are relatively simple to understand, so it is feasible to arrive at a view of the firm's competitive situation even if you don't start out with a deep knowledge of the industry. Second, the group of firms that I have selected share certain financial characteristics that allow students to apply some of the material covered in the course. Third, I want to stick with U.S. firms because it is relatively easy to obtain free, up to date, and accurate financial data on publicly traded U.S. firms.
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Company name
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Ticker
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Lowe's Companies, Inc.
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LOW
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Home Depot Inc
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HD
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Ross Stores, Inc.
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ROST
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TJX Companies Inc
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TJX
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Bed Bath & Beyond Inc.
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BBBY
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Gap Inc
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GPS
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Costco Wholesale Corporation
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COST
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Wal-Mart Stores, Inc.
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WMT
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Target Corporation
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TGT
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Kroger Co, The
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KR
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Macy's, Inc.
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M
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Nordstrom, Inc.
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JWN
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Dollar General Corp.
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DG
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Best Buy Co Inc
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BBY
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Dicks Sporting Goods Inc
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DKS
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Specific Requirements of the Project
1. Identify the firm's closest publicly-traded U.S. competitor. This is the firm that is most similar in terms of the markets that it serves and is closest in size in terms of revenues and enterprise value. Explain your choice and mention any other possible close competitors that you may have considered. I recommend completing this requirement by the end of week 2 of the course.
2. Perform the computations for a cross-sectional and time series ratio analysis of your firm and the competitor using the last 10 years of data. If the last set of annual statements doesn't bring you up to date, also use the trailing-twelve-month (ttm) income statements and cash flow statements and use the most recent quarter's (mrq) balance sheet. In addition, calculate the growth rates of a few key variables such as sales. I recommend completing this requirement by the end of week 3 of the course.
3. Analyze the firm's recent financial performance and current financial health, using the ratio analysis techniques learned in the course. Be sure to touch on liquidity, capital structure, asset management efficiency, and profitability. Focus your discussion on ratios or growth rates that have changed a great deal in recent years, that differ greatly from the competitor's metrics, and that you believe to be important drivers of the firm's value. I recommend completing this requirement by the end of week 6. It might be fruitful to think about the firm's financial and competitive situation (item 4 below) at the same time.
4. Analyze the firm's competitive environment. You may use a framework such as Porter's five forces or a SWOT analysis to organize your thoughts if you wish, but that isn't required. You don't need to go into as much detail here as you would in a strategic management class. Focus on the most important issues. If you do use one of the above frameworks, don't include the parts that are irrelevant or only marginally relevant. Your conclusions from this analysis, along with your analysis of the firm's recent financial performance, should inform your financial projections. I recommend completing this requirement by the end of week 6. It might be fruitful to think about the firm's financial and competitive situation at the same time.
5. Estimate the firm's weighted average cost of capital (WACC) using the techniques presented in the course. Be sure to explain how you arrived at your estimates of all components of the WACC. I recommend completing this requirement by the end of week 10.
6. Analyze a scenario in which your firm acquires Barnes and Noble, Inc. (BKS). Hint: remember that an acquisition of a whole company can be thought of as a capital budgeting "project" and evaluated accordingly. Assume that the acquisition is made for cash, for a 20% premium to the current stock price. Your firm has to retire any outstanding debt, but can also use any excess cash or investments to offset the purchase price. Assume also that the acquisition of BKS is considered an average risk project for your firm. Project the incremental cash flows that the acquisition will provide your firm with in perpetuity. If you want to add some extra challenge, you may assume that there will be some cost benefits from the acquisition. This is frequently described as "synergy" and typically takes the form of lower "overhead," or general and administrative expenses as a percentage of sales. Lastly, calculate the net present value (NPV) and the payback period for the acquisition. I recommend completing this requirement by the end of week 12.
7. Project the firm's income statement and balance sheet one-year forward, using the techniques learned in the course. If there are items on the firm's historical financial statements that you don't understand, read the notes to the financial statements in the original filings. Items that are not material may be ignored or consolidated into a "miscellaneous" category. I recommend completing this requirement by the end of week 13. The remainder of the project should then be completed as soon as possible.
8. Estimate the firm's free cash flows in perpetuity, the value of the firm's operations, and the intrinsic value per share of the firm's common stock using the free cash flow model. Hint: the "Free Cash Flow Valuation in Excel" video presented with the Chapter 7 material may be helpful. If you follow that model, there should be some consistency between the values that you use for the key value drivers in the model and the values that you estimate for your firm's projected financial statements for next year in item 7 above.
9. Perform a scenario analysis with 3 different valuation scenarios (base case, downside case, upside case) using Excel's Scenario Manager tool. Don't make it too complicated. Pick two or three key value drivers to vary in the scenario analysis. Put the results in a separate, well labelled table. Then give your best point estimate of the intrinsic value per share. Is the stock a buy or a sell? Explain why in one to three sentences.
10. Calculate the trailing P/E ratio and EV/EBITDA ratio that are implied by your estimated intrinsic value and use these calculations to as a "reality check" on your intrinsic value estimate. For example, if your estimate of intrinsic value implies a P/E of 100, then you should be able to explain why that makes sense in this one particular case or go back and come up with a more reasonable estimate of intrinsic value.
Attachment:- Assignment Files.rar