Dr. P.V. Viswanath



Economics/Finance on the Web
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FIN 647: Advanced Topics in Financial Management
Homework Assignments, Summer 2008


Assignments must be typed and submitted before the start of class on the due date. You can get much of the required information from the Bloomberg machine in W404, the GPACT lab. You may also want to download and print this Bloomberg help file as a reference.

Corporate Governance Project

Pick a US company that belongs to one of the following sectors.  You should stay with this company for the assignments that follow as well.  You must confirm your company selection with me before you start your analysis.

Consumer Discretionary
Consumer Staples

You can find companies in these sectors by using Bloomberg or a similar program.  The company that you choose should satisfy the following conditions:

  • Make sure that the market value of your chosen firm is at least 0.75 billion dollars.  
  • It should have public debt, preferably publicly traded.

Write a report on Corporate Governance at your company.  Start your report by providing an executive summary. Then, a brief description of the company (about half a page), taken from Yahoo or another source.  Use another two to three pages to present a well-organized report on "Who own/runs your firm."  Make sure to put the important analyses up front; all detailed information, including tables, particularly if they are long, should go at the end as an appendix.  If the table or the graph is small, then you can include it up front, particularly if you're going to refer to the contents of the table in detail.  In any case, you should not include any information in Appendices that you don't refer to at all in the text.

Keep in mind that you are analyzing the company. Providing a lot of data is not valuable, in and of itself. Also, using information and "analysis" indiscriminately from the company's website is also not of much use. Ask yourself regarding anything that you include in the report -- what is this telling me about the company's corporate governance, viz. the structure of the company, broadly defined, and how it affects the optimal working of the company.

And don't forget to use spell check and grammar check!

Some of the questions that you should think about in writing up your report:

  1. Who are the institutions holding the stock?  (Such information can also be found on Yahoo at  http://biz.yahoo.com/hd/m/msft.html for Microsoft -- msft; replace msft with the symbol for your stock.)  What conclusions would you draw from the quality and number of these institutions, as well as the  proportion of the firm's stock that they hold? Please don't give lists of names that have no independent meaning!
  2. How many analysts follow the stock?  What implications would you draw from the quality and number of analysts?
  3. Who are the mutual funds that hold the stock? (Check http://biz.yahoo.com/hd/mf/m/msft.html; replace msft with the symbol for your stock.)  What conclusions would you draw from this information? 
  4. Are there major conflicts of interest in the running of the company that have not been addressed by compensation contracts, etc.?
  5. Have there been major events in the life of the company recently that are indications of conflicts of interest?
  6. Get information on the covenants/bond indentures of the company.  Can you conclude that the bondholders are well protected from stockholder aggression?
  7. How does the company see its role as a corporate citizen?  For example, is it respectful of its social obligations?

You can use the following analysis of Disney, Inc. done by Aswath Damodaran, in 1997.  Focus on the first two sections, Corporate Governance Analysis and Stockholder Composition.  This is a very good model to use.

You can use the following general sources:

For company specific information, 

  • You can search the Wall Street Archive.  
  • You can use the Lexis-Nexis database from the Pace Library homepage (go to http://library.pace.edu, click on Databases, then choose Lexis-Nexis Universe from Complete Alphabetical Listings) to search for information regarding your company.  You can select Business News, then search using your company name, as well as other useful keywords, such as executive compensation or shareholder rights, or other terms that you can come up with based on your reading of Chapter 2 and my webnotes/slides.  
  • Search Lexis/Nexis, focusing on publications such as the Economist, Forbes, Fortune, etc. using appropriate keywords.
  • You can also look at the Annual Report of the company, which you can find at the company website (you can find the company website by searching on Google, or by going to http://biz.yahoo.com).
  • Search on Google using the company name and relevant keywords.
  • Use the information on analysts at http://www.zacks.com 
  • Use information that you may be able to find at http://biz.yahoo.com or at http://www.marketguide.com
  • You can get information from Bloomberg.

Capital Structure Project

Explain the capital structure of a company satisfying the conditions specified in the Corporate Governance Project (see above.)

Here are some kinds of information that you may want to gather in accomplishing this project. However, if you simply present your answers to the questions below, you will have failed in the objective of the project and will not get a passing grade. The point is to use the information below to understand why your company's capital structure has the form that it has, to look into whether the current capital structure is objective, and, if not, what needs to be done to correct it. All of these need to be substantiated using the information you will have collected in responding to the questions below.

The structure of the report should be focused on your arguments. Simply providing data that is not relevant to your arguments is pointless. Also, expressing financial platitudes without relating them to your company is also a waste of your time and mine.

  • Compute the debt-equity ratio for the firm
  • Look at the kinds of securities that it has used for financing its operations
  • Look at changes in its financing strategy over time.
  • Look at the kinds of assets that the firm owns.
  • Is the firm a growth firm or is it a stable firm?
  • What stage of its life-cycle is it in?
  • What sorts of investors own its securities?

    In order to explain your findings, you may find it useful to refer to the different theories of capital structure that we discussed in class.

Among other sources, you can also use:

Make sure your report is well researched, well analyzed, based on theory, and written up in a form easy to understand.  You may submit an Excel spreadsheet to accompany your work, but the main results of the report should be written up in a Word document.

You may use Damodaran's spreadsheets. However, it will be your responsibility to explain each of the assumptions that he explicitly or implicitly makes.

Equity Valuation

To value the stock of the company, Home Depot (HD)

To begin with, go over the slides on Firm Valuation, which can be found on the class website. You may also want to read my webnotes on Valuation.

Then get the firm's 10-K for the latest year. (Some of this information may also be available on Yahoo or one of the other sites, as well as on the Bloomberg terminal.)

FCFE = Net Income + Depreciation - Capital Spending - D Non-cash Working Capital - Principal Repayments + New Debt Issues

Information regarding Net Income can be found from the Income Statement; Depreciation can be found in the Cash provided by operations part of the Statement of Cashflows; Capital Expenditures can be found by looking at the Cash provided by investments portion of the Statement of Cashflows; Principal Repayments and New Debt Issues can be found from the Cash provided by financing portion of the Statement of Cashflows; Change in Noncash Working Capital can be found from the Balance Sheet.

(Historical FCFE can be computed using the information in the Statement of Cashflows,
FCFE = Cashflow from Operations – Capital Expenditures – Net Debt paid (short-term and long-term) + Changes in Cash
However, for forecasting purposes, the previous formula is more useful, since we can forecast each component separately and relatively independently.)

  • Compute Cashflow to Equity for HD for the last four years (2005-2008), using the formula given above. (The financial year ends Jan. 31.)
  • Can you find any stable relationships between between Net Income and Change in Non-cash Working Capital, Net Income and Capital Expenditures, Capital Expenditures and Depreciation; and Capital Expenditures and Change in Non-cash Working Capital?

(You will need 5 years of financial statements to compute FCFE for 4 years. You can get older 10Ks by going to my home page, clicking on Economics/Finance on the Web from the top menu, then clicking on Filings with the SEC; then choosing Search for Company Filings, then click on Companies and Other Filers. Use the ticker symbol, HD and then you can retrieve all SEC filings for HD, since they started filing. If you put in a date in the cell to the right where it says "Form Type" etc, you can go directly to the year that you're looking for. Keep in mind that the filings will take place several months past the end of the financial year.)

Forecast the FCFE for future years.

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