MBA Corporate Finance Paper

Outline of the Project

I. History of the Company

a. Founding of the firm

b. State of incorporation

c. Mergers/Acquisitions

d. Growth history

e. Size of the firm, number of shareholders, etc

f. To understand the relationship between managers and stockholders, answering the following questions

i. Who is the CEO of the company? How long has he or she been CEO? What career path did the CEO take to get to the top? (Did he come from within the organization or from outside?) How much did the CEO make last year? What form did the compensation take? (Break down by salary, bonus and option components) How much stock and options in the company does the CEO own?

ii. Who is on the board of directors of the company? How long have they served as directors? How many of the directors are inside directors? (i.e. employees or managers of the company)How many of the directors have other connections to the firm (as suppliers, clients, customers..)? How many of the directors are CEOs of other companies?

iii. Does the firm have a particularly good or bad reputation as a corporate citizen? If it does, how has it earned this reputation?

iv. If the firm has been a recent target of social criticism, how has it responded?

v. Who holds stock in this company? How many stockholders does the company have? What percent of the stock is held by institutional investors? Does the company have listings in foreign markets? (If you can, estimate the percent of the stock held by non-domestic investors)

vi. Who are the insiders in this company? (Besides the managers and directors, anyone with more than 5% is treated as an insider) What role do the insiders play in running the company? What percent of the stock is held by insiders in the company?

g. Locate and review any recent news about the company available in business periodicals such as Fortune, Forbes, Business Week, The Wall Street Journal, The Investor’s Business Daily or other periodicals including trade journals. Other potential sources: Company web site,

ceoexpress.com, the firm’s financial reports, etc.

II. The Firm’s Product Lines

a. Firm’s major product lines

b. Importance of major products in generating the firm’s revenues

c. Success of the firm’s products in the marketplace

III. The Position of the Firm in the Industry

a. Size of the firm relative to other firms in the industry (currently and historically)

b. Financial position and profitability of the firm (currently and historically) Calculate standard financial ratios and identify and discuss financial strengths and weaknesses of your firm.

c. Identify any trends and compare to industry or competitors' ratios. For example, an analysis of Coke should include a comparison of Coke ratios to both industry averages and PepsiCo ratios, since these two competitors are similar in size and scope. For competitor companies, you can get the data and calculate the ratios in the same way you did for the company being studied.

You can also get company and industry ratios from the Quicken.com Evaluator, Schwab Stock Evaluator, or other locations you may find. To make the industry comparisons you might look at Annual Statement Studies by Robert Morris Associates, Key Business Ratios by Dun &

Bradstreet, or Almanac of Business and Industrial Financial Ratios by Leo Troy. In addition, Value Line and Moody's provide company reference material that sometimes includes industry discussions and comparisons. (Note: you will not be able to compare all of the ratios to industry ratios.) Also, you may use any source or method that you can to determine the industry averages.

d. Scan the statements to look for large movements in specific items from one year to the next. For example, did revenues have a big jump, or a big fall, from one particular year to the next?

If you find anything that looks very obvious, research the information you have about the company to find out why. For example, did the company purchase a new division, or sell off part of its operation, that year? If so, you should factor that information into all the steps that follow

e. Examine the ratio discrepancies between your company and the industry/competitors. Some will have simple explanations; for example, an ROI of 15% versus a 6.5% industry average suggests that the company is more profitable than the average competitor. Other discrepancies may have more complex explanations; for example, differences in inventory turnover may be

due to high sales volume, poorly managed inventory, stockouts, etc. It is critical that you explain why the discrepancies exist.

f. Determine whether the company’s dividend policies are supporting their strategies. For example, if the company is attempting to grow, are they retaining and reinvesting their earnings rather than distributing them to investors through dividends?

g. Leadership position of the firm in the industry (is the firm a leader or a follower?) Potential sources: Firm financial reports, industry reports, Robert Morris Associates, Dun and Bradstreet, Moody’s manuals, yahoo.com, marketguide.com, etc.

IV. Determination of the Firm’s WACC. (This will be thoroughly explained in class)

A. Cost of Common Equity

1. Calculating the cost of equity using the Gordon Constant Growth Model

· D1 may be projected as a trend of past dividends

· g may be estimated as a trend growth rate in dividends or earnings or as a function of ROE

· P0 is the current market price

· Note: Please show your calculations and the sources of the data used. If your firm doesn't pay a dividend, you cannot use this model, and will only use the model below.

2. Calculating the cost of equity using the Capital Asset Pricing Model

k s = kRF + bs(kM - kRF )

· kRF may be assumed to be the rate on long-term U.S. Treasury Bonds

· kM is the rate of return on the market portfolio (e.g., S&P 500 as a proxy). You can calculate the S&P return for the last 10 years.

· Potential sources: yahoo.com, stocktools.com, Tradeline through Dow Jones New Retrieval, etc.

B. Cost of Long-Term Debt. The cost of debt should be calculated using the YTM approach (solve for the discount rate that equates the bond cash flows to the bond’s price). Your firm must have at least one issue of long-term debt outstanding.

Note: Your firm may have several issues of long-term debt outstanding, and they may all have different costs. You would then find the weighted average cost of debt, by using the market value of various debt issues as weights. For this project, however, we will consider just one issue of long-term debt.

For any one issue of long-term debt for your company, determine the following:

· The number of periods, N, until the bond matures

· Determine the coupon payment on the bond

· Note if the bond pays annual or semi-annual interest and calculate the cost of debt accordingly

· What is the most recent rating for the firm?

Potential sources: Wall Street Journal, Moody's manuals, cnnfn.com, etc.

C. Cost of Preferred Stock. The cost of preferred stock is to be calculated as a perpetuity. Calculate the cost of any one issue of preferred stock, even if more than one issue is outstanding. (If there are multiple issues, they may have different costs, and you would find a weighted average of the cost using market value of the preferred stock as weights).

D. Calculation of the Capital Structure Weights. The capital structure weights are to be calculated as follows

· Common Equity Weight

wcommon equity = Market Value of Common Equity/Sum of the Market Values

· Long-Term Debt Weight

wlong-term debt = Market Value of L-T Debt/Sum of the Market Values

· Preferred Equity Weight

wpreferred stock = Market Value of Preferred Equity/Sum of the Market Values

· The Sum of the Market Values is the Sum of the Market Values of Common, Preferred, and L-T Debt.

· If you are unable to find the market value of all these components (long-term debt may be difficult because of multiple issues outstanding) use book value weights. Please specify what weights you

have used.

E. Calculation of the WACC. The WACC is the weighted average of the component costs of common equity, long-term debt, and preferred equity

WACC = wcommon equityks + wlong-term debtk long-term debt(1-T)+ wpreferred stockk ps

· The above calculation will be performed twice, using the two different specifications for ks given above in part A.

F. Summary and Discussion of the Limitations of the Analysis and Reliability of the Calculations Organization and Form of the Written Report. Your written report should conform to the following:

· The report must have a cover page, which will include the title of your study and your name

· Include a table of contents, indicating the major topics and sub-topics addressed. Corresponding page numbers should be given in the right-hand column. If tables, charts, figures, exhibits etc. are used, they should also be indicated in the table of contents.

· The table of contents should be followed by the report’s introduction, the main body of the paper, and then a conclusion or summary.

· Include references throughout the paper by noting the name(s) of the author(s) followed by the publication year enclosed in parentheses without punctuation: e.g., Smith (1990). When a specific page, section, or

quote is referenced, the reference should also be placed in parentheses: (Newsweek (1990), p. 56). You can also use footnotes to cite your sources. Remember that information obtained from the Internet must also be cited with the complete Internet address.

· Include a bibliographic reference section at the end of your report.

· The report should be typed and double-spaced, checked for correct spelling and grammar, and include page numbers.

· The report should be clearly written, well organized, well researched, and adhere to an appropriate form of presentation.

Consider the following sites:

http://www.investinginbonds.com/

http://www.quicken.com/

http://www.reportgallery.com/

http://www.bonds-online.com/

http://edgarscan.pwcglobal.com/recruit/edu.html

http://www.sec.gov/edgar/searchedgar/webusers.htm

http://quotes.freerealtime.com/frontpage/

http://www2.marketwatch.com/

http://fast.quote.com/fq/quotecom/

http://investing.lycos.com/investnews/

http://www.morningstar.com/

http://www.dbc.com/

http://finance.yahoo.com/

http://www.prars.com/

http://wsj.ar.wilink.com/asp/WSJ1_search_eng.asp

http://www.rmahq.org/

http://www.prars.com

http://www.icbinc.com

http://www.irin.com

http://www.hoovers.com/

http://www.fortune.com/

http://www.cob.ohio-state.edu/cgi-bin/DB_Search/db_search.cgi?setup_file=finance.setup.cgi

Several important sources of information that students should consult for their project analysis are the following:

a. Standard and Poor’s Industry Surveys - provides analyses of a large number of industries and some financial data on the largest companies in the industry.

b. The Value Line Investment Survey – Provides a one-page analysis of a large of number of companies along with an estimate of the future performance of the company.

c. Robert Morris Associates Annual Statement Studies – provides financial data and financial ratios for groups of companies by primary SIC code. This is considered by credit analysts to be a primary source of industry ratio data on companies along with explanations of how the ratios are computed.

d. Industry Norms & Key Business Ratio – published by Dun and Bradstreet also provides industry financial ratios by primary SIC code along with explanations of how the ratios are computed.

e. Almanac of Business and Industrial Ratios by Leo Troy