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FINANCE 321

STOCK VALUATION PROJECT

OVERVIEW The project is an exercise in stock valuation. Working in groups, you will pick a company and estimate the value of its stock using the methods we’ve discussed in class. The project has two parts: (1) You’ll estimate the company’s beta by doing a regression analysis of the company’s stock returns compared to those of the market. This will involve finding and downloading the needed data from the internet, using Excel to perform a regression analysis, evaluating the reasonableness of the result and considering any issues or adjustments that need to be addressed. (2) You’ll research the company and its industry and develop your estimate(s) of the value of the company’s stock. You’ll use your beta estimate and apply the three major methods we’ve discussed in class: (a) Dividend discount model (b) Free cash flow (c) Multiples. You’ll compare the estimates you get from these methods with each other and with the stock’s current market price and indicate what you conclude about the value of the company’s stock. The company you choose must be a publicly traded dividend-paying company for which there is a current report in Value Line. Value Line is available through the library; you can access Value Line online through the library’s website (in the “Databases A - Z” category). (We’ll be using General Electric as an example in class, so your company choice should be other than General Electric.) PROJECT SUBMISSIONS Written presentation: One written presentation from each group, due no later than March 13 before class starts. (Brief paper – five pages maximum – plus several exhibits. See next page for outline.) Hard copy submissions are preferred. If it’s necessary to submit by email, the submission must be in a single .pdf file. The written presentation will be the main basis for your group’s grade on the project. Class presentation: Each group will present highlights of the group’s findings to the class (~10 minutes per group) on March 15. No new/additional exhibits will be needed for the class presentation; further guidance will be provided. OTHER NOTES  Consistent with the university academic integrity policy, your submission should be your original work;

sources of data and any material which isn’t original should be documented.

WRITTEN SUBMISSION OUTLINE

 Brief paper (five pages maximum):

 Overall assessment of the company: Provide a concise assessment of the company and its industry, including the outlook for profitability and growth.

 Key factors relevant to valuing the company: Discuss the factors which you think are most important in determining the company’s value and what you assumed about those factors.

 Discussion of valuation results: Referring to a summary exhibit (see below), discuss the results of your valuations and what you conclude about the company’s value. Do you think it’s a good investment? Why/why not?

 Exhibits showing your analysis (see next page for details):

1: Summary exhibit showing results of the different valuation methods, with dotpoints summarizing your conclusions

2: Beta, kE and WACC results

3: Dividend discount model valuations

4: Free cash flow to the firm (FCFF) valuation

5: Multiples valuation

 Attachments

 Printout of your Excel worksheet showing data used for beta regression and the Excel regression output (graph/trendline, ANOVA table)

 Copy of the Value Line page for your company

EVALUATION

Projects will be evaluated relative to: Analysis:

Understanding, analysis of company financial situation and business Grasp and use of relevant theory Discussion of alternative approaches, assumptions – their pros and cons Discussion of open issues, uncertainties

10 points

Clarity of presentation

Concise Easy to understand Logical order Clear writing

5 points

Total 15 points

EXHIBITS

You should prepare five exhibits which address the points listed below. (You may address other points you think are important as well.) A good way to format the exhibits is to have the calculations on the left and the related discussion on the right; if you would like to take a different approach to formatting, we should discuss it in advance.

Calculations Discussion (using dotpoints) 1: Summary exhibit Table recapping values from:  Constant growth dividend discount model

 Multi-stage dividend discount model

 Free cash flow to the firm (FCFF) model

 Multiple comparisons

What causes the differences among the results?

How do your results compare to the stock’s current market value?

What are your conclusions about the value of the company?

2: Beta and discount rates  Beta

 Regression result  Adjustments you made to regression result

 Beta equation, kE  WACC

Beta:

Rationale for any adjustments How does your beta compare to Yahoo’s, Value Line’s? What might cause any difference?

WACC assumptions (basis):

Capital structure Interest rate on debt Tax rate

3: Dividend Discount Models  Constant growth (show formula, inputs/result)  Multi-stage growth (ditto)

What are the most important factors determining the stock’s value? How did you estimate those factors? Which of the dividend discount models works better for this company?

4: Free Cash Flow to the Firm  Table showing FCFF estimates  Value per share calculation

What are the most important factors determining the stock’s value? How did you estimate those factors?

5: Multiples  Table showing the multiples you used and the

resulting values

How did you decide which multiples to use? How did you use them, e.g., to evaluate results from the dividend discount and FCFF models? to directly estimate the company’s value? What do they tell you?