Discuss how appropriate this rate is as a measure of risk.

Students will use two models for this assignment:
1)
the eVal
Financial Forecasting Model for this assignment.
2)
EVA/MVA
Excel Model must be used for the EVA/MVA analysis.
The Excel eVal
model and EVA/MVA Excel Model
completed for the company assigned for the project must be submitted with the assignment.
YOUR SPECIFIC
ASSIGNMENT IS:
1. Introduction (The paper should begin
with a short introduction (explains the purpose of the paper and provides an
overview of the contents that follow) (5%
of the project grade)
2.
DCF Company Valuation (40% of the project
grade) –
Prepare a DCF
Valuation of the selected company using the eVal Excel Model and the
projections developed in Week 4 for the Assignment #2. The model has an
embedded worksheet that accommodates the Discounted Free Cash Flow stock
valuation.

There is a separate worksheet
titled “Valuation Parameters” (tab at the bottom of eVal Excel model). To
proceed with the Discounted Cash Flow valuation of the company, it will be
necessary to update and carefully
explain the Valuation Parameters in eVal.

Please review Learning materials
for week 4 about Cost of Capital.
1.
It will be necessary to estimate the
cost of equity capital. Apply the Capital Asset Pricing Model (CAPM)
Security Market Line to estimate the cost of equity capital. Note that you will
need the risk-free rate, beta, and the market return.
a) To get the current yield on 10-year Treasury
securities go to www.finance.yahoo.com -click on Markets – U.S.
Treasury Bonds Rates. You will use the current yield on 10-year Treasury
securities as the risk-free rate to estimate the cost of equity capital.
Discuss how appropriate this rate is as a measure of risk.
b) The market return is estimated as 5.35%. We will use this number as
the market return for the CAPM. Discuss how
appropriate this rate is as a measure of return.
c) Beta is listed in www.finance.yahoo.com on the
company’s front page. What is the beta listed for the company? What does it
mean?
d) Calculate the cost of equity using
the Capital Asset Pricing Model (CAPM) Security Market Line. Please
show your work.
2. Please review Learning Materials for week 4. We provided some several
tools/sources for estimations WACC.
Include your findings about WACC for your company in you project.
3. Let the value of contingent
claims on common equity remain at 0.
4. Use today’s date for the date of
the valuation.
5. Let the value of the dilution
factor for splits remain at 1.0.
6. For the cost of net debt use
either the average cost of outstanding debt or use an estimate of what you
think it would cost to issue new debt. Explain
the assumption.
7. Enter the cost of preferred
stock if any is outstanding, otherwise enter 0%.
8. For the cost of minority
interest use the same percentage as you use for the WACC.
9. The model instructs you to adjust the WACC so that the two equity
values are approximately equal.
There are two values computed by
the model on the spreadsheet Valuation Parameters: “Equity values computed
directly from flows to equity holders” and “Equity
values computed indirectly as the Entity Value less non-equity
claims” (line 24). The model instructs you to adjust the WACC so that the two equity values are approximately
equal. You need to change weighted average cost of equity capital in line 9
(cell J9) to make these two numbers in line 24 approximately equal.
In previous steps you complete
several estimations of the WACC. What estimation of the WACC work better?
9. Estimated price per share
The estimated price per share
(intrinsic value) then appears in the Green-coded cell at the top of the
worksheet.
Discuss,
interpret and explain the results of the analysis. This involves comparing the intrinsic value
of the company’s stock valuation to the current stock price and carefully explaining
any differences.

The analysis associated with the
two parts of the assignment needs to include:
Explanation of the Variables Used in the DCF Valuation (20% of the
project grade) – Explain and
justify all of the variables used in the DCF valuation. These would include, but are not limited to,
the growth rates, capitalization structure, CAPM calculations, cost of capital
components, WACC, etc.
Explanation and Interpretation of DCF Valuation
Results (20% of the project grade) –
Explain the results of the DCF analysis.
This should include an analysis of any difference between the results of
the DCF analysis and the current stock price

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