MILESTONE 1

Group Project – Part 2

Investment Practicum

Fall 2020

1. Work on forecasting income statement and key balance sheet item related to working capital, net PPE, depreciation and Amortization non cash item by using assumption from ratios you calculate from milestone 1 of valuation project.

Please follow recorded video in week 8 and 9 to work on milestone 2.

2. Calculate Cost of Equity

a. From your spreadsheet containing prices and the value for the S&P 500 index, calculate a series of monthly returns for both the stock of your company and the S&P 500 index from last 60 months.

b. Estimate the beta of the firm by your own drawing of the regression line based on CAPM and by running the following regression (you will have two graphs):

R = + i Rm

Where, Ri = monthly returns on stock

= return independent from market return

Rm = monthly returns on the market (i., e, S&P 500 index)

i = stock’s beta

c. Calculate the cost of equity for the company you select by using yield on 20/30 year bond as a proxy for risk-free rate and market risk premium of 5.5% - 6.5%.

3. Calculate Weighted Average Cost of Capital (WACC)

Use data from company’s annual report and its footnotes to determine weights for long-term debt, federal corporate income tax rate, weights for equity and average cost of equity. Then calculate the company’s WACC.

4. Use WACC as a discounted rate to calculate the firm’s value by using FCF valuation model.

5. Download the historical P/E, P/B, P/S, P/CF and EV/EBITDA ratios from Morningstar.com. and use the key multiples to value the company’s stock.

6. Perform sensitivity analysis for the company stock.

The report related to this part will be due on November 15, 2020 as a group.

Good luck!

Dr. Wu