you have to prepare a professional report of analysis on this company. You will be analyzing and dissecting this company’s business, finance, operations, and risk in order to come up with a valuation.
IMPORTANT: Please save your work as frequently as possible. A sudden crash or shutdown will not be a valid excuse for extension.
Requirements:
i) Professionalism: To become a “professional” rather than an “amateur,” we can start by emulating the looks of professionals. Make your report look good, look like something done by a professional. In the business world, the looks are just as important as the content. People won’t bother to look at unattractive, messy reports, no matter how excellent the content might be.
ii) All reports must be completed in Microsoft Word: 8-10 pages long, single-spaced, Times New Roman, and 12 pts. As for other things, go out of your way and be creative. But don’t overdo it. Sometimes, the simplicity is the virtue. Tables, charts, graphs are all welcome if they serve appropriate purposes and needs. The appropriate use of italics, bold, and underlines is also permitted. You may also use color.
iii) You may have a cover page but it won’t count towards the 8-10 page length requirement of the report.
iv) Math equations and formulas can be typed with the math applications embedded in Microsoft Word. Different versions of Word support different equation tools. For help, please consult the Google search.
v) You’re required to show all your calculations to prove that you did your own work. However, if they make the report look messy, please make the appendix section at the very end of the report where you can show me all your calculation (tables can be imported from Excel and be modified to look nice). Use your judgement to decide whether showing the calculation is critical as part of the report or is more appropriate in the appendix. The appendix does not count towards the designated length of the report. http://finra-markets.morningstar.com/MarketData, search for your company, and download the Excel files of income statement, balance sheet, and cashflow statement on the ‘Financials’ tab by using “Export” function on the page. When you export, the Excel files will be automatically exported as ‘.csv’ files. Please re-save your work as .xls, .xlsm, or .xlsx file to fully enable the Excel functionalities. On a blank sheet, you can choose a cell, simply type in the equal sign ‘=’, and select the cells that contain the relevant numbers for computation. Please consult any basic Excel tutorial online for help.
i) Calculate the liquidity, leverage, turnover, profitability, and market value ratios for the most recent two years (check the fiscal year and month.). In total, you should calculate 20 (ratios) x 2 (years) = 40 ratios. Please also provide the formulas and the numbers you use to calculate each ratio in the appendix. ***Note*** To calculate EPS, P/E, P/S, and ME/BE, you will need the number of shares outstanding for that year. On the income statements on Morningstar, you will see the number of weighted average shares outstanding in two versions, basic and diluted. Please use the basic shares.
[1] monthly historical prices during the same period. Using the adjusted closing price for both series, calculate the monthly returns for the company and the S&P500. Show a snapshot of your work in this part (5-10 lines, not the entire series) in the appendix.
vi) Calculate the variance of the market returns, covariance between market and the company. Then, calculate the company’s beta.
vii) Use the CAPM formula to calculate the cost of equity. Assume that the riskless rate of 2% and the average market return of 8%.
We can compare the costs of equity obtained using two different approaches and determine what to do with them.
viii) In many cases, we use the CAPM cost of equity. However, we may also take the average of the two values (cost of equities from (iv) and (vii)). What is the averaged cost of equity?
Part IV (40 Points): Equity Valuation (2-3 pages)
We are going to value the stock of the company using the methods learned in class and compare it to the market price (the adjusted closing price on the last trading day of 2020). Please review the entire content on equity valuation before proceeding.
[1] SPY is an exchange-traded fund (ETF) that tracks S&P500 index very closely. It’s a good but imperfect proxy for the market portfolio.
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