Written Report for accounting class

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ACC 672 – Advanced Financial Statement Analysis and Valuation

Valuation Project Guide (Revised – 10/31/2020)

General

The course provides a practical guide to company valuation with an emphasis on understanding and

using the information in companies’ financial statements. Almost all of the text book discussion is

based on General Mills (GIS) [Note: Proctor and Gamble if you are using the first edition of the text].

General Mills is manufacturer and marketer of branded consumer food industry. You are likely quite

familiar with many General Mills; e.g., Cheerios, Haagen-Dazs, Yoplait, Pillsbury, Old El Paso, among

many others. In doing this, the text provides a step-by-step guide through the process leading to

valuation.

The goal of the course project is to apply the material covered in the class by implementing it with a

publicly traded company. After completing each module, each team will conduct the analyses that have

been done for GIS in the text using another publicly listed company. Throughout the course, the team

would build the analysis of the company until they arrive at the valuation and reach conclusions about

the company and industry.

Forming Groups

You are required to complete the project—which involves valuation and financial statement

analysis and uses the tools developed in the course—in groups of four. You will be allowed to

choose teams, but all must be enrolled in the same section of the course. It is advised that you find

diverse team members as the skills formed by working with different backgrounds and

strengths/weaknesses are crucial for future success in the business world. At times, you may

encounter struggles in working with the other members of your team including disagreements on

items and scheduling conflicts. Learning how to work past these obstacles to achieve the goal is

part of the task ahead of you. If you cannot form a team, please email me and I will put you in

touch with other students also looking for a team.

One group member should email me your desired group member list no later than noon on

Thursday, October 8th. The finalized assignment of groups (there may be instructor adjustment

of group members) will be communicated via a posting on Blackboard.

Choosing a Company

A list of potential companies is provided at the end of these guidelines. However, you may submit

another publicly traded company to value, subject to approval.

Your team will be allowed to submit a listing of preferred choices for which company you will

study beginning at 9am on Friday October 9th. Feel free to list the order of preference for as many

companies as you desire! Company choices will be considered on a first come, first served basis.

Desired companies should be submitted by email to [email protected] providing the list of

students in the group and the preferred company or list of companies desired (only one person

should be submitting a list per team).

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Presentations and Learning Experience

The course will be very interactive. The goal is to learn in a number of ways: (1) by reading the

text Module and other assigned readings; (2) by attending and participating in lectures; (3) by

undertaking the analysis covered in each Module on your project company; (4) by discussing

issues that arise as you do your own analyses with class-mates, particularly those in your group;

and (5) by presenting your work.

With this goal in mind, there will be two opportunities to present your work and to be a key

participant during the presentations of others

1. “Milestone” presentation: The project has 13 phases, which cover the materials from Modules 1 to 14 and a

final phase, which is the completion of the valuation. You are required to make an

8-10-minute presentation of your work on one of the phases of the project during

class. Your presentation will focus on a phase that was explained in a previous

class, giving you time to execute that phase of the project for your company. During

your presentation, you should provide enough background from the work covered

in earlier phases to bring your classmates up-to-speed on what you have done.

After we have covered a module in class, please indicate your willingness to

present that phase of the project. I will select among the volunteers and let you

know if your group will be presenting.

These presentations have two main goals:

a) To provide an opportunity to present your work to others and ensure you are on-track; and

b) To give all students the opportunity to learn about the valuation of several companies rather than just one; each company is different and, hence, the

issues involved in the valuation will be different.

2. Final valuation presentation: The last class periods will be dedicated to presentation of your completed company

valuation. These will be 10-12 minutes (including Q&A). More on this later.

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Expectations for weekly progress on your valuation projects

At the beginning of lectures (beginning in week 2), I will open up the floor to have a brief

discussion about your group project progress. Please come ready to discuss any issues that pop up

as you complete the valuation, you are expected to be working on your projects every week as we

progress.

While your team may be tempted to take the GIS or PG valuation spreadsheets provided and simply

modify them (i.e. replace the numbers) for your company, that is generally a very inefficient

approach. Those spreadsheets should be viewed as resources (just as the textbook is), you will

then apply what you have learned to the specific context of your chosen company. If you do not

understand what has occurred, either due to allocations of steps in the project to specific team

members or if your team has only followed the GIS spreadsheet blindly, your understanding will

assuredly be insufficient.

Suggested weekly progress and guidelines for your valuation project

Phase 1: Becoming familiar with your company; to be completed by Oct. 14, 2020

The message of Module 1 is: get to know the business enterprise operations of the company/entity

you are valuing. Of course, you will become more and more familiar with your company as the

course progresses but your assignment after Module 1 is to investigate the operations of your

company as thoroughly as possible using whatever sources you imagine. The financial statements

filed with the SEC are a key place to start and you must obtain and read these statements,

particularly the most recent Form 10-K. Of course, there are many other sources, such as the

company’s web-site,1 newspapers, and investor web-sites such as seekingalpha.com and Yahoo!

Finance.2 After you have investigated your company as thoroughly as time permits, feel free to get

together with the people in the peer group, and gather a sense of the industry in which your

companies operate. I suggest that your presentation on the work associated with this Module

should devote roughly equal time to the discussion of the industry and to the discussion of your

chosen company. Use the` ideas presented in Module 1 as the basis of your analysis of the

companies and of the industries in which they operate. You should be aiming for a 1-2 page

summary of your findings / SWOT analysis.

Phase 2: Assembling Financial Statement Data in spreadsheet format;

Assemble at least the past three years of financial statements (Income Statement, Balance Sheet,

and Statement of Changes in Shareholder Equity) in spreadsheet form. DO NOT USE GOOGLE

SHEETS. Through the University, you have access to Microsoft Excel online, OneDrive, and

Microsoft Teams. These tools can be used to collaborate on your Excel spreadsheet. No

presentation is required on this phase, but, there will be a discussion of issues you encountered

when performing this exercise. Spreadsheets MUST be in Excel format. The “spreadsheet tips” in

1 I strongly suggest that you note the time of any listed company conference calls (particularly the earnings

conference call) and that you ensure that you participate in these calls. 2 I recommend that you, immediately, sign on to www.seekingalpha.com to receive news on your chosen and other

related companies.

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the textbook, see page 3.2 for an example, are very hands-on hints to save you time and energy.

You are encourage to send the professor your spreadsheets once they are setup, for review and to

ensure you are on the right track.

Phase 3: Reformulate the Income Statement and the Balance Sheet for your company; to be

completed by Oct. 20, 2020

Your analyses should follow the steps discussed in Module 3. Your presentation should show key

aspects of the original financial statements and the reformulated financial statements with an

emphasis on: (1) the assumptions that you made (and justifications for these assumptions); and,

(2) unanswered questions, which you expect will require further analysis in the future. Post your

spreadsheets.

Phase 4: Digging into the Footnotes and MD&A; to be completed by Oct. 22, 2020

Dig into the footnotes from the recent Form 10-K’s for your company to expand the information

beyond that which is available from the face of the Income Statement and Balance Sheet. You

should also note information that you tried to find (because you thought it could be useful) but

failed; expect this issue to be discussed in class with comparisons to work of the team who is

analyzing your competitor.

Where appropriate, follow the procedures outlined in Module 4 to adjust the accounting

information to render the accounting data for your company and its competitor more comparable.

Ensure that you are aware of differences across the competitor companies. You should focus on

the calculations you have done for your company but you should also, where appropriate, attempt

to understand comparisons to other companies in your industry.

By now you should have reformulated spreadsheets identifying NOA, NFL, NOPAT and FEAT. In

assembling the spreadsheets, you should note for discussion in class and/or final project: (1) the

assumptions that you made (and justifications for these assumptions); and, (2) unanswered

questions, which you expect would require further analysis in the future. Prepare a 1-2 page

summary of your assumptions and unanswered questions. Post your spreadsheets.

Please be aware that the work for Modules 3 and 4 are generally the hardest of the entire

course. Work together, check in with the professor, but don’t spin your wheels endlessly!

Focus on working efficiently. If you find yourselves working more than 4 hours EACH on

these modules, it is likely that you are not working effectively as a group.

Phase 5: Adjusting accounting information; to be completed by Oct. 27, 2020

Where appropriate, follow the procedures outlined in Module 5 to adjust the accounting

information to render the accounting data for your pair of companies more comparable. Ensure

that you are aware of differences across the comparable companies. Presentations should focus

on the calculations you have done for your company but you should also, where appropriate, make

comparisons across the two companies in your industry. Post spreadsheets with expanded financial

statements, which include the additional information and the adjustments from Modules 3 and 4.

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Phase 6: Reformulation of the expanded financial statements and DuPont analysis; expected

progress should see your group completing this by Nov 3, 2020

Reformulate your expanded Balance Sheet and Income Statement to identify NOA, NOPAT, NFL

and FEAT. Carry out a DuPont analysis following the example in Module 6. Discuss the

differences between the two companies in your industry. Prepare a 1-2 page summary. Post your

spreadsheets with reformulated expanded financial statements and your DuPont analyses.

Phase 7: Full Information Forecasting; expected progress should see your group completing this

by Nov 5, 2020

In completing this phase, which is, perhaps, the most crucial part of your project, you should

consult all available sources of information, including (but not limited to) the company annual

and quarterly reports, annual and quarterly reports of comparable firms, industry analyses,

company websites, analysts’ reports, press releases, recent press articles on your company, on

comparable companies, and on the industry. At some point, you will probably seek information

from investor relations personnel at your company (though you might wait until later when you

feel a little more comfortable with your knowledge of the company).

1. Based on this knowledge of your company, your company’s product(s), your company’s share of the market, the market size, changes in consumer tastes, demand,

etc., forecast sales for the next 5 years.

2. Identify key expense line-items. For example, advertising expense (as in Coca Cola and Pepsi), R&D expenditure (as in Procter and Gamble and Kimberly Clark),

administrative expense if this is large and there is an obvious difference between your

company and comparable companies, etc. Forecast these expenses as a proportion of

sales revenue for each of the next 5 years.

3. In a similar manner to 2, but with less emphasis on detail, prepare a forecast of each line item of operating income to sales for the next 5 years.

4. Forecast your company’s effective tax rate for the next 5 years. 5. List any unusual items expected over the next 5 years. 6. Calculate your forecasts of the after-tax profit margin for your company for the next 5

years.

7. Forecast the inventory, payables, receivables, PPE, cash, and any other operating assets required to support the forecasted sales level (these should be expressed as a

percentage of forecasted sales).

8. Calculate your forecasts of the asset turnover ratio for your company for the next 5 years.

Prepare 1-2 pages of written answers to these questions.

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Phase 8: Valuation using multiples; expected progress should see your group completing this by

Nov. 10, 2020

You must identify two other comparable firms and calculate the required financial statement data

for these firms (the calculations of NOPAT and NOA may be approximated rather than

calculated in the detail shown in the earlier Modules). Note that many financial news websites

report multiples for publicly listed stocks, you may be able to save yourself sometime and find

pre-computed multiples for your peer companies. After gathering the information on these

comparable firms and deciding on the industry-specific multiple, you will be ready to do a

multiples analysis for your company along the lines of the analysis suggested for GIS in our

lecture slides and in the textbook Module. Prepare a 1-2 page summary of your multiples

analysis. Include in your summary a buy/hold/sell recommendation as well as a discussion of

your confidence in the valuation derived from the multiples method, and any short-comings you

perceived. We will discuss this in more detail in class.

Phase 9: Estimating the Cost of Capital; expected progress should see your group completing

this by Nov 12, 2020.

There are several parts to this part of the project:

1. Module 9 introduces the Capital Asset Pricing Model (CAPM), which estimates a firm’s expected return using risk-free rates, the market risk premium and the relation between

the firm’s risk and market risk. The model is usually written as:

  rfMktrfEq rrrr   (1) where rEq is the expected return on equity in the firm

rrf is the risk-free rate

rMkt is the expected return on the market

 is the covariance of the return on equity of the firm with the market risk premium

To empirically implement the model we must use historical data to estimate . Normally the past 60 months of realizations for firm returns, risk free rates and market returns are

used when computing an estimate of . To do this, the formula is commonly re-arranged to focus on the relationship between the firm’s risk premium and the market risk

premium as follows:

 Eq rf Mkt rfr r r r      (2)

This yields a regression (after adding an intercept and error term) as follows:

 Eqt rft Mktt rft tr r r r e       (3)

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If possible, obtain monthly rates of return on the stock of your company, for a market

index and for the risk free rate of return for the prior 60 months using the methods

described in the Appendix to Module 9; if data are not available for at least 30 months,

use weekly data. [OPTIONAL - FOR GROUPS THAT ARE CONFIDENT IN

THEIR STATISTICAL ANALYSIS ABILITIES] Using these data and the empirical

model shown in equation (3), calculate your own estimate of  for your company.

Interpret, in layman’s terms, your estimates of ,  and the corresponding standard errors.

2. Locate estimates of  (Beta) for your company on financial sites on the internet.

3. Choose among your estimates of  for your company. Use this estimate and estimates of the risk free rate and the market premium to obtain an estimate of the cost of equity

capital for your firm.

4. Estimate the after tax cost of debt for your firm.

5. Calculate the weighted average cost of capital for your firm.

6. Use a Bloomberg terminal to find Bloomberg’s estimate of the weighted average cost of capital.

Be sure to take notes (at least 1 page summary) about where you sourced data, and why you

prefer one Beta estimate over another.

Phase 10: Valuation Using Free Cash Flow; expected progress should see your group

completing this by Nov. 17, 2020

Use the discounted cash flow valuation model and your forecasts of free cash flow to estimate the

intrinsic value of your firm. See GIS valuation spreadsheet tab to see how to layout your FCF

model.

Phase 11: Valuation Using Residual Operating Income; expected progress should see your group

completing this by Nov. 17, 2020

Use the Residual Enterprise Income Valuation Model to estimate the intrinsic value of your firm.

Note that the estimated value should be exactly the same as you obtained with the discounted cash

flow valuation model. Be sure to include this valuation in your Final Presentation (and

spreadsheets) and make the point to show that the estimated value is the same across the valuation

models.

Phase 12: Valuation Using Abnormal Operating Income Growth; expected progress should see

your group completing this by Nov. 19, 2020

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Use the Abnormal Operating Income Growth Valuation Model to estimate the intrinsic value of

your firm. Note that the estimated value should be exactly the same as you obtained with the

residual income valuation model and the discounted cash flow valuation model. Be sure to include

this valuation in your Final Presentation (and spreadsheets) and make the point to show that the

estimated value is the same across the valuation models.

Phase 13: Valuation of Equity, Gathering and Understanding Analysts’ Forecasts; to be

completed by Nov. 19, 2020

1. Obtain an estimate of the market value of debt for your firm. Use this estimate and the estimate of the value of operations determined in Phases 10, 11 and 12 to estimate the value

of an equity share in your firm.

2. Set up a sensitivity matrix in which you show the effect on your estimate of the value of an equity share of increasing and decreasing your assumed WACC by 1% and by 2% while,

also, increasing and decreasing your assumed growth rate by 1% and by 2%.

3. Search for analysts’ reports and analysts’ forecasts for your firm. Take a look at 2-3 analyst report to get an idea of how they report their valuations. Provide a brief discussion

contrasting your forecasted valuation to those in the analyst reports.

Presentation of company valuation:

The last class periods will be devoted to presentations of your company valuation analysis. The

presentations will be a joint effort of all group members. You will have 8-10 minutes for the

presentation and there will be a 3 minute question and answer period. Your presentation will, of

necessity, just hit the high points of what you cover in your written report. Rehearse and time your

presentation so it does not spill over into another team’s time slot. Please do all that you can to

make these presentations interesting and enjoyable. Have some fun with this!! Your fellow

students will likely appreciate any attempts to be somewhat entertaining.

Prepare a single-page (500 words maximum) summary of your analyses. Use PowerPoint slides

for your presentation. The single-page summary and your set of slides must be emailed by 9am

the morning of your presentation. I will, in turn, email the summary and slides to the class so

that all will have these materials to review at or before your presentation. Students are expected to

be engaged and are encouraged to ask questions / provide suggestions during the presentations.

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Written Report:

Written reports are limited to 5,000 words of typed, double-spaced, text, exclusive of any exhibits,

charts, figures, and appendices (the pages of which do not count against the page limit). These

reports must be emailed (PDF format) to edegeorge@miami,edu by 5pm on Nov 29, 2020.

Your report should begin with a one-page cover sheet that summarizes the analysis. The body of

the report may begin with a brief introduction (no more than 2 pages) where you demonstrate that

you “know the business” of the industry and describe whatever original insights on strategy,

competitive position, and the like that you have developed. Succeeding sections should describe

your systematic analysis of profitability and growth (via DuPont analysis), your forecasts and pro

forma statements, your valuation, and your final conclusions (which may be expressed as a buy,

sell, or hold recommendation for each company in the industry, or simply as a statement about

whether you can justify the current prices). Do not describe either the mechanics of how the

numbers in your exhibits were calculated or the sequence of steps you went through in completing

the project – doing so wastes space. Focus your report on the end product of your analysis – the

valuations! Emphasize important assumptions and how you reached your conclusions (especially

in regards to your forecasts). Justify important drivers and other key assumptions in your

valuations based on your systematic analysis of profitability and growth and based on other

publicly available data. Identify the key drivers of profitability, growth, and value and the

assumptions that involve the most uncertainty; and be sure that you deal with this uncertainty by

using appropriate sensitivity analyses.

Please strive to make your reports clear, concise, and to the point. To keep the body of your report

to a manageable size, let your exhibits do the talking. I expect to see exhibits summarizing all the

work that you have done throughout the course, including the systematic analysis of profitability

and growth for each firm in the industry, as well as exhibits that summarize your valuations and

related sensitivity analysis. Reformulated financial statements should appear as appendices. Please

clean up all exhibits and appendices so they are presented in good form and consistently formatted.

Do not append exhibits haphazardly to your written report. Instead, integrate all exhibits

appropriately into your report by referencing them somewhere in the text. Please cut out all

extraneous material and do not include filler or fluff. In the end it is quality, not quantity,

which counts. Do not, under any circumstances, copy material from other sources without

attribution. You can cover a lot in a 5,000 word report if it is well-organized and to the point, with

good quality exhibits.

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List of Potential Project Companies

Air Delivery & Freight

Beverages

Federal Express FDX Coca-Cola KO

United Parcel Service UPS PepsiCo PEP

Consulting

Personal Products

Booz Allen Hamilton BAH Estee Lauder EL

Accenture ACH Revlon REV

Farm & Construction Machinery

Airlines

Caterpillar CAT Delta Airlines DAL

Deere & Company DE American Airlines AAL

Other

Shake Shack SHAK

Texas Instruments TXN

** You can choose another publicly listed company, but it must be approved by the professor.