Finance project

FINANCE 321

STOCK VALUATION PROJECT

OVERVIEW The project is an exercise in stock valuation. Working in groups of five, 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 should be a publicly traded dividend-paying company other than General Electric (which we’ll be using as an example in class). PROJECT SUBMISSIONS Written presentation: One written presentation from each group, due no later than June 8 before class starts. (Brief paper – five pages maximum – plus several exhibits. See next page for outline.) If the written presentation is submitted by email, it must be in a single .pdf file. Class presentation: One or several members of each group will present the group’s findings to the class on June 8 (15 minutes per group). The presenters will show the class the exhibits from the group’s written presentation and comment on (1) the results of the different approaches to valuing the company, (2) the group’s overall conclusion and (3) interesting things the group discovered in doing its analysis. Note: No new/additional exhibits are needed for the class presentation. 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.

 My LIFEfolio: Each group member should put a copy of the group’s presentation in her/his My LIFEfolio.

WRITTEN SUBMISSION OUTLINE

 Brief paper (five pages maximum):

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

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

 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?

 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

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

 Copies of one or two exhibits from the source data about the company which you use (e.g., Value Line, Yahoo Finance, etc.) – not a lot, just enough to provide the reader some context.

EVALUATION

Projects will be evaluated relative to: Identification and understanding of key issues 5 points Analysis and recommendations:

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 20 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 model 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?