Introduction to the Finance Company Project
Introduction to the Finance Company Project Your team is required to analyze the future business and economic prospects of a major, publicly traded corporation using financial concepts and techniques as well as the concepts and techniques from other business areas. Make sure any statements you make in your analysis are consistent with the knowledge base of finance. Also please include your calculations (including spreadsheets), data sources (be specific, including date and page number(s)), and assumptions (explain your rationale) in the appendices.
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While your analysis should be geared toward finance, nobody, of course, can make business decisions using solely finance techniques and concepts, so where applicable, incorporate techniques and analysis from other business fields. The following is a list of the minimum requirements for your project. Additional credit will be given for creativity and analysis beyond the minimum requirement. If you have any questions, please e-mail them to your instructor. (1) EXECUTIVE SUMMARY:
Provide a one (1) page executive summary which summarizes your findings and provides a recommendation whether to buy or not to buy the stock and the debt securities of the company (two separate decisions). (2) COMPANY INTRODUCTION: Provide a one page (1) introduction to your company including: company history, strategy, main products & services, primary markets & customers, major competitors, industry overview, and other relevant information. (3) FINANCIAL ANALYSIS: Conduct a two-year financial analysis of your company using financial ratios. Include a Du Pont analysis. You can refer to your Essentials of Business I Corporate Annual Report project for the appropriate ratios. ) Comment on the financial health of the company. Please look at ratio trends and compare to industry average. (4) WEIGHTED AVERAGE COST OF CAPTIAL (WACC): Estimate the components of the cost of capital for your company using market data. a) For the cost of common stock, analyze using the dividend growth model and CAPM. To determine Beta, first use published sources. Next, calculate your own beta estimate using regression analysis with 52 weeks of daily data.
See the textbook’s website to download the regression tool kit from Chapter 6. If the published estimates and the results of your regression analysis differ, justify your final choice of Beta for the WACC determinations. b) Calculate the cost of preferred stock c) Calculate the cost of debt. Recall that you do NOT use the coupon rate, but instead use the YTM for each bond issue. d) Determine the appropriate weights for each of the categories using market values. e) Calculate the company’s WACC. f) In your opinion, has the company minimized its WACC?
What could it differently? Recall that more debt increases the risk of bankruptcy and more equity means the flotation costs of issuing stock. g) Provide reasons why or why not the current WACC is appropriate for future use by the company. If not, explain which WACC should be used for future business decisions. (5) FUTURE CASH FLOWS: Prepare a three (3) year forecast of estimated future cash flows for you company and give valid economic/business reasons for your projections. This means you will have a statement of incremental cash flows.
One year in the future, develop a future market value of equity and an estimated future price per share for the company’s common stock. Write a 1 page analysis, which incorporates marketing, accounting, sales, production, management, technology, etc. information into your estimates of future cash flows. Please cite 2-3 media sources for this analysis. a) Perform a what-if analysis for your cash flows using at least one of the following: sensitivity analysis, scenario analysis, or simulation analysis. Also, provide a written summation of your what-if analysis. ) Collect and evaluate information on inflation estimates and incorporate those estimates, as you see fit, into your cash flow estimates. c) Comment on how future cash flows maybe be affected by information contained in the footnotes to the financial statements. Footnotes are often more interesting than the rest of the financial statements and provide valuable information. d) Do a brief analysis of your competitors, the prospects of their future cash flows, and how that affects your company’s cash flows. e) Conduct a “post-audit” of one (or more) of your company’s major past projects and ncorporate this qualitatively into your estimates of future cash flows. (6) HISTORICAL STOCK PRICE: Review briefly the historical performance of the company’s stock price. Explain if this affected your analysis. (7) SECURITY ANALYST’S REPORTS: Evaluate what securities analysts are saying about your company, and explain if you agree or disagree with their recommendations. What is the sentiment for your stock: are there a lot of buy recommendations or are there a lot of hold/sell recommendations? (8) DIVIDEND and CAPITAL STRUCTURE: ) Analyze the current dividend policy of your company. If it doesn’t pay a dividend, should it? b) Analyze the target capital structure of your company including bank loans, leases, and other financial securities issued in addition to preferred stock, common stock, and debt. Why do you think it maintains the capital structure it does? Do you think it is an optimal capital structure? If not, what do you think would be? Justify your answer. c) Does your company have a substantial degree of informational asymmetry (assets which are hard for outsiders to value)?
Do you think this affects the capital structure of your company? (9) CORPORATE GOVERNANCE: Comment on the corporate governance of your company. Is management doing a good job? Does management hold shares in the company? What is their percentage of equity ownership? How much stock do institutions own? Do you think these factors affect your company’s performance? (10) MERGER and INTERNATIONAL STRATEGY: Describe and evaluate the merger and acquisition strategy and the international expansion strategy for your company.