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Case Study – BUS 609

The objective of the project (case study) is for you to build a financial model that forecasts

performance and calculates the value of a stock of a publically traded U.S. company. The end

result is an equity valuation report that establishes a target stock price and provides a

recommendation to buy, sell, or hold the stock to an investor.

Getting started:

Chose a U.S. publicly traded company listed on either the NYSE or NASDAQ. Please do not

select companies that are in the financial sector or have divisions that operate in the financial

sector. These firms are difficult to evaluate.

Start familiarizing yourself with your company and the industry it is operation in. Make sure that

you start to follow the news regarding the company.

You will need to download the income statement, the balance sheet and the statement of cash flows

for the company from Mergent Online. To access Mergent Online, please go to the Mercer

Libraries web site and choose Mergent Online under Indexes/Databases. You can then type in the

name of the company of interest and click search. Download 10 years of annual statements in excel

and consolidate all of them on a single Excel spreadsheet on different tabs. Download

standardized financial statements! Make sure that the scaling is the same for all statements (i.e.

thousand, millions, or billions) and that the currency is as reported (USD). Clean the statements

up so the key lines stand out (Ex. Net income, Total Assets, Total Liabilities etc.).

Please follow the flow of our class as you work on this case study.

Tasks to accomplish:

1. Compute various financial ratios and other financial measures of your company and

comment on the performance of the firm over the past 10 years.

2. Compare your company to several closest competitors; provide comment on how your

company compares to the competitors from a financial standpoint – use ratios and other

financial analysis methods.

3. Using the information learned from the above steps and your understanding of the industry

and the economy, create projected financial statements for your firm (at least 2 years).

4. Compute the expected net income of the firm and assume that all of it will be paid out as

dividends to the shareholders. Also assume that the net income will grow in perpetuity at

a growth rate that is consistent with the expected long-term growth rate of the US GDP

(please research what such an expectation is and reference the source where you found the

long-term GDP growth projection).

5. Determine the appropriate discount rate to be used by you in the valuation of the firm.

Here, you can either come up with your own desired rate of return, research what

companies in this industry generally return and use that as your discount rate, or you can

use CAPM to compute the historic beta of the firm and then use it to compute the cost of

equity of the firm. Either of the three methods are acceptable. Please make sure to discuss

your approach to the discount rate assumption in the case study write up.

6. Compute the present value of the future earnings that you expect your firm will produce

(make sure to include the terminal value in your calculation). This is the value at which the

firm should be valued based on your valuation model. Convert this value into share price

based on the present number of outstanding shares.

7. Provide a recommendation on whether to buy, sell or hold the stock.