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End-of-chapter
Problems
- Chapter 4: Problems 2, 4, 7, 11, 13 (problems 2, 4, 7, 12, 14 from
the pdf version of the chapter)
- Chapter 7: Problems 2, 6, 10 (problems 2, 6,10 from the pdf version
of the chapter)
- Chapter 8: Problems 5, 8, 13, 19, 20, 24 (problems 5, 8, 13, 19, 20,
24 from the pdf version of the chapter)
- Chapter 9: Problems 1, 4, 5 (same problems in pdf version)
- Chapter 10: Problems 1, 2, 3 from pdf version (4, 5, 6 from hardcopy
version -- but these are different; do the pdf problems preferably)
- Chapter 11: Problems 3, 4, 5, 6 from hardcopy version (problems 2,
4, 5 from pdf version); get a copy of the hardcopy problems from me
if you don't have access to them.
- Chapter 12: Problems 5, 6 (there are no problems in the pdf version);
get a copy of the hardcopy problems from me if you don't have access
to them.
- Chapter 14: Problems 3, 5, 7, 8 (only problems 3 and 5 are available
on the pdf version); get a copy of the hardcopy problems from me if
you don't have access to them.
Project
For your project, you will write an equity research report,
with the focus on valuation. It will be structured as an Initiating Coverage
Research Report.
Firm Selection:
Form a team of about five students and choose a firm from
the list below. If you want to choose an alternate firm, come talk to
me.
- Consumer Goods: General Mills - (NYSE: GIS)
- Airlines: Southwest Airlines - (NYSE: LUV)
- Air Delivery & Freight Services: United Parcel Service - (NYSE:
UPS)
- Application Software: SPSS - (NASDAQ: SPSS)
- Home Improvement Stores: Home Depot - (NYSE: HD)
- Telecom Services: Verizon - (NYSE: VZ)
- Chemicals: Celanese - (NYSE: CE)
Types of Analyses:
Along the way, you will do the following analyses. Your team will present
your progress reports in class during the term.
- Industry and Company Analysis (Porter Analysis)
- Computation of the Cost of Capital
- Corporate Governance and Management Issues
- Beta Computation (excel file
with returns)
- Computation of Free Cash Flow to Equity
- Forecasting of Working Capital
- Forecast of Capital Expenditures
- Terminal Value
Porter Analysis:
For your Porter Analysis write-up, keep the following in mind:
- One, read your 10-Ks, particularly, the introductory description of
the industry and the risk factors
- Two, write out a description of the industry and the company.
- Three, use this as a background for your Porter Analysis
- Four, when you do your Porter Analysis, keep in mind why you're doing
it -- the ultimate goal is valuation, for which you'll need cashflow
forecasts. To get cashflow forecasts, you'll need to know the nature
of the market and probable competitor responses. This is why you need
Porter Analysis. Porter Analysis will also tell you how sensitive your
estimates are to things going wrong.
- Five, use the headings from the Porter Analysis slides that I put
up on my site
- Six, do not treat the headings as a check list, where you simply
answer the implied questions. You should be treating them as ideas to
think about the points laid out in Four.
Keep in mind that the Porter Analysis is not an end in itself. It's purpose
is to give you a better idea of the firm's business model, as well as
its competitive environment. The results of your Porter Analysis should
inform your cashflow and dividend forecasts so that your arrive at a more
precise valuation of the firm.
Final Report
The final report should have the following structure. The focus of the
report should be on the analyst’s (that’s you!) trading recommendation
– should the investor buy the stock, hold it (if s/he already owns
it) or sell it; this recommendation should be based on a valuation of
the stock. The report should discuss your valuation of the stock, including
a specific recommendation – buy, sell or hold; the key factors that
led you to your conclusion, and the risks with the investment strategy
that you recommend.
Indicate where your data came from. There are many sources of information
about companies, and you are free to use any of them as long as you properly
indicate what you have used. You are also free to consult with any member
of the Pace community, both faculty members and students. However, passing
off the work of others as your own is plagiarism and is unacceptable in
this competition – you are expected to do your own analysis.
The format of the report should be:
- Summary of recommendations
- Discussion of the company’s financial situation and prospects
- Industry and Competitive Analysis
- DCF and Comparative Valuation, including the assumptions on which
your valuation is based.
- Investment Risks with buying/holding the stock.
You should also include an easy-to-read self-explanatory excel spreadsheet
containing your Discounted Cash Flow (DCF) valuation of the company and
your relative valuation. This should be in the nature of an appendix (and
in addition) to your report. However, all the main elements of the results
from the spreadsheets should already be in the written report, in the
text and, if necessary, in appendices. It should be necessary to access
the spreadsheet only to confirm points made in the report or to look up
details of assumptions and data.
The focus of the Excel spreadsheet will be the valuation of the stock.
This will involve various components, which should be analyzed in separate
worksheets to the extent possible. The valuation worksheet should reference
the relevant cells in the other worksheets. The following worksheets will
be expected:
- Historical Income Statements
- Historical Balance Sheets
- Historical Statement of Cashflows
- Regression estimation of the firm's beta
- Estimation of cost-of-capital
- Growth rate estimates
- Capital Expenditure estimates (assuming that a dividend model is not
being used)
- Working Capital estimates (assuming that a dividend model is not being
used)
- Valuation: Free Cash Flow estimates and stock price estimation
Keep all these worksheets in the same Excel file and reference all balance sheet, Income Statement and Statement of Cashflow numbers to the appropriate worksheets. Similarly, all inputs in your Free Cash Flow estimates worksheet should refer back either to the first three worksheets above or to the other derivative worksheets.
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