Discussions in this course are meant to probe your thinking about the content and deepen your understanding. Each week there will be one discussion question or topic which relates to that week’s readings. Students should respond substantively to the prompt posed by 11:59 pm CT Friday. Responses will need to be informed by material taken from the text, required article readings, and as outside sources. Sometimes you will be asked to find related articles and read and summarize them, so plan ahead and begin your work as soon as possible.
You will be graded on the quality of your original response, as well as the quality of your interaction with peers. To get the full 15 points for the discussions, you must respond substantively to at least two of your classmates by the discussion closing date.
With the exception of Week 8, all discussion activities are due at 11:59 pm CT Sunday (Week 8 posts are due by 11:59 pm CT Saturday).
Additionally, there will be a “General Discussion” thread to use throughout the course. This will allow you to ask questions or make comments of general interest to others in the course.
There will be a dropbox assignment of a case/problem for Weeks 1, 2, 3, 5, and 6. These will consist of fictitious cases, article reviews, real-world case analysis, and/or data cases from the text that illustrate concepts that we are studying.
Dropbox papers involving articles and/research questions, should be formatted as a MS Word (.doc/.docx) file. They should be edited carefully for grammar and style, and also include a separate cover page and works cited/references, if relevant. All references should be properly cited using APA or Chicago Manual of Style.
Dropbox assignments, which are data cases from the textbook, require current market data for their inputs. All market data (e.g., prices, rates, shares outstanding, etc.) must be current and the date the data is retrieved must be included in your analysis. Any solution using data that is more than one week old will receive a grade of 0.
Dropbox assignments will be due at 11:59 pm CT Sunday of their respective weeks (Week 8 dropbox papers are due at 11:59 pm CT Saturday).
Firm Financial Analysis Project
The purpose of this project is to give you the opportunity to apply many of the concepts and tools that we are learning throughout the course. You will have the opportunity to utilize real-world data in order to complete a number of objectives:
- Assess the current financial performance of a firm.
- Create and calculate various financial measures for a firm, including the cost of various sources of financing and the Weighted Average Cost of Capital (WACC).
- Determine the current valuation of a firm.
- Analyze the firm’s capital and risk structure, along with the condition in the macro environment, to strategize about growth/investment opportunities and the optimal financing methods to pursue such activities.
A good source of real-world data can be found using the business databases on the Stafford Library’s website, specifically the Standard and Poor’s NetAdvantage and ValueLine Research Center, along with the firm’s 10K, Morningstar.com, Yahoofinance.com, and other financial websites.
Your final Firm Financial Analysis Project should compile all components covered above with edits and feedback from initial grading made if requested. Quantitative data compiled must be present to support your analysis and formatted in a way that is clearly understood. Raw data may be included in your submission(s) using MS Excel.
Your final project should be formatted as a MS Word (.doc/.docx) file that has been edited carefully for grammar and style, and include a cover page and a complete bibliography and index of data. All references should be properly cited using APA or Chicago Manual of Style.
Selecting a Firm
Students will select a firm to analyze during Week 2. Students should post their firm selection to the General Discussion to insure that no two students are analyzing the same firm. The firm must meet the following criteria:
- The firm should be listed on the NYSE or NASDAQ. Further, the firm should be included in the S&P 500 or the Russell 2000.
- The firm should have a history paying dividends and be currently paying a dividend.
- The company chosen must begin with the same letter as either your first or last name—e.g., if your name is Bart, a possible firm choice would be Boeing.
Part I: Firm History and Overview (due Week 4)
Develop an overview/history of the firm that you have chosen, as well as the industry your firm operates in. You should include information that describes the market structure and competition in the industry, along with the position of your firm within this industry – i.e., is the firm one of the leaders or is it a niche player? Is the firm one of the medium-size firms in the industry? Part I will be worth 30 points.
Part II: End-Point Financial Analysis (due Week 4)
Using historical financial statements (income statements and balance sheets) for the firm, analyze the financial performance and changes to the firm over a ten-year time period using an end-point analysis framework similar to that used in the analysis of Coca-Cola (Week 2 dropbox assignment). You should calculate the same ratios and financial measures as were provided for the Coca-Cola case.
Next, you will identify the major changes in the firm’s financial performance over this time period. Include an analysis of: 1) overall changes/growth in the firm’s revenues, assets, and liabilities; 2) common-size statements; 3) ratio analysis; and 4) analysis using the DuPont model.
You will be required to provide the conclusions regarding which way the major ratio categories are trending. An acceptable conclusion might be, for example: “profitability has increased over the last five years as evidenced by increasing net margin and gross margin ratios. This is the result of a decrease in cost of goods sold, higher margins because of increased market share, etc.” You should also research the notes to your company’s 10K to determine the probable causes of these changes (“Leverage increased because the company issued $50M in bonds to pay for a plant expansion.”). Part II will be worth 70 points.
Part III: Working Capital Analysis (due Week 4)
Using the same financial statements from your Financial Analysis (Part II), provide an analysis of the firm’s working capital policy and changes to this policy over a ten-year period. Your working capital analysis should include the following: 1) overall level and change in WC over the time period and the factors that caused these changes; 2) calculation of the Cash Conversion Cycle for the beginning and ending period and a discussion of causal factors and implication of these changes; 3) overall assessment of the firm’s working capital policy (i.e., is it conservative, moderate, or aggressive?). Compare your results to the firm’s industry averages. Part III will be worth 40 points.
Part IV: Determination of WACC (due Week 7)
Using the principles and tools outlined in the textbook, form an estimate of the Weighted Average Cost of Capital (WACC) for the firm. In order to complete this task, you will need to do the following:
- Determine the cost of debt: Using information from the firm’s website, annual report, the website Investing in Bonds (link available in the Content area), and the library database sources, determine the ‘average’ rating of your firm’s bonds and the current YTM on a composite of these bonds. Based on this information, estimate the current cost of debt for the firm. Explain the approach and procedure you used to make your determination and what this number means.
- Determine the cost of equity: Determine the required rate of return for your firm using the CAPM. Explain the approach and procedure you used (and justification for the sources of inputs used for your model) to make your determination and the meaning of this required rate of return.
- Determine the capital structure of the firm: Determine the market value of the firm’s debt and equity. Explain the approach and procedure you used and use these values to determine the weights for the WACC.
Finally, provide an overall explanation for your results and how the firm will use this WACC. There are resources available in the Content area that will help guide your determination of WACC. Part IV will be worth 80 points.
Part V: Stock Valuation (due Week 7)
In chapter 9, we learned how the dividend-discount model can be used to determine the value of a firm’s equity, or the current price of a share of stock. Use this model to estimate the value of a share of your firm’s stock and compare this estimate to the current market value. To do this, you will need to do the following:
- Estimate the firm’s stock price using the dividend-discount model: Use an investment source (some have been provided in the Content area) and find: 1) the current dividend; 2) analyst’s estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firm’s historical growth rate or the formula “g=ROE x b”.
- Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM).
- Compare your result to the current market price of your firm’s stock. Provide analysis and an explanation of how they compare and explain any differences you observe.
Part V will be worth 50 points.
Part VI: Capital Budgeting Analysis, Capital Structure Analysis and Funding Growth Strategies, and Bibliography and Data (due Week 8)
Capital Budgeting Analysis (30 points): You have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of your current EBITDA and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following:
- Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years.
- Current return on equity is 15%
- Current WACC is 10%
- Tax rate is 30% (constant)
- 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values.
- Residual value for this operation is to be 2x current EBITDA in year ten.
Create an after-tax cash flow analysis to answer the following:
- Economic analysis: is this a fundamentally sound investment?
- Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?
- Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion.
Capital Structure Analysis and Funding Growth Strategies (80 points): Imagine your firm has some attractive investment opportunities that it is considering. The capital budgeting process has been completed and found that these projects have a positive NPV and are desirable. The firm must raise financing for the projects in the amount equal to 5% of the current level of its total assets. As you know, these funds can come from a number of sources: operations, short-term debt, long-term debt (new bond issues), or equity (new stock issues).
Your task is to decide where funds for these projects should come from based on your knowledge of the firm and your knowledge of the current state of the economy (i.e., level of interest rates, state of the stock market, future prospects for the economy/firm). This section is worth 80 points. Your analysis should answer the following questions:
- How much must your firm raise for the investments to be undertaken?
- How will you determine where the funds should come from? Provide analysis for the following areas:
- Current capital structure of the firm, specifically, you must cite how some of the ratios you calculated in Part II will influence your decision.
- Federal Reserve policy and interest rates, meaning what are current borrowing interest rates and what direction do you believe these will trend in the near future?
- Stock price and state of the stock market, meaning are current stock prices high? Low? How could a firm’s financing choice(s) be impacted?
- Working capital policy
- Profit/loss situation and operating cash flows
Bibliography and data compilation (20 points): to complete submission requirements, compile a detailed bibliography and index of the data and sources you’ve collected for the project.
With the exception of Week 8, all components of the Firm Financial Analysis Project are due to the appropriate dropbox or discussion by 11:59 pm CT Sunday. The final submission of the Firm Financial Analysis Project is due 11:59 pm CT Saturday of Week 8.