Corporate Business Finance

Assignment

Learning outcome  1: Understand the role of finance functions within a business.

Learning outcome  2: Understand how forecast the financial statements for a business and interpret their significance for decision-making purposes.

Learning outcome  3: Be able to conduct a ratio analysis to assess their implication on investment decision and financial performance of a business.

Learning outcome  4: Be able to analyse and discuss the working capital cycle of a business.

Learning outcome  5: Valuation basics and their link to return on capital measures.

Project Introduction

In this project, you will select a publicly traded US-based corporation and analyze it along several dimensions related to corporate finance. More specifically, you will estimate its cost of capital (WACC) and per-share value, as well as offer comparisons among multiple financial ratios between the firm and its peer group. In particular, the analysis will stress the links between analysis of financial statements, firm behavior, and value creation.Your submission will include your report (preferably PDF, or else Word) and then also the Excel file on which you do your calculations.

Overview:

• Introduction
• Summary of External References
• Cost of Capital Estimation
• Financial Ratios and Interpretation
• Valuation Estimation
• Pro Forma Statements
• Conclusion

1. INTRODUCTION

In this section you will introduce your firm, list all external resources or references consulted, and then explain your selection of its peer group. Ideally, the peer group can consist of your firm plus 3, 4, or 5 other firms (per your preference).
There is no need in the introduction to summarize your results.

Specific guidance:
• As this is your instructor's first semester in Oman, please select only a US-based firm.
• Do NOT choose a bank or firm with a financing wing (such as General Motors or Ford Motors). If in doubt, you may ask your instructor or try a Google search.
• Please avoid firms that have ZERO debt.
• Your introduction of the firm should tell what it does, its size in terms of market capitalization and revenues, and then any other details that you think are relevant for understanding its basic business approach such as market share or recent growth trajectory.
• Please try to find at least one external reference that provides insights into the firm. In fact, doing so will make your job easier! The most obvious such references are the ‘Management Discussion and Analysis' (MD&A) from the financial statements or a credit rating report from one of the major rating agencies (Moody's, Fitch, S&P). Other eligible references are detailed equity valuation or a business profile.
• The peer group should consist of similar firms. You should briefly justify them as true peers of your chosen firm.

2. SUMMARY OF EXTERNAL REFERENCES

It is frequently the case that we can quickly come to an appreciation of a firm's competitive position and strategy by reading an external reference. As mentioned previously, obvious potential references are the ‘MD&A', report from a credit rating agency, equity valuation analysis, or business profile.

Your summary here should include anything relevant to understanding the financial ratios, the competitive position, market strategy, etc etc. In other words, look for details that are interesting and / or illuminating that might otherwise not be obvious.

Your instructor will provide an example of references and summary.

3. COST OF CAPITAL (WACC) ESTIMATION

Here the goal is to calculate the weighted-average cost of capital (WACC). Relevant inputs are the cost of equity, the cost of debt, the respective weights (based on market values), and the tax rate faced by the company.

You may consult the slides from Week 7 as a guide for the steps.

Specific Guidance:
• For the cost of equity, you can use CAPM. For the risk-free rate, you may assume it to be the yield on a 10-year US government bond (which you can look up online
- please cite the source). For the market premium, you may assume for simplicity that it equals 5%. For the beta, you should do the unlevering-and-relevering procedure from the slides. You may use either the average or median unlevered beta within the estimation. You may collect the initial beta estimates from any

online source such as Yahoo Finance or Investing.com, but please cite the source. The betas for you firm and its peers should come from the same source.
• For the cost of debt, please calculate a "synthetic rating" based on the method in the slides. However, if you are able to find a yield quotation for a debt instrument of the firm that has at least 5 years to maturity, then you may use that yield in your final WACC calculation instead.
• For the weights, remember to be careful with units such as millions and billions! Also see the slides for "What counts as debt" as a guide.
• For the tax rate, you may either use the average of taxes / pre-tax income of the past few years, or else sometimes the firm itself will mention its own tax rate in its financial statements.
• In your report, you should briefly outline the steps and calculations, and show a table or screenshot of the peer group unleveraging-releveraging technique. If you use a yield quotation for the cost of debt, then you should also include a screenshot.
• With respect to the beta and overall cost of capital, does it make sense to you on an intuitive level? That is, if your firm has a high beta, can you explain why it might be high risk? If a low beta, why low risk?
• In your Excel file, your WACC calculations should be a separate tab, titled ‘WACC.'

4. FINANCIAL RATIOS

Here you will conduct analyses on two types of common-size financial statements. First, you will do ‘vertical analysis' your own firm's balance sheet and income statement in which you look at growth trends in recent years (this is very fast). Next, you will look at common-size ‘horizontal' financial ratios of your firm and its peers.

Specific Guidance:

• Details on specific financial ratios will be forthcoming as we cover them in our class lectures each week.
• Of course, you should comment on the ratios as well as simply provide the tables. You should highlight any differences and, if possible, offer interpretation.

• *** Important Note on Implementation (Read!): For any tables that involve the entire peer group, you are welcome to use standardized financial statements from any source. For example, SimFin offers free standardized financial statements after registration. Furthermore, in the construction of these tables, you may collaborate with other students or student whose own firm resides in the peer group. However, for parts of the project that focus solely on the specific firm, you of course must work alone, and preferably you should use the firm's own official financial statements rather than anything from a standardized source. Any standardized statements for peer analysis should be mentioned in your introduction.

5. VALUATION

Here you will conduct three distinct rough estimations for the value of the firm's stock on a per-share basis. All three estimations will involve the firm's Free Cash Flow to the Firm (FCFF) and its WACC (which you calculate in an earlier section). For each of the three calculations, you will first calculate firm value, then adjust to get equity value (we will cover the details later), and then divide by shares outstanding to get price per share.

We will discuss later the specifics for the valuations. However, the first two will be quite easy, whereas the third one will require you to incorporate your estimated ROIC, one of the financial ratios.

You should briefly explain your results and compare the estimated values with the actual current price per share.

As with the calculations for WACC, your Excel should include a separate tab, "Valuation."

6. PRO FORMA STATEMENTS

Here you will calculate a one-year-ahead pro forma balance sheet and income statement based on sales projections. You will also calculate the sustainable growth rate and EFN (external financing needed).

This portion of the project is dependent on class progress. The instructor may waive it per his discretion (subject to class notification, of course).

7. CONCLUSIONS

Here you should not only summarize your major findings from each section, but also identify any connections between the results from the individual sections.

{For example, do any useful details from your external references relate to your findings for the financial ratios? Does the PE ratio seem justified to you in light of your analysis? Do the firm's policies in terms of its debt load, payout ratio, and reinvestment ratio seem sensible to you? etc etc. These are just examples of connections you may make - the section is intended to be open-ended.}