Dr. P.V. Viswanath

 

pviswanath@pace.edu

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  Courses / FIN 647 /  
   
 
 
 

FIN 647: Advanced Topics in Financial Management
Homework Assignments, Spring 2005

 
 

Assignments must be typed and submitted before the start of class on the due date.


Assignment 1: Corporate Governance

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.

Materials
Industrials
Consumer Discretionary
Consumer Staples
Transportation

You can find companies in these sectors by using StockVal 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?
  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


Assignment 2: Reworking Financial Statements

Pick a company satisfying the conditions specified in Assignment 1; as far as possible stay with the company you have chosen in Assignment 1.  Do either part A or part B, whichever will allow you to stay with your company.  (If you need to switch companies, you have to get permission from me beforehand.)  Make sure that you provide sources for all your data and other information.  You can use http://10kwizard.com; note, however, that access to 10kwizard.com is no longer free.  You can get the same information from the Library's databases, or from Yahoo or Edgar Online (http://www.edgar-online.com/).This assignment should be done in Excel.  Make sure that you provide sources for all your data and other information.  You can get the information from the Library's databases, or from Yahoo or Edgar Online (http://www.edgar-online.com/).

Please submit electronically as an Excel spreadsheet.

  1. Go through the company's most recent 10K . Search for research and development expenses.  If you find any, capitalize them, and make up a revised balance sheet, including the capitalized R&D.  Also, show a revised income statement.  (Include the original balance sheet and income statement, as well.)  Leave out all the details of these financial statements that are irrelevant for the purposes of this exercise; i.e., do not itemize them.  (Obviously, the left and right sides of a balance sheet have to match!)  Present all relevant information from the 10K.  If you need to go to any other sites, do so.  Explain all the assumptions that you make.  In particular, justify your choice of the amortized life of R&D for your company.
  2. Go through the company's most recent 10K. Search for operating lease expenses.  If you find any, capitalize them, and make up a revised balance sheet, including the capitalized operating lease liability.  Also, show a revised income statement.  (Include the original balance sheet and income statement, as well.)  Leave out all the details of these financial statements that are irrelevant for the purposes of this exercise; i.e., do not itemize them.  (Obviously, the left and right sides of a balance sheet have to match!)  Present all relevant information from the 10K.  If you need to go to any other sites, do so.  Make as few unsupported assumptions as possible.

Assignment 3: Estimating Betas

Download historical price information for a stock satisfying the conditions specified in Assignment 1 above, using the information given below, and estimate a beta for your stock.

Your ultimate objective is to estimate a beta using all available information. First of all, you should use historical price information to estimate historical betas. Compute a historical beta, first using daily data, and then using monthly data, for the most current five year period for which you can get data. Then split the period into two and compute betas for both subperiods. If you get beta estimates that are very different, explain why the estimates differ. Use the results of this analysis to decide how much data you want to use for your beta computation and whether you want to use monthly data or annual data.

In order to compute historical betas, you need to compute returns. For this, you can use the following procedure. Download daily closing price data on your stock for the periods required.  (You can get this information from Yahoo or other sources.)  Do the same for the NYSE Composite (^NYA) (If sufficient data is not available for the NYSE Composite, use the S&P 500).  Compute the return on the stock and on the index.  Then compute the daily return by using the formula, R8/11/99 = P8/11/99/P8/10/99-1, where Rt, Pt stand for the return and price on date t.  If a stock went ex-dividend on August 11, 1999, use the formula,  R8/11/99 = (P8/11/99+Div8/11/99)/P8/10/99-1, where Divt is the amount of the corresponding dividend. Compute monthly returns similarly.

Next, look at betas for other firms in the industry that your stock belongs to, to figure out whether your beta estimate makes sense. Compute fundamental betas or bottom-up betas, where appropriate. (See Prof. Damodaran's write-up on betas on his website for more details, as well as the textbook, Chapter 7).

Use Excel to run the regressions; interpret your results. (You can get more information on regression analysis from my website.  You may also want to consult the solution to Q. 2 on Midterm II for FIN 320 in Spring 2000.)


Assignment 4: Capital Structure

Compute the weighted average cost of capital for the company satisfying the conditions specified in the Corporate Governance Assignment (see Assignment 1 above.)

You can use the following exam problems for hints on what sort of information you will need, as well as on how to process the information. 

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.

 
 
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