Overview of Process – Required Elements of Project

FIN 449 Company Analysis Project

Assignment Objectives

1) To prepare you for large-scale, team-based analytic projects that you may be involved with in the future.2) To gain an understanding and appreciation for the intricacies of building a valuation model.3) To polish your skills in communicating the results of analysis.4) To improve your skills in conducting and interpreting financial analyses.

Process (Required Elements) Overview

Nature of business model Financial structure Cost of capital (focus on equity) Forecasts Calculate FCFE Valuation Interpretation of results

Nature of Business Model Communicate the competitive environment facing the business and its

industry Products/services sold Size of market Capabilities to expand (geography and/or products) Outlook for industry’s product/services Significant/recent events Summarize competitive environment

Source(s) of competitive advantage? (industry level & company level) Difficulty to replicate, lower cost structure, etc. Other issues…superior management, better workforce, etc.?

Bottom-line: this is an analysis…incorporate facts about industry and company fundamentals into observations about financial structure & performance.

Financial Structure Understand and communicate the financial structure &

performance of your firm AND industry (or important competitors)

NOT simply stating ratios Use “enough” history Goal: helps to build “better” forecast Benefit: may provide some insight regarding challenges

facing the firm

Cost of Capital

Remember: cost of capital reflects RISK Given this: do your estimates make economic

sense? Goal: cost of equity should be reasonable

approximation of rate of return demanded by shareholders of the firm

Forecast Tell your story regarding your thoughts about the company’s

future….this story becomes the foundation for your forecast assumptions.

Assumptions should be justifiable based on business/industry analysis (OK to incorporate history…don’t rely solely on it…remember there were 3 different sources for estimating growth…use appropriately)

State & justify all assumptions in forecast (improving/declining profit margins, changing leverage, reinvestment, etc.)

Define and defend forecast period….remember, the length of forecast is based on competitive advantage.

FCFE Calculation Based off income statement and balance sheet forecasts FCFE is highly dependent on evolution of assumptions

about payout, cash balances, and debt policy. Especially relevant for high-growth firms with no history of

distributing cash to shareholders

How does your FCFE forecast compare to historically computed FCFE?

Valuation Find the value of equity based on your forecasted FCFE

(forecast horizon & terminal value). If relevant, compare to a dividend valuation

Incorporate payout from repurchases as well How does your valuation compare to market price? Evaluate your assumptions…too optimistic, pessimistic,

etc.? Do you have any “words of wisdom” for company

management?

My Advice for Presentation Relax…it’s a learning opportunity. Prepare approximately 30 minutes of material. Budget time allocation appropriately. What do you want

to spend the most time discussing…where will feedback be most useful?

Make sure to go through whole process before presentation, regardless of whether you are satisfied with your assumptions.

Listen to the questions and comments made during the presentation.

My Advice for Final Paper Edit your document as much as possible to ensure readability,

flow, and consistency. Discuss important/relevant figures thoroughly (NEVER refer

reader to a table/exhibit without discussing) There are MANY relevant numbers computed in forecast and valuation

analysis. Valuation should be “transparent” as I read your paper.

Don’t plagiarize! Document your sources. If in doubt, see me!

Avoid filler.

Companies – Spring 2012 Monday, 5/21

Molson Coors BrewingPossibly interesting issue?

Value of brand names

Brown-FormanPossibly interesting issue?

Dual-class structure (management/board ownership & corporate governance)

Companies – Spring 2012 Wednesday, 5/23

Staples Possibly interesting issue?

Valuing an oligopoly business? YUM Brands

Possibly interesting issue? Difficulties in measuring ROE

Buffalo Wild Wings Possibly interesting issue?

Role of operating leases in valuation

Companies – Spring 2012 Wednesday, 5/30

ApplePossibly interesting issue?

Role of profit margin & operating asset assumption in valuation

Amazon.comPossibly interesting issue?

Defining comparables

NetflixPossibly interesting issue?

Evolution of distribution system

Companies – Spring 2012 Monday, 6/4

Estee LauderPossibly interesting issue?

????? Kroger

Possibly interesting issue?Low profit margin business

Goodyear Tire & RubberPossibly interesting issue?

Valuing a turnaround story