1) consulting report
Consultant Project
This objective of this project is to help you to understand a firm’s business model (how it generates profit), its corporate governance and corporate finance decisions. Suppose a company’s board of directors has just hired you as a consultant to assess the company performance, to identify the company’s problems, and to make recommendations on how to improve the performance. Your analysis and recommendation will be prepared and summarized in 3 files, an Excel file (one or more tabs from each member), a Powerpoint file, and a word file
1. Data Preparation
a. Data Download:
You can obtain the firm’s financial data from the following sources:-
• Stock Price and S&P/ASX200 Index weekly performance (See Appendix 1). Then, compute the stock and index returns, in weekly basis.
• Annual Report: From the http://www.google.com/finance Website, you will download the firm’s Annual Report (consolidated and audited financial statements)
• You can identify your firm’s competitors from http://www.google.com/finance
• What is the company’s stated goal and strategy?
b. Data Handling in the spreadsheet file:
• Input data to tabs, such as “Input Sheet”, “Operating Lease Converter”, “Beta”, “WACC Optimal ip 19.3” , “Summary”, “Valuation”, but ignore “Implied Growth Calculator” tab
• Perform regression analysis on the weekly stock returns versus market index returns in the “Beta” tab, and estimate beta, Jensen alpha, average stock return and average index return (to be explained in point 2c).
2. Analysis
a. Corporate Governance
• Outline the organizational structure and the company stated strategy.
• Identify Related Party Transactions, New shares issues, Takeover activities, Insider trading.
• Find out the Director Remuneration during the last 3 fiscal years and answer the following question: Were there any abnormal director remunerations, relative to its peer?
• Were the managers acting in the interests of shareholders?
• Did the company practise the code of best practice of Corporate Governance, relative to its peers?
b. Accounting Performance
Based on the Balance Sheet and Income Statement information, you need to perform financial ratio analysis for the latest 3 financial years, in forms of time-series (three years financial data) and relative to peers’ (the company with similar sales in same industry). The tax rate should be the highest marginal tax rate, 30% for Australia
• The Du Pont Model & major financial ratios:
In the context of the Du Pont equation, ROE = PM * TO * EM
Company performance ROE (return on equity) depends on net profit margin (PM), total asset turnover (TO), and leverage (EM, equity multiplier). In addition, you should compute the current ratios, ROA, Debt-to-Capital (D/(D+E)) ratios, Days Receivable outstanding, Days inventory held, Days account payable outstanding, and Required financing period. You may consult explanations on these financial ratios from Chapter 4 of the “Corporate Finance – Theory and Practice” reference book.
You should compute your own financial ratios based on audited financial figures stated in annual reports, not relying on the ones from data service providers (such as Google).
You also need to look at the Segment Report information (both Business segments and Geographic segments which are in the footnote section on the Annual Reports) to see why those ratios were high or low. (e.g. poor sales, high costs in certain segment, gain in currency..) These are usually discussed in the Management Discussion section of the annual report. You would also need to compute the cost of equity (CAPM kE).
c. Market Performance
• Stock price performance: Estimate beta, Jensen alpha, average return and standard deviation for your stock and for the Market index for the period Jan 2009 to Dec 20011 in the “beta” tab in Esprit_all.xlsx. To estimate stock beta, you would need to use regression analysis, and use the company returns (as Y variable) and market index returns (as X variable). Attach a historical stock price chart in the presentation file.
2. (continued)
d. Investment Decision: You need to contrast the accounting performance and actual stock performance against CAPM cost of equity. From the shareholder’s point of view, you can examine the company’s historical performance by:
• Estimating the cost of equity, CAPM kE = Rf + beta * (RM – Rf)
We assume that risk free rate (Rf) = 4.5%, and the market risk premium (RM- Rf) = 7.5%
• Assuming the average project return can be proxied by average ROE, you can compare average ROE versus cost of equity to gauge the firm’s investment performance.
• Assuming the stock market is efficient, you can compute Jensen Alpha to gauge the firm’s investment performance, as perceived by the stock market.
• Computing the Economic Value Added (EVA) for the last 3 fiscal years.
e. Financing Decision – Based on the intuitive approach, should the firm use high or low leverage? Estimate the current and optimal capital structure, using the WACC Optimal ip 19.3 tab. Evaluate if the company should change the capital structure.

f. Dividend Decision – Estimate the average free cash flow to equity (FCFE) of the firm, and the average percentage of cash return to FCFE ratio. Evaluate if the company should change the dividend decision.
g. Valuation: Estimate the input parameters to the Discount Cash Flow (DCF) equation, estimate the intrinsic equity value per share, and compare this to the market share price at the latest fiscal year-end. Was the share price over- or under-priced? Suggest a reason why this is so.
h. Mergers and Acquisitions: Did the manager pursue a diversification takeover strategy? How did this affect accounting and stock performance? (not much computation required)
i. Hedging policy: Evaluate the current hedging policy. Do you recommend the manager to change? (not much computation required)
j. Recommendation: Based on your analysis, make recommendations on how to improve the firm’s performance. For example, recommendations for Esprit can be found in the “Summary” tab. Comment on the issues such as, Should the company move to the optimal capital structure? Should the company change its dividend policy?