Prepare a 7-page minimum (11⁄2-spaced paragraphs) equity research report with corporate financial analyses and firm valuation. Your discussions and findings should be based on your original insights, and your own analyses and findings.
Pick a non-financial, publicly traded company, which has comprehensive business information and financial data available from financial statements and resources (see, e.g., http://www.morningstar.com/cover/funds.aspx, http://finance.yahoo.com/, etc.). Note: Do NOT pick financial companies or banks as they require different sets of techniques/analyses.
Organize your equity research report using a systematic approach of business analysis, financial analysis, firm valuation model with sensitivity analysis, and policy analysis with all of the following five steps:
Step (1) Business Analysis
Perform a business analysis of the company you selected for the equity research. Based on your own insights and findings, discuss all of the following:
(1.A) Discuss major Value Drivers (including assets, cash flow and growth options) of this firm. (1.B) Perform calculation of External Financing Needs of this firm. Discuss any issues or challenges related to corporate financing strategies of this firm.
(1.C) Apply the M-M Theorem (see Class #1) and identify various types of Capital Market Imperfections (such as asymmetric information, agency cost, corporate control and governance, financial distress, financial market inefficiency, etc.) faced by this company.
Learning Outcomes: Fundamental concepts of corporate finance, such as corporate financial system, firm value creation, capital market imperfections, and the M-M Theorem (see Class #1).
Step (2) Financial Analysis
Perform your own financial analysis and provide “Financial Highlights” of the firm using major financial ratios (with the “2-step approach”) and other relevant information to understand the firm’s characteristics, financial conditions, firm performance, and capital market imperfections (see Class #2 for applications of financial ratio analyses). Examples of financial data and ratios should include (but are not limited to) the following: firm size, operating performance ratios
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(ROE, ROA, etc.), liquidity ratio, leverage ratio, efficiency ratio, dividend/payout ratio, market multiples (Forward P/E, P/B, etc.), analyst coverage, institutional ownership, among others. Important Instructions: Your financial analyses should include financial ratios such as leverage ratios, liquidity ratio, profitability ratio, dividend ratio, efficiency ratio, market valuation ratio, etc. Provide summary tables of the key financial ratios with proper interpretations and application of the “2-step approach” to ratio analyses (see Class #2): How do these ratios compare to (i) the overall market average; and (ii) the firm’s major comparable firms or industry average?
Do your financial analyses reveal any market imperfections? Provide interpretations of your results with your own insights and understanding. Importantly, your financial analyses should be used to identify different types of market imperfections. For example, examine liquidity and leverage ratios for risk of financial distress; examine financial analyst coverage and dividends for information asymmetry; examine Free Cash Flows, dividends, and institutional ownerships for agency costs and corporate governance problems.
Learning Outcomes: Techniques of corporate financial analyses, including the “2-step approach” to financial ratio analyses (see Class #2).
Step (3) Firm Valuation with Sensitivity Analyses
Based on your own insights and assumptions, perform firm valuation models to estimate the value of this company (i.e., the present value of the firm) with sensitivity analyses. You valuation model should include: (i) the Free Cash Flow method; and (ii) the Economic Profits (EP) method. Importantly, provide detailed discussion on all of the key assumptions (such as Sales Growth Rate, Long-Term Growth Rate, Beta, Cost of Capital, Reduction in Cap Exp, etc.) used in your firm valuation model and forecasting. Most importantly, provide Sensitivity Analyses for the results of firm valuations (e.g., based on alternative values of Sales Growth Rate, Beta, Reduction in Cap Exp, etc.). Equally important, provide detailed interpretations of the firm valuation results and sensitivity analyses.
Important Instructions: You should provide detailed discussion and justification of all of your forecasting and valuation assumptions (e.g., your assumptions of Sales Growth Rate, Long-Term Growth Rate, Beta, Cost of Capital, Reduction in Cap Exp, etc.) as clear as possible. Importantly, your firm valuation should include Sensitivity Analyses (e.g., based on alternative values of Sales Growth Rate, Beta, Reduction in Cap Exp, etc.). Apply the firm valuation spreadsheet models with forecasting (including the discounted FCF method and Economic Profits (EP) valuation), which will be posted in Blackboard. For a complete valuation analysis, you should provide all of the following: (i) Detailed and clear discussions on all of the assumptions of your forecasting and
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firm valuation models. (ii) Completed firm valuation models (including FCF and EP valuation models) with sensitivity analyses. (iii) Most importantly, perform sensitivity analyzes for different/alternative assumptions and parameters used for forecasting and valuation.
Learning Outcomes: Important skills to conduct professional equity research with applications of firm valuation model and sensitivity analyses (see Class #3 to Class #5).
Step (4) Policy Analysis and Stock Recommendations
In your own words, provide your original policy recommendations on corporate financial management of this firm. Your own policy recommendations should include all of the following: (4A) Short-term financing and financial planning (e.g., management of cash, working capital, corporate liquidity, etc.);
(4B) Long-term financing and capital structure decisions (with applications of Capital Structure Theories);
(4C) Dividend policy (with applications of Dividend Theories).
As the management of this firm, how would you manage financial planning, corporate financing strategy (including capital structure decision), and dividend policy of this firm? Provide your policy recommendations with your analyses and results in Steps (1) to (3) above, as well as applications of corporate finance theories (e.g., the M-M Theorem, Capital Structure Theories, Dividend Theories, Corporate Governance, etc.).
Important Instructions: Apply corporate finance theories/tools learned from FIN 4300, such as the M-M Theorem, Financial Planning, Capital Structure Theories, Dividend Theories, Corporate Governance, etc.
(4D) Stock recommendation: As a financial analyst, what would be your own stock recommendation (e.g., buy/hold/sell/others) of this company based on your findings in Steps (1) to (4) above?
Learning Outcomes: Corporate financial management and policies (see Class #6 to Class #8). Integrate all important concepts and tools in Steps (1) to (4).
Step (5) Conclusion and Learning Outcomes
In concluding section, please summarize:
(5A) the key findings of your equity research; and
(5B) the key learning outcomes such as new ideas/concepts, corporate finance theories, financial analyses/models, and implications learned from this individual research assignment.
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Important Note and Evaluation Criteria: All analyses and discussions must be original, well- organized, concise, and integrated with analytical frameworks and tables of summary statistics. Explain and present all your assumptions, calculations, and ideas as clear as possible. Original findings, rigorous analyses, critical thinking, innovative methods, and insightful discussions are highly valued.
Your write-up will be critically evaluated based on the following criteria:
(I) Originality, rigor, completeness, and clarity of your own analyses including financial analyses, firm valuation model, sensitivity analyses, and other analytical tools;
(II) Theoretical applications, qualitative insights, and policy implications of your original findings; and
(III) Your learning outcomes and demonstrations of successful applications of theoretical concepts, analytical tools, and financial-quantitative analyses learned from this course.
Final Suggestion: Utilize your access to CSUEB library (and their electronic resource), financial statements, financial data and information, corporate announcements, etc. Be original, critical and creative. Have an enjoyable and productive research-learning experience!