Corporate Finance

INTRODUCTION

The objective of this project is to familiarize you with the investment analysis of a publicly traded stock. You will assume the role of a financial analyst. Your task is to value the common stock of a public company and issue a recommendation to investors whether to buy, sell or hold the stock.
SELECTING A COMPANY

Your first task is to select a company for your project. The company must be listed in a stock exchange and paying dividends. You are not allowed to select a service provider, such as a bank, an insurance company, etc.
1. ECONOMIC ANALYSIS

Your second task is to conduct an economic analysis.
• What is the state of the overall economy?
• Describe key economic measures such as GDP, interest rate, inflation, consumer spending, etc.
2. INDUSTRY ANALYSIS

Your third task is to conduct an industry analysis.
• What is the nature of the industry?
• Who are the major competitors in the industry?
• How important are technological developments?
• Which economic forces have the most impact on the industry?
3. COMPANY ANALYSIS

Your fourth task is to conduct a company analysis.
Collect the income statements and balance sheets of the company and a major competitor.
• Calculate the liquidity, efficiency, financial leverage and profitability ratios for the company for 2011 and 2012 and the competitor for 2012.
• Evaluate the financial condition and operating results of the company using both time-series and cross-sectional analysis.
4. ESTIMATING BETA

Your fifth task is to collect the monthly stock prices of the company and the market index between January 2008 and December 2012.
• Enter the data into Excel.
• Calculate the monthly return of the stock and the market index between January 2008 and December 2012.
• Estimate the beta of the stock using regression analysis.
5. ESTIMATING THE INTRINSIC VALUE OF THE STOCK

Your sixth task is to estimate the intrinsic value of the stock.
• Collect the dividend per share paid by the company in 2012.
• Estimate the constant dividend growth rate of the stock for the foreseeable future. You need to justify this rate based on your economic, industry and company analyses.
• Determine the required rate of return on the stock using the Capital Asset Pricing Model. You may use 13% as the market return and 8% as the risk-free rate.
• Estimate the intrinsic value of the stock using the constant growth dividend valuation model.
6. CONCLUSION AND RECOMMENDATION

Your final task is to make a recommendation.
• Provide a summary of your economic, industry and company analyses which should shed some lights on the future prospects of the company.
• Compare the intrinsic value calculated above to the market price (the stock price on 31 December 2012) and determine whether the stock is undervalued or overvalued.
• State your recommendation to buy, sell or hold the stock.

Points
Allocated Points
Scored
1. Economic analysis 15
2. Industry analysis 15
3. Company analysis 30
4. Estimating beta 10
5. Estimating the intrinsic value of the stock 10
6. Conclusion and recommendation 10
7. Organization, grammar/spelling, and data sources 10
Total 100
Additional Tips on Project

Following are my additional suggestions on the project.

For selecting a company and company analysis, I would suggest that you pick a big US company like Microsoft, Walmart, etc. You want a company which is traded on NYSE or NASDAQ. Big US companies have data widely available on them to do accurate company analysis. I recommend using www.smartmoney.com website. I use it for my own financial analysis and it provides useful data in user friendly format. Check the website to make that the company you select has been paying dividends. For example, Microsoft has a symbol “MSFT†. Go to the above website, and type the symbol of Microsoft “MSFT†on top right and it will tell you everything you want to know about the company including balance sheets and income statements for last 5 years.

For economic analysis, when you pick a US company, you can restrict to only analysis of US economy. In real life, you need to look at different countries but for this project look at only US economy if you pick a US company. I would go to one of the US Central Bank website at http://research.stlouisfed.org/fred2/ It provides all the relevant information to know very quickly where US economy stands now or in the past.

For computing Beta, I am putting an excel sheet on BlackBoard which does Regression. You need to enter your data smartly and it will tell you Beta.

Finally, make sure you do all parts of the project well