Finance 311 Company Analysis Project

Finance 311 Company Analysis Project (100 points). Due Tuesday, April 26.

This assignment is to be done in groups. It requires you to select a firm, obtain information about it, analyze the information and communicate the results in writing.

Company requirements:

Select a company that is covered by Value Line Investment Survey.

Select a US (not a foreign) firm.

Avoid banks and insurance companies. You will have fewer problems if you

choose a manufacturer or a retailer.

Select a firm that pays a regular quarterly dividend. This will be shown by Value

Line.

Value Line Investment Survey, is available online (it requires an NAU network connection) at the Cline Library website. From the Cline website, go down to “Research Resources” and click on “Find Articles & Research Information,” then “Finance.” Click on “Value Line Investment Survey,” then “lookup Company.” Use the PDF version.

You can get all kinds of information, including recent developments, citations of articles about the firm, and often the Annual Report, on the Internet. Most publicly traded firms have a home page on the Internet, and that is a good place to start once you have identified a company that meets the requirements stated above. Use Google, or another search engine to find additional information. You can access ratios for your firm and industry averages on moneycentral by going to money.msn.com and entering the ticker symbol for your stock. Then click on “Fundamentals” and “Key Ratios.”

Other useful sources of information include the Wall Street Journal, Moody’s, Standard and Poor’s. They are available in Cline Library.

Your report must be typed, double-spaced. Your report must address the following points, in the order stated.

I Title page. Include the name of the company, your names and the course name and number.

II. Company Description. Provide a one page description of your firm. Do not simply download this from a website or plagiarize from any source. However, use the Annual Report and at least one magazine or newspaper article for this. Be objective. Do not give a detailed history of the firm; focus on things of interest to potential investors. Identify the industry or industries your firm is in. Is there anything for which the firm is particularly noted, such as technical innovation, excellent management, customer loyalty, etc.? Identify the sources of your information.

III. Do a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the firm. For each section, provide one or two paragraphs in which you identify and discuss what you consider to be the firm’s primary strength, weakness, opportunity and threat (for example, explain why it is a strength or weakness, and why it is important to the firm’s future). This requires analysis, not a laundry list. Other, less important strengths, weaknesses, opportunities and threats can be addressed, but you should focus on what you consider to be primary. In discussing opportunities and threats, you must address the firm’s external environment (macroeconomic and industry conditions). Identify sources (the information that follows on SWOT analysis is from www.quickmba.com).

a. Strengths: A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

· patents

· strong brand names

· good reputation among customers

· cost advantages from proprietary know-how

· exclusive access to high grade natural resources

· favorable access to distribution networks

b. Weaknesses: The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

· lack of patent protection

· a weak brand name

· poor reputation among customers

· high cost structure

· lack of access to the best natural resources

· lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.

c. Opportunities: The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

· an unfulfilled customer need

· arrival of new technologies

· loosening of regulations

· removal of international trade barriers

d. Threats: Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

· shifts in consumer tastes away from the firm's products

· emergence of substitute products

· new regulations

· increased trade barriers

IV. Ratio Analysis. To do this, you need ratios for your firm, and industry averages for financial ratios for your firm’s industry. Industry averages can be obtained from one of the sources listed on p. 51 of your text, or via the Internet (www.money.msn.com for example). Identify your source(s). For your firm’s ratios, obtain them from the internet or other source (identify the source) or calculate them yourself using your firm’s financial statements. Make a table showing the ratios for your firm and the industry averages and include it in your text, not at the end. Compare your firm’s ratios to the industry averages in a paragraph addressing each of the following: liquidity, activity, debt, and profitability (i.e. four paragraphs, not one). Required financial ratios are: current ratio, quick ratio, total asset turnover, inventory turnover, average collection period (if relevant), debt ratio (or debt-to-equity), times interest earned, gross profit margin, net profit margin, return on assets, return on equity and price/earnings ratio. Use your textbook as a reference to help interpret the ratios. (You might not be able to find industry averages for all of the ratios, however, you should try. Use more than one source if necessary. Tell me where you have looked.)

V. Calculate the required rate of return using the Capital Asset Pricing Model, represented by eqn. 5.7 on p. 222 of your textbook. For the risk-free rate, use the yield on 6-month Treasury Bills, which you can find on the Internet (go to www.bloomberg.com, then “market data,” “rates and bonds”). The “market risk premium” (rM – RF) has averaged 8.4 percent historically, so use that number rather than estimating the return on the market. You can get the firm’s beta from Value Line. Show all calculations and explain what you have done.

VI. Estimate the value of your firm’s common stock using the constant growth dividend discount model (DDM). To do this, you need the required return on the stock from part V and: (a) the projected dividend for the coming year; (b) the projected growth rate of the firm’s dividends:

a, b. Your firm’s dividend and forecasts of the growth rate of the firm’s dividends can be found in Value Line or moneycentral.msn on the internet.

c. Use the results from part V and parts (a) and (b) to estimate the value of the firm’s stock using equation 7.4 on page 298 of your text. Show your calculations and explain what you have done. (If the projected growth rate is greater than the required return, you cannot solve the stock value using the constant growth model. In that case, substitute the market price of the stock into the equation and solve for the growth rate. Then for part (d) discuss whether or not you believe the firm can maintain that growth rate indefinitely. If you have questions, see me.)

d. If you can use the constant growth model for your firm, comment on the difference between the stock value obtained from eqn. 7.4 (in part (c)) and the current market price of the firm’s stock. Which do you believe is closer to the stock’s true value? Why? If you cannot use the constant growth formula, explain why not.

VII. Go to www.money.msn.com enter the symbol for your firm. Go to the Intraday Chart and select 1Y. Customize the chart to compare returns on the company’s stock to the S&P 500 index for the past year. Print the chart and include it in your report (clearly label which line represents your firm’s stock and which line represents the S&P). Compare visually the percentage return on the stock to the percentage change in the S&P 500 over the same period and describe what you see. Has your company's stock provided a higher or lower return than the S&P 500 index over the past year? Explain why, in your opinion, this stock performed better than or worse than the overall stock market.

VIII. Visit the firm’s web site. Are there details about the firm’s products, or other information that is useful to customers? Can you order the firm’s product directly from the site? Does it provide information for prospective employees? Does it provide information for investors? Is the website easy to use? Why or why not?

IX. Make a recommendation regarding the firm’s stock: Do you believe an investor should buy the stock? Explain why or why not. In doing this, use the results of your analysis in parts 3, 4 and 6 above.

X. Appendix. Print and attach the pdf version of the Value Line report on the firm’s stock and any other material you wish to include.

Note on grading: Your project will be graded on both content and presentation. It should correctly address the points listed above, and your discussion should be complete and correct. Spelling, punctuation and grammar count, so use a spellchecker and have someone proofread it. I will be looking for plagiarism, so clearly identify and provide attribution for any quotes.

Fin 311 Group Project Grading Rubric

Late: 10 points per weekday

Followed guidance in selecting firm: 5 points

I Title page: 4 points

II Company description done according to guidance: 5 points

III SWOT Analysis

a. Relevant strengths identified and discussed (3 points)

b. Relevant weaknesses identified and discussed (3 points)

c. Relevant opportunities identified and discussed (3 points)

d. Relevant threats identified and discussed (3 points)

IV Ratio Analysis: 16 points

V CAPM (k) correctly calculated: 8 pts

VI Stock value correctly estimated using dividend discount model: 10 pts

Discussion comparing your estimate of stock value with market price: 5 pts

VII Chart and interpretation: 5 points.

VIII Web Site: 5 points

IX Recommendation consistent with analysis: 5 points

X Value Line page attached, pdf version: 5 points

References at the end: 5 points

Spelling, grammar, syntax, clear exposition, punctuation: 10 pts

Misc. notes:

Company is singular. Do not refer to the firm as “they.”

Avoid statements that are obviously wrong. Example: “Profits were lower last year, increasing by only 5 percent.”

The company is located “out of Detroit.” How far out of Detroit is it located? Rather than telling the reader where it is not, state where it is located.

Avoid use of passive voice. (“Earnings are expected to be…”) Whose expectation is it?

Avoid contractions and do not use slang.

Use abbreviations only if you have previously introduced them.