evaluation

FIN449

Individual Final Project

Introduction:

Valuation can be oversimplified, and frequently is. This, however, does not mean that we should always take the most time-consuming path to valuation. Among the things you have learned this term is that each company is different: They report differently even though they all use GAAP. They create revenue, profits and cash flows differently even though they are all in the same economy (and sometimes in the same sector).

Your project is to value a firm thoroughly, but to simplify your valuation as much as you can without losing clarity in examining the most crucial aspects of the firm. For example, understanding the growth of fixed assets and its relationship to the creation of revenue may require detailed analysis, or a more simple trend forecast may be appropriate. Whether your work is simple or complicated, be aware that if you create unrealistic forecasts, you will be graded down.

Assignment:

Choose a company to value for the final project. The company MUST be publicly traded and based in the USA. I recommend you pick a company which is not in distress and which has at lease 5 years of solid financial performance to examine in your analysis.

For this project, you are not required to model complete financial statements (as in the team project). You should model only those line items crucial to your valuation. At a minimum, you should model the following for at least five years in the future:

· Revenue

· Direct costs

· Depreciation

· Operating income

· Operating assets

· Operating liabilities

· Financial leverage

· Interest expense

You should compare the forecast figures to the past five years and include thorough explanations of your reasoning for each item you model. Use ratio analysis, common-size figures and growth analysis if it helps illustrate your reasoning.

Required:

Value the company using the three DCF methods (FCFE//Ke, FCFF//WACC and APV). Include:

· Detailed computation of FCFF and FCFE

· Detailed explanations of assumptions in your costs of capital

· Comparison of these DCF valuations to other methods, such as PE, EV/EBITDA, etc.

· Identify which value you believe is the true intrinsic value.

· A comparison of your intrinsic equity value per share to the market price per share at the date of interest.

Work will be graded according to the following rubric:

- Process (e.g. documented assumptions, robust analysis, follows accepted steps, etc.)

- Legitimacy (e.g. forecasts are realistic, inputs & outputs make economic sense, follow reasonable patterns, are due to identifiable causal relationships, etc.)

- Technique (e.g. correct computations are chosen, computations are made properly)

- Thoroughness (e.g. Double check results vs other methods: FCFE//Ke, FCFF//WACC, APV, multiples…)

- Completeness (e.g. all required elements are present)

The written portion is a technical discussion of your valuation: Why the method(s) you used for your final valuation opinion were the most appropriate, why your inputs and other assumptions were correct and what areas of uncertainty still exist. Be sure to state how you are treating these uncertainties: sensitivity analysis, scenarios, etc. In the write-up, you must explain why there is a difference between the intrinsic value you compute and the market price and the significance (if any) of this difference.

I would expect a four-page detailed defense of your analysis, plus any spreadsheets, exhibits and anecdotal evidence which supports your case. The write-up is graded based on the rigor of your analysis, so be thorough. The basic outline of the write-up should follow Fernandez’ grid (see attached).