Derivatives Project Fall 2020 - FIN 4220/6220 Due December 1, 2020 Overview The purpose of this project is to allow you to demonstrate critical thinking skills through the analysis of a catastrophe in historical derivatives use. Each project will be completed in groups as assigned. Partial credit may be awarded as appropriate depending on the specific section requirement. Subject Incident Each group will be assigned one of the following events: • Barings Bank • Metallgesellschaft • Amaranth Advisors • Orange County, California • LTCM • The Financial Crisis of 2008 Class Presentation 15% Each group will prepare a 12 minute presentation summarizing your findings from the project. The presenta- tion may be delivered live or from a recording. Immediately following delivering or playing the presentation for the class, each group will take 5 minutes of questions. Written Report 85% You should prepare a written report that must contain the following sections. Section descriptions contain guidance on what you should include, but is not all inclusive. You may include additional information as appropriate. Each section will be given the weight indicated. Section word counts are merely suggestions. 1. Organization Background 15% Give a brief history of the subject organization. Include details about the organization’s founding and key events through history. Give background that will help the reader understand why the organization might pursue an investment strategy that required derivatives. 2. Derivatives Use 15% Explain how the organization first started using derivatives. Give general specifics about the kinds of goals the firm had for their derivatives usage. For example, was it to hedge or speculate? you may include example of successful derivatives usage by the organizaiton. 3. A Failing Strategy 35% Give a detailed description of the derivatives strategy that failed. Explain how the strategy was supposed to work and identify what went wrong. Identify any key players and how their actions affected the outcome. Was there something they could have done to prevent the disaster? 4. Fallout 25% Explain in detail what happened in the fallout of the catastrophe. Consider if the organization failed, how it was unwound, criminal or civil legal proceedings, regulatory responses, etc. 5. Conclusion 5% Provide a synthesis of what you learned from this research project. Summarize your overall findings. 1 Graduate Student Modification In addition to the above requirements, graduate student groups must produce a simulation/model showing how the derivatives trading system worked. You may use real or simulated historical asset prices, depending on the event you have been assigned. Graduate students’ project sections will be weighted 10%, 75%, and 15% for the presentation, written report, and trading model, respectively. Other Requirements 1. The written report must contain at least 2500 words (10% deduction per 100 words below 250 ...

1. Derivatives Project
Fall 2020 - FIN 4220/6220
Due December 1, 2020
Overview
The purpose of this project is to allow you to demonstrate
critical thinking skills through the analysis of
a catastrophe in historical derivatives use. Each project will be
completed in groups as assigned. Partial
credit may be awarded as appropriate depending on the specific
section requirement.
Subject Incident
Each group will be assigned one of the following events:
• Barings Bank
• Metallgesellschaft
• Amaranth Advisors
• Orange County, California
• LTCM
• The Financial Crisis of 2008
Class Presentation 15%

2. Each group will prepare a 12 minute presentation summarizing
your findings from the project. The presenta-
tion may be delivered live or from a recording. Immediately
following delivering or playing the presentation
for the class, each group will take 5 minutes of questions.
Written Report 85%
You should prepare a written report that must contain the
following sections. Section descriptions contain
guidance on what you should include, but is not all inclusive.
You may include additional information as
appropriate. Each section will be given the weight indicated.
Section word counts are merely suggestions.
1. Organization Background 15%
Give a brief history of the subject organization. Include details
about the organization’s founding
and key events through history. Give background that will help
the reader understand why the
organization might pursue an investment strategy that required
derivatives.
2. Derivatives Use 15%
Explain how the organization first started using derivatives.
Give general specifics about the kinds
of goals the firm had for their derivatives usage. For example,
was it to hedge or speculate? you
may include example of successful derivatives usage by the
organizaiton.
3. A Failing Strategy 35%

3. Give a detailed description of the derivatives strategy that
failed. Explain how the strategy was
supposed to work and identify what went wrong. Identify any
key players and how their actions
affected the outcome. Was there something they could have
done to prevent the disaster?
4. Fallout 25%
Explain in detail what happened in the fallout of the
catastrophe. Consider if the organization
failed, how it was unwound, criminal or civil legal proceedings,
regulatory responses, etc.
5. Conclusion 5%
Provide a synthesis of what you learned from this research
project. Summarize your overall
findings.
1
Graduate Student Modification
In addition to the above requirements, graduate student groups
must produce a simulation/model showing
how the derivatives trading system worked. You may use real or
simulated historical asset prices, depending
on the event you have been assigned. Graduate students’ project
sections will be weighted 10%, 75%, and
15% for the presentation, written report, and trading model,
respectively.
Other Requirements

4. 1. The written report must contain at least 2500 words
(10% deduction per 100 words below 2500)
2. The written report must be turned in as a PDF
(5% reduction if any other format is used)
3. The simulation/model (graduate students only) must be in
Excel format or another pre-approved
format
(10% deduction if in an unapproved format)
4. The written report must be well-formatted
(5% deduction for poor formatting)
5. The written report must include a title page with key
information, including word count.
(5% deduction if lacking)
6. All external sources of data and references must be cited in a
consistent format
(15% deduction for failure to cite)
2
COSTCO VALUATION PROJECT
20
Costco Valuation Project
FIN 4220
10/14/2021
Business Description

5. Costco was founded in 1976 as a wholesale retail club (Borger,
2018). It started with a distinctive annual membership model,
setting it apart from the other retailers in the market, including
Target and JC Penney. The company was deriving the
revenues from the annual membership fees, and hence it was
able to compete aggressively on the
prices, which has become a competitive advantage until today.
Therefore, the company provides high-quality, nationally
available products and private-label merchandise at lower prices
available in the market. It has more than 740 warehouses
globally, selling its products online or physically in stores
(Hollingshead, 2020). Costco sells its merchandise in three
general categories. These are the foods category, that includes
the dry, packaged, and groceries. The second section is the
sundries, such as beverages and snacks. The company also sells
soft lines, including apparel and small appliances. The
Ancillary
products include the pharmacy
and gas station.
The last category is the hardlines: appliances, electronics, and
health (Hollingshead, 2020). The company has adopted
technological developments by increasingly growing its online
business. They thus provide products that are beyond those
available in the warehouses through online sales. These are
operations such as e-commerce, business delivery, and the
travel segment.
History of Costco
The company started with the aim of serving small businesses.
The company later changed into serving a selected audience to
increase its market and audience
. This led to the company's expansion, with a new location
opened in Seattle in 1983 (Chen, 2021). The sales grew from

6. zero to $3 billion in less than six years. The merger between
Costco and Price Club in 1993 increased the number of
locations for the company to 206 while generating $16 billion in
annual sales (Chen, 2021). Therefore, through the operation
philosophy of keeping the costs down and passing the savings to
the members, the company increased its buying power. The
company has further grown into a worldwide institution with
total sales of $64 billion (Borger, 2018). The company has
transformed the retail sector by introducing efficient buying
practices that give the members increased savings. The club
members derived benefits, and this increased the subscriptions.
The Price Club first targeted the business members purchasing a
wide range of supplies wholesale. However, it was later applied
in retailing through the guidance of Jim Sinegal, bringing a
change in the retail business worldwide
.
Geographical Footprint and Latest News
Costco has its operations distributed in different parts of the
world. Some of the countries
where it operates are the United States, where the headquarters
is located (Chen, 2021). The other countries are Canada,
Mexico, United Kingdom, Japan, Korea, and Taiwan. It also has
online operations in all the countries worldwide
except in Japan, Australia, Spain, Iceland, and France
(Hollingshead, 2020). According to Nasdaq, the operations in
Costco were affected in September 2021 after the recall of
70,000 units of shower benches on speculations that they can
collapse while in use, hence causing a hazard on the users.
Industry Overview and Competitive Positioning
Costco operates in the wholesale and retail industry. The
company offers club membership to consumers, increasing the
audience purchasing the products (Peterson, 2020). As a
result, the company sets low prices, placing it in a better

7. competitive position. The availability of a wide range of
products under the same roof also makes it easy for consumers
to acquire what they need (Chen, 2021). Therefore, the company
remains competitive in the United States and other parts of the
world in the wholesale industry due to low prices.
Closest Peers
Costco has several peers that compete in the same market. As a
wholesale corporation using membership warehouses, the other
companies try to compete with the model to enhance dominance
in the market.
BJ's Wholesale Club is a warehouse club that focuses on
perishable goods, general merchandise, and ancillary services
(Jalbert, 2019). Therefore, Costco has competitive advantages
over BJ's because it offers a wider range of products. The
second peer is Office Depot (Moagar-Poladian et al., 2017). It
provides business services, supplies, and technological
solutions to medium and small enterprises. Therefore,
Costco has advantages over the company because it targets
businesses and the audience. The Sam's Club is a leading
membership wholesale club that offers high-quality products. It
presets
more competition to Costco.
Costco Porters Five Forces
Competitive Rivalry
The competition in the wholesale industry is a strong force. The
company needs to counteract the effects of competition in the
environment (Chen, 2021). The strong competitive rivalry
against Costco is due to many firms, a high variety of firms, and
low switching costs in the industry. Costco engages in both
wholesale and retail business (Lenard, 2017). The retail
industry is saturated, and many firms are aggressive in gaining a

8. market share. The firms also capitalize on their unique
competencies to make the competition tougher. As such,
competition is among the important concerns at Costco.
Customer Bargaining Power
Customer bargaining power is a strong force. This is because
the customers can easily switch to the competitors, there are
many substitutes, and there is a high quality of information. The
low switching costs show that the customers can acquire
products from competitors, including Walmart and Amazon
(Chen, 2021). The customers also have access to the internet,
and, hence, they can choose and compare prices and choose the
company with lower- and higher-quality products. As such, it is
a major issue in the company's Five Forces Analysis.
Suppliers Bargaining Power
The supplier bargaining power is a weak force. The suppliers
affect the company's business and retail environment (Johnson,
2021). However, there are a large number of suppliers from
whom the company can choose from
. There is also a high overall supply. As such, with many
suppliers, there is no single one who can impose high prices on
the supplies.
Threat of Substitutes
The company operates in the same market as the other strong
competitors. Therefore, this is a strong force (Chen, 2021).
Substitution is a challenge that has to be dealt with
. The substitutes' low switching costs, high availability, and
high performance-to-price ratio make this a strong force. The
substitutes are easily accessible and hence raising the threat of

9. substitution.
Threat of New Entrants
The new firms in the industry are a threat to the established
firms. They have low switching costs, high economies of scale,
and moderate business costs
(Lenard, 2017). Therefore, when the consumers are assured of a
great chance of success, they engage effectively with the
company.
Costco SWOT Analysis
Strengths
Costco enjoys several benefits in the industry. Therefore, some
of the strengths that have made it successful in the market
include low prices. The low pricing strategy attracts more
customers increasing the annual sales (Chen, 2021). With more
sales, the profitability increases. The membership business
model is unique to
the company. This increases its sources of capital. Some loyal
customers devote their purchases to Costco (Chen, 2021). The
company does not waste money on advertising and lacks a
budget for these measures. They provide high-quality products
that satisfy customers.
Costco's Weaknesses
Although profitable, Costco provides a limited selection of
products since, even with wide varieties, the choice for
individuals is limited (Chen, 2021). The cost of transporting the
goods in bulk is also high, especially when operating in the
remote and suburbs. It also lacks a global presence and hence
depends on few markets such as the United States.

10. Costco's Opportunities
Costco has opportunities in enhancing its online presence as
people continue to adopt the internet. There is an opportunity
for the company to expand its e-commerce for better shopping
(Chen, 2021). They can also use digital advertising to reduce
costs in advertising and expand to different countries to enhance
competitiveness.
Costco's Threats
Costco is faced with the threat of brand reputation, where
financial losses are associated with mistakes, such as product
recall. Reputation in the retail business is important to remain
competitive (Chen, 2021). The second threat is controversies,
where problems cause the company to lose its credibility with
customers. There are also political uncertainties in different
countries, hence increasing costs.
Financial Analysis
Financial analysis is a system that slows provides
measurements for a company's past and current financial data to
establish its performance and future potential or risks.
According to Nizam et al. (2019), financial analysis is used by
numerous individuals such as investors, the authorities,
regulatory agencies, financial analysts, among many others who
depend on financial data to make essential economic decisions.
Financial analysis is essential because it provides insights i nto
the firm's relative strengths and weaknesses. According to Osina
(2019), financial analysis helps provide recommendations on the
actions taken by a firm to take advantage of its strengths and
overcome its weaknesses in the future.
The financial analysis allows evaluating the liquidity position,
financial viability and profitability, and the solvency of a firm.

11. The financial position of Costco Corporation will be examined
by evaluating the financial ratios for the most current fiscal
years.
Ratio Analysis
Financial ratios are the most widely used financial tools to
analyze the financial position of a firm. The financial ratios of
Costco Corporation are calculated from the company's financial
statements and balance sheet.
Liquidity Ratios
The liquidity ratios determine the ability of a firm to meet its
debt obligations for both current liabilities as they are due and
long-term liabilities as they approach being current. According
to Kim and Im (2017), liquidity ratios disclose the firm's cash
levels and the ability to turn assets into cash to meet debt
obligations. The ratios include current ratio, quick ratio, and
debt to equity ratio.
Current Ratio
The current ratio is determined by dividing the current assets by
the current liabilities
. According to the income statement, Costco registered $23485
in current assets and $23237 in current liabilities, giving a
current ratio of 1.01 (Yahoo Finance, 2021). This means that
Costco has $1.01 worth of current assets for each $1.0 of
current liabilities. The estimated healthy current ratios for most
industries
are between 1.5 and 2. This indicates that Costco is not in a
good position to meet short-term obligations. Therefore, the
current ratio depicts weakness, and the managers should plot
steps to correct it. This may include improving conversion
cycles for accounts receivable, fast payments for current
liabilities, and working out unproductive assets.
Quick Ratio
The quick ratio is calculated by dividing quick assets by current
liabilities. According to the income statements, Costco recorded

12. $10979 in quick assets and $23237 current liabilities,
translating to a quick ratio of 0.47 (Yahoo Finance, 2021). The
quick ratio can be interpreted as $0.47 of quick assets for each
$1.0 of current liabilities. This further explains that Costco is
not able to pay off its current liabilities by utilizing quick
assets. The recommended quick ratio should give at least 1:1 for
the quick assets and the current liabilities. Purnomo (2018)
asserts that a higher quick ratio ensures that the company can
meet its current liabilities using its quick assets only. To
improve the quick ratio, Costco management should improve
sales and inventory turnover, promote invoice collections, and
pay early liabilities.
Debt to Equity Ratio
The debt-to-equity ratio is calculated by dividing the total long-
term debt by the total shareholder's equity. Costco recorded
$5124 long-term debt and $15243 shareholder's, translating to a
0.34 debt to equity ratio (Yahoo Finance, 2021). This means
that creditors provide $0.34 for each $1.0 provided by
shareholders in the company's overall financing. According to
Purnomo (2018), a lower debt to equity ratio shows strong
financial stability. The debt-to-equity ratio is essential in
determining the risk levels of a firm. Costco should maintain
this low ratio for a longer period to take advantage of the
financial stability.
Profitability Ratios
Profitability ratios compare the firm's financial statements to
determine its ability to make profits through its operations.
Several profitability ratios exist, including gross margin,
returns on investment, returns on equity, and returns on assets,
among others.
Gross Margin Ratio
The gross margin ratio is determined by dividing the gross

13. profits by the revenue. Costco registered $19817 gross profits
and $152703 revenue, translating to a 12.98% gross margin
(Yahoo Finance, 2021). This indicates that Costco has 12.98%
more after paying off its inventory, which can be used to pay
for other operational costs. According to Rahman (2020), a
gross margin above 30% is considered favorable. Thus, Costco
should aim to improve the gross margin ratio by taking steps
such as increasing product prices, avoiding competitive pricing
, limiting discounts, and taking discounts from suppliers.
Return on Assets Ratio
Return on assets is obtained by dividing the net income by the
average total assets. Costco registered a ROA of 8.49%,
indicating that shareholders obtain 8.49% from the investment
on assets (Yahoo Finance, 2021). According to Calista and
Widjaja (2019), a ROA above 5% is desirable and explains
the ability of the company to manage assets effectively. This
shows that Costco exceeds the expectations of the industry in
this case. However, the management should focus on
maintaining a higher ROA to attract more investors.
Return on Equity Ratio
Return on equity is determined by dividing the net income by
total shareholders' equity. The ROE ratio of Costco is 26.10%,
indicating that each $1.0 invested on equity earns $0.26
annually (Yahoo Finance, 2021). A ROA of above 15% is
considered desirable (Calista & Widjaja, 2019). This indicates
that Costco is performing well in this ratio and should maintain
it for a long period for better financial health.
Forecasting of the Free Cash Flow
The compound annual growth rate gives the average growth rate
of an investment over more than one year. Using the formula;
CAGR= (ending value/ beginning value) (1/no. of years)
-1, the CAGR of Costco from 2015 to 2020 is 12.16% (Yahoo

14. Finance, 2021). This indicates that the forecast for the FCF will
be increasing in future years. Free cash flow is the measure of
the firm's financial performance. It is calculated by subtracting
capital expenditures from the operating cash flow. FCF is
essential in helping the company explore opportunities that
increase shareholders' value. Therefore, the FCF for the next
fiscal’s years would be calculated by the formula; FCF2021=
FCF2020 (1+CAGR), which gives $3766.27 million for 2021,
$4224.17 million for 2022, $4737.74 million for 2023, $5313.76
million for 2024, and $5959.80 million for 2025.
Investment Risks
Exposure to Market Risks
Costco is not adversely affected by exposure to the market like
its peers, even when stocks fall below the broader S&P 500.
According to Chen (2021), Costco has a strong performance and
maintains robust financial stability and excellent stock market
operations. The relatively strong performance is because Costco
is not exposed to risky and awful business trends affecting other
companies, such as Target Inc. and Kroger. Its steep premium
prices depict
that its stocks will take a long time to fall if the company faces
challenges. The operations of Costco are less volatile than for
other retailers. This is caused by the effective strategy of the
company to sell products in bulk. The company also relies more
on subscription sales than products markup. Subscription fees
for the company keep increasing regardless of competitive
selling environments (Chen, 2021). Costco prides itself on the
high membership fees collected, which cushion the company
when sales go down. Costco does not engage in margin
competition due to its mechanism of selling memberships. This
may be a good aspect for investors who have already purchased
stocks. However, it may make the cost of shares to be high for
new investors
.
Idiosyncratic Risks

15. Idiosyncratic risks are investment risks that are endemic to
individual assets or stocks. According to Chen et al. (2019),
idiosyncratic risks account for the largest variations in
uncertainties surrounding individual stocks over time than
market-related risks. These factors affect the stocks of a firm at
a microeconomic level and have little influence on external
macroeconomic factors such as the market. Microeconomic
factors associated with idiosyncratic risks include management
decisions and policies, investment strategies, and specific
operations that affect individual firms. Costco illustrates strong
asset management and effective investment strategies, including
diversification. The company does not rely on products
sales for income generation like most retailers. The
membership selling strategy helps to diversify the methods and
strategies for the generation of revenue. This mechanism helps
reduce idiosyncratic risks associated with company operations
and increases effectiveness in the stock market. The company
has a good corporate culture that supports employee welfare.
Freeman et al. (2017) assert that Costco's turnover rate is less
than half of its competitor, Sam's Club. This improves the
productivity of the employees promotes sales for the company.
Consequently, the performance of the company improves its
stability in the stock market. By reducing idiosyncratic risks in
the company, Costco can attract more investors and attain better
financial capabilities.
Financial Risks
Investors are very keen on companies' financial statements
because they provide essential financial information that can
help make decisions on investments. According to Osina (2019),
financial analysis reveals the company's financial health
through analyzing various financial ratios. Depending on the
outcome of the financial analysis, financial risks can be
determined to ascertain the company's profitability, liquidity,
and solvency. According to the financial analysis of Costco, the

16. company depicts a strong financial capacity. For instance,
Costco has a forward price-to-earnings (P/E ratio) of 36.82
(Yahoo Finance, 2021). This is higher than the industry's
average of 5.29. The company registered a higher P/E ratio than
its main competitor, Walmart, which registered a P/E ratio of
22.85. Costco enjoys a dividend yield of 0.84%, which is lower
than Walmart’s, 1.84%. However, to complement the low
dividend yields, the company has a record for consistency that
can be utilized for long-term investment. The debt-to-equity
ratio of Costco is 0.34. This explains that most of the company
financing is from shareholders rather than creditors. A lower
debt to equity ratio illustrates strong company financial
stability, which sends a positive message to investors. The
return on equity for Costco is 26.10% which is higher than the
estimated industry average. This indicates that every $1.0
invested on equity earns $0.26. The financial issue with Costco
is a low current ratio. However, this can be rectified to maintain
higher financial stability and reduce the financial risks further.
Political Risks
Political stability is eminent in major Costco markets such as
the United States and the Asian markets. According to Uddin et
al. (2017), a firm's performance is partly dependent on the
political stability of the micro and macro environments. The
political stability in most of the company's market environment
provides growth opportunities. It can also improve its polici es
and strategies to meet or exceed the expectations of different
political environments. The opportunities for future growth
positively attract investments. For instance, Costco developed a
more accommodating animal policy that has increased the sales
for animal feeds such as Dog food. Political stability in
international markets has also favored Costco’s operations by
providing great and peaceful markets abroad, allowing
expansion and the call for more
investments (Uddin et al., 2017). Investors should not this as a
positive element towards purchasing Costco stock.

17. Legal Risks
Legal systems are responsible for imposing requirements on
companies that may affect their operations and eventuality its
investment attractiveness to potential investors. According to
Haggard et al. (2018), laws and regulations can affect the firms'
micro and macroeconomic environments, making it easier or
difficult for businesses to operate. For instance, the changing
employment laws in the United States indicate the minimum
wage rate of $7.25 per hour. However, Costco has improved its
employment practices, which exceed the requirements of the
employment laws. The company increased its starting pay rate
to $15.0 per hour, which is twice the minimum wage rate in the
United States. Increased pay rates significantly improve
workers' morale, and thus the company attains increased
productivity and performance (Jardim et al., 2017). This is a
good illustration to investors since increased productivity shows
up in increased return on investments. Therefore, the company
indicates to be a viable investment opportunity for potential
investors since it shows fewer investment risks associated with
it. However, investing in the company may be beneficial in the
long term because it focuses on low prices and does not depend
on product sales for their total revenue. Investors should also
consider that the company shares may be expensive due to its
performance excellence.
Corporate Governance
According to the company corporate guidelines, Costco adopts a
staggered board. A staggered board is essential in ensuring that
no particular board member gains majority control over the
board. Hamilton James is serving as the chairperson of the
board and has been a director since 1988. He was the lead
independent director until he became the non-executive
chairperson in 2007. Other board members include Susan
Decker, who has been a director since 2004, Kenneth Denman, a
director since 2007. Richard Galanti is the chief vice president,

18. the chief financial officer, and a director in the company. He
has been a director of the company since 1995 and an executive
vice president and chief financial officer since 1993. Craig
Jelinek is the president, the chief executive officer, and a
director in the company. Jelinek has served as a director and
president of the company since 2010. Sally Jewell has served in
the company as a director since 2020. The director emeritus of
the company since 1993 has been Richard Libeson
. Other directors include Charles Munger, Jeff Raikes, John
Stanton, and Maggie Wilderotter.
The majority of board members have served in the company for
terms exceeding ten years. According to Bravo et al. (2017), the
long-term tenure of directors may adversely harm the board's
independence, with the long-serving members taking majority
control of the board. However, this is the main reason the
company has adopted the staggered board, which takes the
popularity voting mechanism to counter the effects of the long-
serving tenure of the board members. According to Mbanyele
(2021), staggered boards effectively control the board's
management and avoid a takeover. The method harms
shareholders by restricting their rights. Shareholders would
require a supermajority in voting to induce changes in the
existing charters. The mechanism also bars the shareholders
from taking any actions in meeting through written consent.
Costco has eleven board members, which is the normal average
for large United States corporations. Four among these members
are inside directors, some of whom serve in more than three
boards. The corporate governance guidelines in Costco do not
dive limitations
on the number of boards a member should serve. However,
having four busy board members may negatively harm the
effectiveness of operations (Mbanyele, 2021). Costco must
address the challenge of the four busy directors to streamline

19. the effectiveness of company management, especially in
decision-making strategies. The composition of the board
depicts all members been whites and born in the United States.
However, the policies in the company do not handle or stipulate
the composition of the board members. Three board members
are female, which translates to less than a quarter of the board
composition. The board has no minorities, and the few female
board members are still fewer.
Costco should take measures to correct this because it serves
many different countries with diverse customer bases. A diverse
board would be more effective in managing the large and
diverse customer compositions. However, the board has shown
tremendous ability to manage most company issues and has
continuously taken the company to larger heights.
References
Borger, M. J. (2018). Diamonds in the Rough: A Review of
Tiffany v. Costco and a Call to Apply Daubert to the
Admissibility of Consumer Survey Evidence in Trademark
Infringement Litigation. Touro L. Rev., 34, 431.
Bravo, F., & Reguera‐ Alvarado, N. (2017). The effect of board
of directors on R&D intensity: board tenure and multiple
directorships. R&D Management, 47(5), 701-714.
https://onlinelibrary.wiley.com/doi/abs/10.1111/radm.12260
Calista, M., & Widjaja, I. (2019). Pengaruh current ratio, return
on asset, return on equity, debt to equity ratio, total turnover
asset, dan dividend policy terhadap harga saham. Jurnal
Manajemen Bisnis Dan Kewirausahaan, 3(5), 13-18.
http://journal.untar.ac.id/index.php/jmbk/article/view/6074
Chen, J. (2021). Marketing strategy management of Costco:
Analysis and comparison to S-Group.
Chen, Z., & Strebulaev, I. A. (2019). Macroeconomic risk and
idiosyncratic risk-taking. The Review of Financial
Studies, 32(3), 1148-1187. https://academic.oup.com/rfs/article-
abstract/32/3/1148/5034939

20. Freeman, R. E., & Parmar, B. L. (2017). Managing for
Stakeholders and the Purpose of Business.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3042721
Haggard, D. L., & Haggard, K. S. (2018). The impact of law,
religion, and culture on the ease of starting a
business. International Journal of Organization Theory &
Behavior.
https://www.emerald.com/insight/content/doi/10.1108/IJOTB-
04-2018-0043/full/html
Hollingshead, D. (2020). The Parasitology Unbound Collective:
Commission Report. ASAP/Journal, 5(3), 715-744.
Jalbert, T. (2019). Merger Opportunities Among Club Shopping
Stores. Global Journal of Business Pedagogy, 3(1), 54-65.
Jardim, E., Long, M. C., Plotnick, R., Van Inwegen, E., Vigdor,
J., & Wething, H. (2017). Minimum wage increases, wages, and
low-wage employment: Evidence from Seattle (No. w23532).
National Bureau of Economic Research.
https://www.nber.org/papers/w23532
Johnson, E. A. (2021). Costco Wholesale's Dominance in the
Market.
Kim, J., & Im, C. (2017). Study on corporate social
responsibility (CSR): Focus on tax avoidance and financial ratio
analysis. Sustainability, 9(10), 1710.
https://www.mdpi.com/226036
Lenard, M. (2017). Whole Foods Case Analysis.
Mbanyele, W. (2021). Staggered boards, unequal voting rights,
poison pills and innovation intensity: New evidence from the
Asian markets. International Review of Law and Economics, 65,
105970.
https://www.sciencedirect.com/science/article/pii/S0144818820
301836
Moagar-Poladian, S., Dumitrescu, G. C., & Tanase, I. A. (2017).
Retail e-Commerce (E-tail)-evolution, characteristics and

21. perspectives in China, the USA and Europe. Global Economic
Observer, 5(1), 167.
Nizam, E., Ng, A., Dewandaru, G., Nagayev, R., & Nkoba, M.
A. (2019). The impact of social and environmental
sustainability on financial performance: A global analysis of the
banking sector. Journal of Multinational Financial
Management, 49, 35-53.
https://www.sciencedirect.com/science/article/pii/S1042444X18
300215
Osina, N. (2019). Global liquidity, market sentiment, and
financial stability indices. Journal of Multinational Financial
Management, 52, 100606.
https://www.sciencedirect.com/science/article/pii/S1042444X19
301872
Purnomo, A. (2018). Influence of the ratio of profit margin,
financial leverage ratio, current ratio, quick ratio against the
conditions and financial distress. Indonesian Journal of
Business, Accounting and Management, 1(1).
https://stei.ac.id/ojsstei/index.php/ijbam/article/view/218
Rahman, M. H. (2020). Financial Analysis Of Costco Wholesale
Corporation: Exploring The Strengths And Weaknesses. The
Bangladesh Journal of Agricultural Economics, 41(1), 17-34.
http://bjae.bau.edu.bd/home/article/view/46
Uddin, M. A., Ali, M. H., & Masih, M. (2017). Political
stability and growth: An application of dynamic GMM and
quantile regression. Economic Modelling, 64, 610-625.
https://www.sciencedirect.com/science/article/pii/S026499 9317
30696X
Yahoo Finance. (2021). Yahoo Finance - Stock Market Live,
Quotes, Business & Finance
News. https://finance.yahoo.com/quote/COST/
�remove
�remove

22. �remove
�should be lower case
�change to pharmaceuticals
c�hange to gasoline
�AWK
�Avoid repeating “audience”
�Operating might be a better word here
�This feels a little disjointed, consider rephrasing and moving
parts of this discussion earlier in the paper
�The US is just one country
�Double check this is true. It would mean that they have online
operations in nearly 200 countries
�AWK

23. �This makes is seem like Costco has the advantage because
Office Depot sells business supplies. Consider removing.
�Is this the right word?
�Do not end a sentence in a preposition
�Ending with a preposition
�What would it take to start a business that credibly competes
with Costco?
�Do any of their competitors attempt the same strategy?
�reword
�AWK
�Is this the right word?
�You can probably remove all of this. You can assume the
audience knows it.
�Explaining these formulas is not necessary

24. �What about for Costco’s specific industry?
�How would this impact Costco in other ways?
�Find an alternative word
�Should be an exponent…
�AWK
�Reword
�Possessive?
�AWK
�In what way?
�AWK
�AWK
�Reword

25. �Reword
�What do you mean? There used to be more female members?
Valuation Project
Fall 2021 - FIN 4220/6220
Due: November 16, 2021
Overview
The purpose of this project is for you to demonstrate critical
thinking skills through the analysis of a publicly
traded company and the valuation of its common stock. This
project contains two parts, a written report
and a valuation model. Each project must be completed on your
own. Your subject company may be Tesla
(TSLA), Netflix (NFLX), or Costco (COST).
Written Report 70%
Each written report must contain the following sections. Section
descriptions contain guidance for what
you should include but are not all inclusive. You may include
additional information as appropriate. Each
section will be given the weight indicated. Section word counts
are suggested minimums; the only hard and
fast word count requirement is the 5,000 word requirement

26. described in “Other Requirements”.
1. Business Description (5%, 400 words)
Explain key facts about the company including its history,
geographic footprint, major recent
news, and any other material facts or events.
2. Industry Overview and Competitive Positioning (15%, 850
words)
Discuss the firm’s industry. Identify the firm’s closest peers.
Identify the firm’s competitive
position using Porter’s Five Forces analysis, SWOT analysis, or
an alternative methodology.
3. Financial Analysis (15%, 750 words)
Examine the balance sheet, income statement, and statement of
cashflows to understand the
overall financial health of the firm. Use financial ratio analysis
to quantify profitability, liquidity,
debt management, and other key financial metrics. Analyze the
firm’s capital structure. Calculate
the firm’s historical free cash flows. Identify recent capital
raising or returning events. Compare
metrics across time and against the firm’s industry and peers.
4. Investment Risks (10%, 1000 words)
Discuss in detail the risks that an investor must consider if they
were to purchase the company’s
stock. Consider the firm’s exposure to market, idiosyncratic,
financial, operational, credit, liquid-
ity, regulatory, legal, tax, political, and other risks.

27. 5. Corporate Governance (5%, 500 words)
Review the key players in the firm, including the CEO, CFO,
COO, board of directors, or any
other important personnel. Do not simply recite the resumes of
these individuals. Analyze the
quality of the firm’s corporate governance.
6. Valuation (15%, 1000 words)
Report the conclusions from your valuation model. You must
give a detailed description of the
assumptions you made and why you made those assumptions.
Discuss which technique(s) you
employed that are most appropriate for your firm. Arrive at a
valuation for the firm and issue
guidance on the current value of the firm and a one year from
now price target. Discuss your price
targets. Make a quantitative argument for why the stock is a
buy, sell, or hold.
7. Investment Summary (5%, 500 words)
Concisely summarize your overall conclusions from the
previous sections. Make a qualitative
argument for why the stock is a buy, sell, or hold.
1
Valuation Model 30%
Develop a valuation model for the firm using the sections
described below. Use a single Excel workbook for
your results. Your model should include any data you used in

28. your decision making process. The assumptions
you use in this model must be explained in your written report.
1. Cost of Capital (5%)
Estimate the firm’s cost of equity, cost of debt, and cost of
preferred shares. Estimate the firm’s
weighted average cost of capital (WACC).
2. Dividend Discount Model (7%)
Value the firm using the dividend discount model with non-
constant growth.
3. Relative Valuation (3%)
Value the firm using financial multiples, also known as relative
valuation. Your reference multiples
should be pulled from the industry and peers you identified in
the written portion of this project.
4. Discounted Cash Flow Analysis (10%)
Use the firm’s free cash flows to arrive at a value using the
corporate valuation model with non-
constant growth .
5. Price Targets (5%)
Combine the results from the dividend discount model with non-
constant growth, relative valua-
tion, and corporate valuation model with non-constant growth to
produce a current value and a
one year ahead price target for the firm.
Other Requirements

29. 1. The written report must contain at least 5000 words
(10% deduction per 100 words below 5000)
2. The written report must be turned in as a PDF
(5% reduction if any other format is used)
3. The valuation model must be in Excel format or another pre-
approved format
(10% deduction if in an unapproved format)
4. The valuation model must follow best practices for
spreadsheets
(15% deduction if lacking)
5. The written report and valuation model must be well-
formatted
(5% deduction for poor formatting)
6. The written report must include a title page with key
information, including word count.
(5% deduction if lacking)
7. All external sources of data and references must be cited in a
consistent format
(15% deduction for failure to cite)
8. Each deliverable must contain at least two sections from the
report
(10% deduction for each missing section)
2