Finance

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COURSE PROJECT INFORMATION

FINANCE 410 INTERMEDIATE FINANCIAL MANAGEMENT

Part I:

This section should include information about your company. The following points need to be

covered in this section. Please feel free to include tables and figures, as you deem necessary. Do

not forget to label the tables and figures. When stating financials and any numbers, please do cite

the source and the date as of when these numbers are true.

1. Company overview. This sub-section should include the following information: i) Brief history of the company. Headquarters and places of operation. ii) Major products and services. Is the firm a market leader in any of these product(s) or

service(s)?

iii) Segment data – major business segments and revenue breakdown for the most recent year(s).

iv) Major competitors both at the firm level and at the segment level. What criteria did you use to identify competitors?

v) Industry overview – Recent trends and forecasts on growth prospects. If your firm operates in multiple business segments, do this analysis for each segment.

vi) Any other pertinent information such as the number of employees, interesting facts about your company etc.

2. Market Data and Ownership Structure. Document the following information for the most

recent year (or later data if available). Source: Bloomberg Security Description; Annual

report.

i) Major (Top 5 to 10) stockholders in the company ii) Where is the company listed? Is the company listed on more than one stock exchange? iii) What percent of the stock do institutional investors hold? How does this number

compare to industry averages?

iv) What percent of the stock do executives hold? How does this number compare to industry averages? What are the implications of a higher (lower) executive ownership?

3. CEO and the Board of Directors - Bloomberg security description i) Who is the CEO of your company? How long has he or she been CEO?

(1) Was the CEO hired from within the firm? What was his/her career path? (2) How did the firm’s stock perform since the CEO start?

ii) What are the major committees in the company? iii) What proportion of directors are outsiders? – What do the terms inside and outside

directors mean? Why is this distinction important?

iv) What proportion of directors are CEOs of other companies?

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4. Code of Ethics and Corporate Social Responsibility (CSR) i) Is the code of ethics available on company website and/or annual report? Please read

through this and summarize in one or two paragraphs.

ii) Does your company engage in any CSR related activities? Please summarize in one to two paragraphs. More information, if available, is welcome.

iii) Was your company / top executives accused or found guilty of any fraudulent or unethical activities in the recent past? Provide a one to two paragraph summary of the

action and the consequences.

Part II

This section involves estimating costs of equity, debt and ultimately the weighted average cost of

capital for your firm. The objective is to expose you to the choices available for the input variables

used in these calculations, and to the several decisions you have to make in the process. It is very

important that you clearly identify the input values and sources and your reason for choosing these

inputs over available alternatives.

1. Cost of Equity using capital asset pricing model (CAPM): You need estimates of risk-free rate, market premium and stock beta to calculate cost of equity using CAPM.

i) Risk-free Rate: Choose an appropriate risk-free rate (for ex. 10-year T-Bond rate)

ii) Market Premium: Estimate two measures of market premium. (1) Historical premium calculated as average market premium for the last 10 years.

Market premium for each year can be calculated as (Return on S&P index – 10

year treasury bond). Example: Jan 1 2016 Dec 31 2016 Return

S&P 2,000 2,200 (2,200-2,000)/2,000 = 10.0%

Ten year treasury 2.2% 2.2%

Market Premium for

2016 7.8%

(2) Implied (forward looking) premium calculated using the following data (a) Price – value of S&P500 index as of January 2, 2018 (b) Total cash returned by S&P 500 firms during the year. (total cash =

dividends + share buybacks). This data is available on S&P website. S&P

releases this information once every three months. (www.spindices.com –

index news and announcements – search for dividend and buybacks)

(c) S&P 500 growth forecast for the next five years (yahoo finance. Enter your company ticker; go to analyst forecasts and look for earnings growth

forecast for the next five years. Your company’s growth forecast and S&P

500 growth forecast are available)

(d) Use the excel sheet provided by me to estimate implied premium.

iii) Beta: Estimate two measures of stock beta.

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(1) Run a regression using Bloomberg interface. (Type Beta in Bloomberg and enter relevant the following values in the prompts - market index – S&P 500

index; frequency – monthly; period: January 01, 2012 – December 31, 2017.

(2) Run a regression using Excel. Download adjusted close price data for S&P 500 and your company from yahoo finance. Calculate returns and run a regression

and perform the regression analysis using Excel.

Please incorporate the following in your write-up:

• Any adjustments you made in the calculation of historical premium (outliers, arithmetic vs geometric averages etc)

• Your idea behind why historical and implied premiums are different.

• Compare the intercepts and slopes from Bloomberg and regression. Are the results similar or different? If different, mention a few reasons that could be driving these

differences.

• Focus now on your regression results and discuss the following. o What is the slope of the regression? o What does it tell you about the risk of the stock? o How precise is the estimate of risk? (use the standard error of the beta

estimate to construct a 95% and 99% confidence interval)

o What portion of this firm’s risk can be attributed to market factors? (look at the R2 for this)

2. Estimate Cost of Debt using the following methods. Try to estimate all three measures subject to data availability.

i) Use the yield on company’s long-term bond outstanding as the pre-tax cost of debt. Use a long-term straight bond with no convertible features for this purpose.

(Source: Bloomberg fixed income)

ii) Estimate cost of debt from financials (interest expense from income statement and long-term + short-term debt outstanding from balance sheet)

iii) Use the cost of debt associated with the firm’s current credit rating (i.e., default spread associated with the rating plus 10-year treasury rate. Most recent default

spreads are available on Prof. Aswath Damodaran’s website)

3. Weighted average cost of capital (WACC). Use costs of equity and debt from your calculations and proportion of debt and equity from annual report or Bloomberg.

In your write-up, you may want to incorporate the following:

a) Discussion about the current capital structure including any recent equity and bond issues. b) Summary of what numbers (and as of what date) you are using to calculate WACC. c) It is very likely that the WACC from Bloomberg and WACC you calculated will be

different. What factors may have led to these differences?

d) Get industry-averages and discuss your firm’s capital structure with respect to industry averages.

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Section III

This section involves evaluating and discussing the dividend policy of your firm. Use the following

guidelines for this exercise.

• For the latest year (last five years recommended), estimate how much cash (dividends + buybacks) has been returned to shareholders. Source: Annual report or Bloomberg.

• Estimate how much cash could be returned to shareholders – FCFE is a good proxy. You can calculate this measure or use publicly available figures or get it from Bloomberg

• Compare dividends and FCFE to determine whether the firm is paying too much or too little dividends.

• Evaluate performance of firm/management over the last five years using one or more of the following performance benchmarks

o ROE vs Cost of Equity during the last five years o ROA vs WACC during the last five years

In your write-up, you may want to incorporate the following:

a) Discussion about the current dividend policy; how the policy has changed over the last few

years.

b) Any recent dividend increases / bonus dividends / buybacks (and if you can, how the stock

market reacted to these announcements and what you make of that reaction).

c) Compared to FCFE, is the firm paying too much or too little dividends?

d) Discussion about firm performance in the recent years.

e) Based on this analysis, provide a recommendation on how the firm should alter its dividend

policy. It may be helpful to look at the breakdown of FCFE of your firm to get an idea of the

driving factor behind FCFE.

Questions and Answers

1) Is there a minimum length requirement?

Answer: No. I would rather prefer reading a well-written short piece as opposed to a lengthy

report with irrelevant content. On average, a typical project comes out to 15 pages including

title page, tables and figures. Students are advised not to include irrelevant tables and figures

just to fill space (For instance, a half-page picture of the CEO or pictures of all board members

doesn’t really add value to your project)

2) What if I cannot find information on a specific topic or question?

Answer: This is a general questionnaire and not all companies may have all the information.

Do your best to find information. Please adapt the questions to your company. For example,

your firm may only give information on geographic segments as opposed to business segments.

That is perfectly fine. You may present that information. Another example: your company may

not have publicly traded debt, so you will not be able to calculate the YTM approach for cost

of debt. This is okay. Please mention in report that your firm doesn’t have publicly traded debt.

3) What sources should I use?

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Answer: Most information for the project is available from the latest annual report, Bloomberg

and Yahoo Finance.

4) Should I write everything in my own words? Is there an acceptable length I can copy and paste? Answer: It is suggested that you try to rewrite as much as possible in your own words. If you

copy something verbatim, you are required to put quotations mark around it, and cite where

the quotation came from. Anything less could be construed as plagiarism. This is okay in one

or two instances for a sentence or two, but most of the draft copied verbatim from external

sources or the internet is unacceptable.

Written Report Guidelines

• Writing style: MLA format recommended. At the minimum, the report needs to contain o Title page (may contain your company’s logo). o Table of contents, list of figures and tables. o Properly numbered sections and sub-sections. o Consistent font and formatting style. Font size 12 or greater (Times New Roman) and

one-and-a-half line spacing.

• Tables and graphs should be self-explanatory (i.e., with proper titles and legends).

• Try to avoid pasting pictures from external sources such as yahoo or Bloomberg as much as possible.

• Lengthy calculations / tables can go into the appendix.

• Tables can be placed inside the text or at the end in an order.

• Due to the nature of the project there are not many references – Your primary sources of data are your firm’s annual report, Bloomberg database and Yahoo Finance.

o However, you are required to choose among several choices while picking data and variables (e.g., the measure of profitability you use, type and date of risk-free return

you use etc). You should clearly state which measure/variable you are using, its

source and the reason you chose this measure/variable as opposed to similar

alternatives.

Feedback: The following feedback will be provided on the written projects:

• Peer reviews. Two or three peer reviewers will review Parts 1, 2, and 3 of your project and provide comments to help you prepare your second draft. Peer reviewers are expected to

provide constructive criticism and thoroughly review the paper. Students are expected to

take peer reviewer comments into consideration when preparing the second draft of the

paper.

• Meetings with writing center: Students who have difficulty in written English should use all available resources throughout the course of the semester to make sure they are making

satisfactory progress in the written part of the course project. Please do not expect us to help

you out extensively in the last week of classes.

• Instructor feedback provided students submit a complete draft one week prior to each of the peer-reviews. A complete draft adheres to all the written report guidelines mentioned above.