Sheet1NPV and IRR TemplateAssumptions & inputsrequired rate of re.docx

Sheet1NPV and IRR TemplateAssumptions & inputs:required
rate of return20.0%InvestmentYear 1year 2year 3$
(110,000.0)$ 51,781.00$ 51,780.00$ 71,780.00discount
factor1.201.441.73Present values$ 43,150.8$ 35,958.3$
41,539.4Total present value$ 120,648.5NPV$
10,648.5IRR25.8%
Sheet2
Sheet3
Captain Walter J. Harris, JR.
Captain Harris provided us with a very inspirational and full of
enthusiasm speech. He shared his personal experiences from his
early life. Being able to see first-hand how a person talks about
his ambitions and success in life is very inspiring. Captain
Harris share how he started out as a pilot on a transport plane,
to finally flying passenger planes and even flying
intercontinental flights. One suggestion that Captain Harris
offered to us younger people is to not be complacent and
careless. Having a goal to work towards, we should not get
distracted by other things. Focusing on the set goal will get us
to the end and will help achieve the goal. Four other
suggestions were made. Choosing the right friends can help
determine if we will be successful in our career or if we will
fail and get pulled down and away from our career. If we have
set goals, we will be able to stay on the right track while
staying away from distractions. This also goes hand in hand
with Captain Harris’s other suggestion. We need to stay out of
trouble. A criminal record can keep us away from the dream job
that we might be trying to reach and get. Once we are on our
way to achieve our goal, stopping and checking the direction is
important. If we are still on our way to get to it, then we should
continue. Now if we have strayed from the straight path then
stop, evaluate and get back on the right track. The most
important suggestion that Captain Harris had was to have a plan

for our life. Time does not wait and will not stop for us to make
a pit stop. It keeps going and we could lose a chance of a
lifetime by stopping midway.
Sheet1NPV and IRR Template_ five yearsAssumptions &
inputs:required rate of return9.0%InvestmentYear 1year 2year
3year 4year 5$ (100,000.0)$ 25,000.00$ 25,000.00$
25,000.00$ 25,000.00$ 25,000.00discount
factor1.091.191.301.411.54Present values$ 22,935.8$
21,042.0$ 19,304.6$ 17,710.6$ 16,248.3Total present
value$ 97,241.3NPV$ (2,758.7)IRR7.9%
Sheet2
Sheet3
Sheet1Free Cash Flow Forecast TemplateAppl Inc.(billions of
dollars)2015201620172018Sales$233.7$252.4$272.6$294.4%
increase8.0%EBIT71.2Depreciation11.2EBITDA82.489.897.910
6.7% increase9.0%Tax Expenses19.120.822.724.7%
increase9.0%Operating Cash
flow63.369.075.282.0Capex11.212.012.813.7%
increase7.0%YoY increse in w/capital44.34.75.0%
increase8.0%Levered Free cash
flow$48.10$52.69$57.72$63.22growth rate9.55%9.54%9.53%
Sheet1Discount free cash flow modelApple
Inc.Date:2/24/16assumptions:3-year growth rate9.55%discount
rate (wacc)10.0%discount
factor1.101.211.332015201620172018terminal valuefree cash
flow$ 48.1$ 52.70$ 57.70$ 63.20$ 632.0growth
rate9.55%9.55%9.55%discount factor1.101.211.331.33Present
value$ 47.9$ 47.7$ 47.5$ 474.8total firm value per share$
617.9billionsdebt$ 64.5cash$ 180.0total equity value$
733.4shares outstanding$ 5.5equity value per
share$133.3terminal value calculation:using the 10 factor$
632.0Note: Red numbers indicate required inputs

Sheet2
Sheet3
2
Research term paper
Five major sections:
l Company background / introduction
l Competitive strengths
l Financial analysis (focus section)
l Stock valuation analysis
l Investment summary & recommendations
Company Competitive strengths
• Cost / price leadership
• Differentiated products
• Industry positioning:
• market share, brand & reputa1on, corporate
culture, management
trackrecord, etc.
An Economic moat
An economic moat is a barrier that protects a firm's margin and

profits from
competing firms, thus better able to sustain its high margin and
profitability.
• An economic moat comes from a firm’s sustainable
competitive
advantages over similar companies.
Example:
• Wal-Mart's buying power, economy scaleand
distribu1on infrastructure create a
wide and sustainable economic moat.
Economic moats
• A cost advantage
• A size advantage: economic scale
• Intangible assets: patents, brand recognition, government
licenses, etc.
• High switching cost
• Network effect: a firm's value increases as number of users
increase
• Soft moats: exceptional management, unique corporate
culture.
Example: Intel Corporation
Competitive strengths:

l Low cost producer / economy of scale
l Generally superior products
l Dominant market share
l Well capitalized balance sheet
l Manufacturing expertise / vertical integration
l Brand recognition: Intel Inside
Intel: economic moats
Sustainable advantages:
l Dominant market share position
l well capitalized balance sheet
l Strong technology and R&D expertise
l Deep manufacturing knowhow
Financial analysis
• Sales / growth analysis
• Profitability and margin analysis
• Asset turn over analysis
• Liquidity analysis
• Financial leverage
• ROE analysis (DuPont formula)
• WACC analysis and Enterprise value
• Free cash flow projections

Sales / growth analysis
• Sales by business segments and by regions
• Historic sales growth rate (last 5 years)
• Es1ma1ng growth rate next 5 years based on
the historic sales
growth
Ra1oanalysis
• Profitability and margin analysis:
• EBIT margin and net margin
• Asset turn over analysis:
• Total asset turnover
• Inventory turnover
• Liquidity analysis
• Quick ratio
• Debt/equity ratio
• EBIT/interest coverage
ROE analysis
The DuPont Identity:

• ROE
= Net margin * total asset turnover * equity multiplier
Free cash flow projections
Using the % of sales approach:
• Look up 2015 year sales, EBITDA, taxes, capex and working
capital change
• Estimate sales growth rate for next 3 years;
• estimate growth rates for other income statement items: EBIT,
Taxes, capex and working capital change
• Estimate free cash flows for next 3 years
(see FCF forecast template)
WACC analysis
• Market value of debt
• Market value of equity
• Total enterprise value
• Cost of debt es1mate
• Cost of equity es1mate using CAPM
• WACC calcula1on
Financial analysis example:
Apple Inc.
Company Compe11ve strengths:

1. Integrated products and services (one eco-system):
hardware, soQware, apps store,
iclouds, Pay, etc
2. Brand
3. Customer loyalty
4. Financial strength and profitability
5. Abilityto leverage current plaWorm: Apple
Pay, Watch
6. Management
Apple Inc.
Compe11ve strategies:
1. Differen1ated products
2. Product quality and innova1ons
3. Integrated offerings: hardware, soQware and services
4. Third partydeveloper contents and apps
5. Company-own distribu1on network: retail stores
6. New products/ services: Pay
Apple: Free cash flow projections
From Yahoo/finance:
For FY2015:
• EBIT: $71.2 b
• D&A: $11.2 b
• Taxes: 19.1 b

• Capex: 11.2 b
• w/capital increase: $4 b
Apple FCF forecast
(see template)
17
Free Cash FlowForecast Template
Appl Inc.
(billions of dollars)
2015 2016 2017 2018
Sales $233.7 $252.4 $272.6 $294.4
% increase 8.0%
EBIT 71.2
Depreciation 11.2
EBITDA 82.4 89.8 97.9 106.7
% increase 9.0%
Tax Expenses 19.1 20.8 22.7 24.7
% increase 9.0%
Operating Cash flow 63.3 69.0 75.2 82.0
Capex 11.2 12.0 12.8 13.7
% increase 7.0%
YoY increse in w/capital 4 4.3 4.7 5.0
% increase 8.0%

Levered Free cash flow $48.10 $52.69 $57.72 $63.22
growth rate 9.55% 9.54% 9.53%
Apple: WACC analysis
• Market value of debt:
• use book value of debt at $64.5 b
• Cost of debt:average about 1.5%
• Market value of equity
• Market capitaliza1on at $528 b
• Total enterprise value
• Debt + equity = 64.5 + 528 = $592.5 b
• Debt % = 64.5 / 592.5 = 11%
• Equity % = 528 / 592.5 = 89%
Apple: stock data
(from yahoo/finance)
Stock Price: $95 (as of 2/24/2016)
• Current dividend: $2.08 per share
• Beta: 1.35 (will use 1.1)
• Growth rate (next5-year): 12.7%
• Total shares outstanding: 5.5 billion
Stock Market assump1ons:
• Market beta: 1.0

• Long term risk free rate: 4.5%
• Long term risk premium: 6%
Apple: WACC analysis
Cost of equity es1mate using CAPM:
• Re = 4.5%risk free rate + 1.1 beta* 6% risk
premium = 11.1%
WACC calcula1on:
• WACC = Re * (E%)+ Rd *D% (1 – t)
• =
11.1% * 89% + 1.5%*11% (1 -35%)
• =
10%
20
Stock valuation analysis
• Estimate the stock beta
• Estimate stock discount rate using CAPM
• Estimate dividend growth rate
• stock valuations model:
• Dividend Growth Model
• Discount Free Cash Flow model

• Set weighted price target
• Use the investment criteria to make buy /sell decision
Investment buy criteria
To buy a stock:
• Strong competitive strengths
• Strong financial conditions
• Free cash flow generation
• Stock price target from DGM and DCF models:
• upside potential from current price at least 20%
Apple: stock data
(from yahoo/finance)
Stock Price: $95 (as of 2/24/2016)
• Beta: 1.35 (will use 1.1)
• Longterm growth rate:
Market assump1ons:
• Market beta: 1.0
• Long term risk free rate: 4.5%
• Long term risk premium: 6%
Apple: discount rate & growth rate

Apple Beta = 1.1
• Discount rate using CAPM:
k =
4.5%+ 1.1 *6% = 11.1%
• 5-year growth rate es1mate: 11.9%
(yahoo/finance)
• For my models, I will use 9% 5-year growth
rate.
Apple Inc:
Perpetual DDM model
• dividend growth rate: 9% (assump1on)
• Equity discount rate: 11.1%
• Fair value = $2.08 (1+9%) / (11.1% -
9%)
•
= $108
( )
k)g :(Important
gk
D
gk
g1D
P 100 <

−
=
−
+×
=
Apple: DCF Model
From the DCF spread sheet:
• 3-year growth rate: 9.55%
• Discount rate: WACC = 10%
• Equity fair value = $133
26
27
Discount free cash flow model
Apple Inc.
Date: 2/24/16
assumptions:
3-year growth rate 9.55%
discount rate (wacc) 10.0%
discount factor 1.10 1.21 1.33
2015 2016 2017 2018 terminal value
free cash flow 48.1$

52.70$
57.70$ 63.20$ 632.0$
growth rate 9.55% 9.55% 9.55%
discount factor 1.10 1.21 1.33 1.33
Present value 47.9$
47.7$
47.5$ 474.8$
total firm value per share
617.9$
billions
debt 64.5$
cash 180.0$
total equity value 733.4$
shares outstanding 5.5$
equity value per share $133.3
terminal value calculation:
using the 10 factor 632.0$
Note: Red numbers indicate required inputs
Apple: Sejng pricetarget
• DDM fair value : $108

• DCF fair value: $133
• Weighted average pricetarget: $120.5
• Current price: $95
• Stock upside poten1al: 26.8%
• Investment recommenda1on: buy
Apple:
Investment summary & recommendation
Investment summary:
• Strong compe11ve posi1ons with leading market
share, integrated
products and services (one eco-system), strong brand
and customer
loyalty
• Strong financial strength and profitability
• Stock fair value: over 20% upside from current
price
Recommenda1on: buy
Team discussions items:
• What are the company’s competitive strengths?
• How are the company’s financial conditions?
• What are reasonable estimates for company beta and growth
rate and discount rate?

• What is the fair value from the DDM and DCF models?
• Does the price target from the stock valuation models provide
20% upside?
• What’s the investment recommendation based on the buy
criteria?
CFA Institute Research Challenge
Hosted in
Consumer Goods, Paper & Paper Products Industry
New York Stock Exchange

Date: 1/6/2015 Current Price: $46.14 Recommendation: Sell
Ticker: CLW 1 Year Target Price: $41.19
Market Capitalization:
52 – Week Range $39.81-75.69 Book Value per Share $25.69
Beta .68 Shares Outstanding 18M
Company Overview:
Location: Spokane, Washington
Industry: Paper and Paper Products
Company Website: clearwaterpaper.com
Analysts: Investment Research Advisor:
Bhanu Adhikari Cai, Vinson
Carmelo DeLeon
Vanessa Ibarra
Ava Le
Derrick Woodbury
This report is produced solely as part of an educational
program. The information set forth herein has been obtained
or derived from sources generally available to the public and
believed by the author(s) to be reliable; however, the
author(s) does not make any representation or warranty, express

or implied, as to its accuracy or completeness. This
information does not constitute investment advice, nor is it an
offer or solicitation of an offer to buy or sell any
security. In regards to any potential investment, you should
consult an investment consultant and/or conduct your
own primary research.
Company Background
Primary Businesses
The primary businesses of Clearwater Paper includes pulp and
paperboard
production which holds 40% of 2014 net sales, as well as
consumer
products which holds 60% of 2014 net sales. Clearwater Paper
Corporation is among the largest manufacturers in North
America for both
of the previously stated segments.
Bleached Paperboard Business
Bleached paperboard manufactured by Clearwater Paper holds
the fifth
largest capacity in North America with 12% of the market share.
They are
also the largest manufacturer of Solid Bleach Sulfate
Paperboard (SBS) in
the United States. This business includes producing the finished
paperboard and selling the product to companies who will turn
the
paperboard into finished containers for their own products.
These products
include but are not limited to consumer goods, pharmaceuticals,
food, and
liquid containers. The top ten customers of Clearwater account

for 50% of
paperboard shipments.
Consumer Products Business
Clearwater Paper Corporation also has one of the largest
consumer
product manufacturing businesses in private label tissue.
Clearwater paper
puts much of their effort towards assuring competitive quality
and value of
tissue in all of the different types of private label products they
offer. The
three largest customers they retain for these products consists of
Safeway,
Albertsons, and Kroger. Business with the three of those
companies makes
up almost a quarter of the total revenue for Clearwater Paper.
The amount
of business Clearwater receives from these companies mirrors
the time
they have had together. Clearwater has been supplying those
three
companies for over 25 years. Also to be noted, Clearwater has
an average
customer relationship span of 19 years.
Industry Research
Competitive Rivalry in the industry
We believe the competitive rivalry in the industry is high.
Clearwater
Paper Corporation is competing with good standing in Western
U.S.A. but
facing high competition on Mid-West and East U.S.A. CLW
Corporation’s major competitors on consumer branded tissue
and private
level products are Procter & Gamble, Georgia-Pacific, Kimberly

Clerk,
International Paper, MeadWestvaco, and RockTenn. Most of the
major
competitors are larger in size and have significant market share
in U.S. We
assess the threat of competition as high.
Threat of new entrants
The threat to new entrants for this industry is moderate. Despite
the
capital-intensive manufacturing process of private label tissue
and
bleached paperboard products, foreign manufacturers of
paperboard from
Asia are increasing and expected to increase their presence in
the U.S
market. Long-standing customer relations with some contact
customer can
decrease certain level of the threat. Another strength for
reducing threat of
new entrant is strategically positioned pulp and paperboard
facilities for
efficient distribution and availability of corporation’s
manufacturing
inputs. We assess a moderate threat of new entrants due to
some barriers
to new entrant to the industry.
Bargaining Power of Customers
Customers have a high bargaining power. Clearwater Paper
Corporation

has to deal with retailers and other institution such as airports,
hotels,
restaurants, and office building for both of its Consumer
product and Pulp
and paperboard business segments. Those institutions have huge
buying
power. Buyers can choose competitors’ products and service for
better
quality or price. We assess high bargaining power of consumer.
Threat of Substitutes
There is a low threat of substitutes in this market. Clearwater
Paper
Corporation’s pulp & paperboard and consumer products are
basic goods.
There are very few substitutes for their products. Still there are
threats of
substitutes from larger competitors’ products with possible new
technologies improvement due to their operational advantages.
Also use of
toilet paper and other tissue paper can be replaced by air drier.
We access
the low threat of substitutes in near future because CLW
products do not
have perfect substitutes.
Bargaining Power of Suppliers
Suppliers in this market have a moderate level of bargaining
power.
Principal raw material used is wood fiber consisting of pulp and
chips,
sawdust, and logs. Clearwater Paper Corporation limits some
level of
bargaining power of suppliers by owning and operating a wood
chipping
facility located in Clarkston, Washington. The suppliers of
other inputs
such chemicals in the production of pulp and paper, caustic,

polyethylene,
starch, sodium chlorate, latex and specialty process paper
chemicals has
high bargain powers.
Industry Life Cycle
Maturity Stage
In U.S market, paper & paper products industry is in the
maturity stage of
its life cycle, but it is still in growth stage in its respective
international
market. In recent years U.S paper and paper product industry
has slow
sales growth and low profit margin because this industry has a
long history
of providing products since 20th century. Now there are many
competitors
in the paper & paper product industry creating product
differentiation with
high promotion and advertisement. We assess paper & paper
products to
be in the maturity stage of its life cycle in the U.S market.
In international markets, especially in emerging markets, paper
& paper
products are in growth stage. Economic situation of developing
counties
are improving and they are consuming more of those products.

Developing countries used other alternatives for paper & paper
products
for example; people in less developed country’s use water
instead of toilet
paper, and use durable clothes as towels instead of tissue paper.
Stable Growth and Demand of Tissue Market
Clearwater Paper Corporation focuses on tissue paper business
in its
consumer products division. The tissue market has grown an
average of 1%
- 2% annually since 1996, which is consistent with U.S
population growth.
In 2015 it was expected to increase tissue demand index to 143
from
demand index of 141 in 2015, which is proportion to the
expected
population growth in 2016 to 324 million from 321 million in
2015.
Company Strengths
High Quality Products
Pulp & Paperboard products are at a high quality for printing.
They are
durable, yet, flexible for transforming into finished products for
their
customers. These paperboard products are also offered in
various sizes and
thicknesses. The consumer products offered by Clearwater
Paper are of
high quality that match leading brand name products. These
products are
also offered in various grades of quality for different price
ranges.
Clearwater Paper's consumer tissue paper products are 100
percent private

label products.
Long-Standing Relationships
Clearwater Paper has created flourishing, long-standing
relationships with
their customers for both, their pulp and paperboard products, as
well as
their consumer private label products. The consumer product
business
supplies three major national grocery brands. The paperboard
business'
largest 10 customers account for more than half of the
shipments of the
business. Many of their top tissue customers have been
associated with
Clearwater for more than twenty years.
Strategic Plant Locations
The geographic strength of Clearwater Paper reaches throughout
the
United States. In regards to Clearwater Paper's Pulp and
Paperboard
business, the Lewiston, Idaho facility is the only coated solid
bleach
sulfate (SBS) paperboard mill in the Western United States.
This allows
them to have reduced transportation costs to the Western United
States as
well as Asia. There is also another Clearwater Paper pulp and
paperboard
mill in Cypress Bend, Arkansas that assists the Lewiston mill
reach
customers throughout the whole United States. This mill's
primary focus is

to the Midwestern and Eastern United States.
The consumer products segment holds most of the company's
sales. This
fact directly complements the reasons for having seven mills
scattered
throughout the United States dedicated to providing customers
with their
private label consumer products. Due to the light weight nature
of tissue
paper, it is necessary that Clearwater Paper have multiple mills
throughout
the U.S. in order to maintain lower transportation cost and still
be able to
reach a broad amount of customers nationwide. This is precisely
the
methods that Clearwater is utilizing.
Competitive Strategy
Private Label Focus
Clearwater Paper Corporation has many products that rival their
competition. For example, their consumer products offered and
the quality
that is attached to them. But Clearwater Paper also has
competitive
strengths in regards to production. Clearwater unlike many of
their
competitors produces much of their own pulp. Other companies,
outsource
most, if not all pulp from companies in order to produce their
finished
products. Whereas, Clearwater paper, only has to insource
minor amounts
for production. Clearwater Paper has determined to enact
consist of
growing their tissue business, as well as maximizing the

profitability of
both, their paperboard and tissue businesses. Clearwater Paper's
macro
strategy is to create and increase shareholder value.
Growing Tissue Business
Some of the goals Clearwater Paper have set to grow their tissue
business
are to lead private label in quality. They wish to expand to more
locations
geographically, as well as diversify their customer base.
Maximizing Profitability of Paperboard Businesses
In order to maximize the profitability of paperboard and tissue
businesses,
Clearwater Paper plans to improve the sales mix of their
products. They
also are taking steps to reduce various costs within their
company.
Clearwater Paper is working on finding new ways to become
more
desirable through improvements of their products quality. They
have also
taken other investment actions to maximize the profitability of
their
businesses. For example, Clearwater Paper has announced that
they will
be investing $160 million in their Lewiston, Idaho mill. The
finished
product of this investment is a continuous pulp digester. This
will reduce
air emissions, reduce cost of wood supplies used in pulp
production, and
produce higher quality pulp.
Location Strategy
There are seven facilities of Clearwater Paper Corporation
scattered
throughout the United States. Their biggest, being located in

Lewiston,
Idaho. Due to their more lucrative business in private label
consumer
products, Clearwater Paper aims to expand geographically to
meet the
needs of private label customers all around the United States
while cutting
transit cost that are attached to shipping their products. The
company has
opportunity to gain market share in the tissue paper market
throughout the
United States, more specifically, the Eastern United States.
Clearwater
Paper is contemplating options to open more mills on the East
coast. At
this time, Clearwater Paper has only one facility on the East
Coast located
in Shelby, North Carolina that provides private label products to
customers in that section of the country. This strategy would
better enable
Clearwater to meet demands of present customers and give them
the
opportunity to add East coast retailers to the customer base.
Enacting in
these options would help Clearwater Paper achieve more market
share
through a larger customer base from manufacturing and sales at
more
locations. This strategy would also further the reduction of
transportation
costs of materials of outsourcing and finished products to be
sent to
customers.

Financial Analysis
Free Cash Flow Analysis
Clearwater seems to be showing small improvements in its
yearly free
cash flow over the next few years. Growing from $82 million to
$157
million (estimated). There was relatively small growth in
operating
income. However there seems to be a steady demand growth in
tissue in
the range of 2%. Also their pulp sector will become more
efficient over
the next few years with the installment of a continuous digester.
This will
increase CAPEX in 2016 and 2017, however the new machinery
produces
more output with the same amount of input allowing Clearwater
to
increase inventory. The excess pulp can in turn be used to
reduce their
tissue expenditures. Please refer to appendix two for the free
cash flow
analysis.
ROE versus Competitors
ROE for Clearwater at 3.6% versus the simple industry ROE

average of
12.7% is low. Clearwater Paper simply cannot compete with its
competitors in offering any return on its equity to its
shareholders.
However, ROE will most likely fluctuate over the next few
years due to
increasing financial leverage and a decreasing asset turnover
ratio.
Economic Value Added
Clearwater had a total equity of $497,537, total long-term debt
of
$575,000, a tax rate of 37%, a discount rate of 11.2%, and a
cost of debt
6.78%. Using these factors we derived their ROIC of 12.7% and
WACC
of 9.4%. Therefore the economic value added is 3.3%. This is
their highest
true economic profit when compared to previous years.
Forecast Model
Clearwater’s revenue fell from $1,967 million in 2014 to $1,746
million in
2015. However total revenue growth is expected to grow at a
slow but
steady pace of about 1-3% in the next few years. Their revenue
growth is
closely tied to population growth. This information entitles us
to assume
that there will not be any substantial revenue growth over the
next 3 to 4
years. They completed a repurchased program, which minimized
their
outstanding shares to 18 million.
There are no indications of Clearwater disbursing dividends to

shareholders’ nor any indication of increasing their outstanding
shares.
From this we forecasted that their EPS would increase over the
next few
years by from 3.76 in 2015 to 4.69 in 2018 mirroring their
steady increase
in net income. Please see appendix three for the financial
forecast.
Stock Valuation Analysis
Discount Cash Flow (DCF) Model
Since the current stock price is $46.14 and the number of shares
is
18million, the market value of the firm’s equity is $830.52
(46.14*18
million). The market value of the firm’s debt is $575 million.
So the total enterprise value of the firm is $1400 million. The
total equity
and debt is $1405million. 60% of company financing comes
from equity
(total equity/ total equity and total debt), the same 40% comes
from debt
(total debt/total debt and total equity). According to S&P 500
index (on
2/11/15), the long term market risk premium is 6%, longer risk
free rate is
4%, the market expected return = long term market risk
premium + longer
risk free rate = 6% + 4% = 10%.
We believe the stock price has high volatility being a small cap
company,
so we use the beta of 1.2. Under the CAPM (Capital access
pricing model)

the cost of equity with beta of 1.2 is 11.2% (4%+1.2*6%). The
interest
expense in 2014 is $39 million. The total debt is $575 million.
The cost of
debt is 6.78% (the total expense/total debt).
By using all the information above, the weighted average cost
of capital
will be 9.4%. (60%*11.2%+40%*6.78%). We estimated the 5
year growth
rate for this firm is 9.0% and estimate the long term growth rate
to be 4%.
The firm’s estimated EBITDA in 2015 is $208 million. The
estimated
income tax expense is $30 million. The estimated capital
expenditures are
$100 million. Using the DCF model in appendix 4, we can find
the fair
value to be $40.54 per share.
High PEG Ratio
Clearwater Paper has a PEG ratio of 3.87 versus the simple
industry
average PEG ratio of 2.92. Using this as a benchmark to value
the
company’s performance it is considerably high. This confirms
that our
analysis of the stock is overvalued.
P/E Valuation for CLW
Because CLW does not pay a dividend, and is expected to have
low (1-
2%) revenue growth, conventional valuation measures like
DDM, RIM
produce unreliable results. CLW is looking to increase
profitability

through operational efficiency and margin improvements; so, we
conducted financial ratio analysis of more established and
larger
competitors to derive a reasonable present value. Here is a
compilation of
data for the primary competitors of CLW:
Peer Group Comparison
As of 1/5/15 WRK IP WY CLW Simple Avg of Competitors
Price 45.49 37.99 29.90 46.30 -
Market Cap 11.58B 15.75B 15.26B 0.823B 14.20
P/E (ttm) 15.53 18.04 27.48 51.85 20.35
Forward P/E 12.92 9.82 20.62 11.05 14.45
PEG 1.64 1.32 5.79 3.87 2.92
P/S 1.02 .69 2.13 .46 1.28
P/B .99 3.59 3.13 1.76 2.57
ROE 8.1% 18.6% 11.3% 3.6% 12.7%
LT Debt/Equity .48 2.04 1.11 1.30 1.21
Div Yield 3.30% 4.63% 4.15% - 4.02%
Beta 1.32 1.43 1.11 .68 1.29
As shown, CLW represents a comparatively good value in terms
of its P/S
of .46, likely due to comparatively thinner margins. The
company’s P/B
also appears comparatively attractive, especially given their
modest
Debt/Equity. Trailing P/E for the company is much higher than
their
competitors; and so, with robust growth expected over the next
5 years, we
based our financial ratio valuation on the forward P/E.

Because CLW is a micro-cap, albeit with a comparatively low
beta, we
believe this warrants additional margin of safety compared to
competitors.
Also, we consider Weyerhaeuser to be an outlier in our forward
P/E
comparison, so we calculated the average forward P/E of
Westrock and
International Paper to be 11.4. A discount factor of 12.5% was
used to
give sufficient margin of safety, leaving a target forward P/E of
10.0. This
translates into a price target of $41.83.
Based on the DCF model price of $40.54 and the P/E model
price target of
$41.83 we achieve our one year average target price of $41.19.
This target
price is below the current price of $46.14.
Investment Summary & Recommendation
Summary
With a high competitive industry and high bargaining power of
customers
it is difficult to break entry into the paper and paper product
industry. This
industry is already in the mature stage of if its life cycle and
with the
amount of economic risk/industry pricing pressure this company
faces this
stock seems unfavorable. Clearwater does not pay dividends as
do their

competitors and is subject to minimal growth. The PEG ratio is
high and
the ROE is low when compared to the industry and does not
favor a sound
investment. With Clearwater’s competitors being a more
affordable stock
and offering dividends with a higher ROE and better margins
than
Clearwater it is hard to see why purchasing this stock would be
a good
idea.
Recommendation
We recommend to sell Clearwater Stock at the current price of
46.14. The
stock is overvalued by our models. The volatility of this
company seems
to be underrated with a beta of .68 which is considerably low.
The risks
this company faces outweigh the positive factors that the
company
presents. The growth rate of the company is predicted at too
high of a rate
and with sales only increasing at the rate of population growth,
this small
cap company would pose too risky for any significant returns.
With this
company generating a negative net income in the year 2014, the
recommendation to hold off on this stock is high.
Investment Risk Factors
Late Stage of U.S Economic Growth
Paper & paper products have positive relation with the U. S
economy,
especially its housing market. Currently, the U.S economy is in

a
relatively strong recovery position since the recession of 2008.
However,
with the Federal Reserve raising interest rates and the
uncertainty of oil
prices these risks pose a threat to the growth of the paper and
paper
products industry.
Operational Risks
A majority of the risk Clearwater Paper faces is operational.
They face
competitive pricing pressures on their products due to increased
capacity
as additional manufacturing facilities are operated by their
competitors.
Changes in transportation costs or possibly disruptions with
transportation
services. Changes in the availability or cost of wood pulp and
wood fiber
or possibly labor disruptions. As well as manufacturing or
operating
disruptions such as IT system failures, equipment malfunction,
or possibly
damage to manufacturing facilities due to fire or other weather-
related
incidents. If changes in costs occur for packaging supplies,
chemicals,
energy, and maintenance/repairs this could prove harsh and
effect the
company’s bottom line at the end of the fiscal year.
Industry Pricing Pressure
These risks include but are not limited to events such as
changes in

international, U.S. economy, or in regions in which Clearwater
Paper
operates. Any announced price changes for their product that
may not be
widely accepted. An inability to fund their debt obligations,
facing
restrictions on their business from terms and debt covenants,
and or
changes in laws, industry standards, or regulations that affect
their
business. If any foreign currency were to suddenly appreciate
against the
dollar than Clearwater may face more import competition from
overseas.
Other Risks
Customer preference also plays a risk if changes in customer
preferences
occur or competitors have better product offerings. Cyclical
industry
conditions as well as customer acceptance of timing, and the
quantity of
purchases through Clearwater Paper’s new through-air-dried or
TAD
products. There is also a chance that the company may not
successfully
implement its planned operational efficiencies or its expansion
strategies
causing even further setback and stagnating potential company
growth.
Weather also poses a significant risk in some areas where
Clearwater
Paper has placed its plants, in the Spokane and Lewiston
locations, known
wind storms have been known to occur as well as significant
snowfall
which can lead to power outages or delayed transportation

shipments.
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report do
not hold a financial interest in
the securities of this company.
The author(s), or a member of their household, of this report do
not know of the existence of any
conflicts of interest that might bias the content or publication of
this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on
investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as
an officer, director or advisory
board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject
company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived
from sources generally available to
the public and believed by the author(s) to be reliable, but the
author(s) does not make any
representation or warranty, express or implied, as to its
accuracy or completeness. The

information is not intended to be used as the basis of any
investment decisions by any person or
entity. This information does not constitute investment advice,
nor is it an offer or a solicitation
of an offer to buy or sell any security. This report should not be
considered to be a
recommendation by any individual affiliated with Eastern
Washington University, CFA Institute
or the CFA Institute Research Challenge with regard to this
company’s stock.
CFA Institute Research Challenge
Appendix 1
Clearwater’s Balance Sheet Two-Year Comparison
2015 2014 $ Variance
Assets
Cash & Equivalents $128 79 49

Accounts Receivable 148 134 14
Inventory 157 286 -129
Other Current Assets 37 28 9
Total Assets 471 527 -56
Liabilities
Short Term Liabilities 101 0 101
Accounts Payable 61 216 -155
Other Current Liabilities 90 8 82
Total Current Liabilities 252 224 28
Long-Term Debt 574 575 -1
Other Long-Term
Liabilities
380 280 100
Total Long-Term
Liabilities
954 855 99
Total Liabilities 1,206 1,088 118
Shareholders’ Equity 460 498 -38
Total Liabilities and

Equity
1,666 1,586 80
Appendix 2
Free Cash Flow Model
Appendix 3

Appendix 6
Clearwater Market Share
Appendix 7

Appendix 8
Research term paper
• Students in a team of 3 or 4 people
• Term paper due on the final week
2
Research term paper
Seven major sections:
l Company background / introduction
l Industry research

l Company research
l Company financials
l Stock valuations
l Investment summary & recommendations
l Investment risk factors
Industry research
l Porter’s five-force analysis
l Industry life cycle
l Industry fundamentals:
l competitive structure / market share
l long term demand /growth outlook
l Economic sensitivity
Company analysis
Compe..ve strengths
• Low cost producers
• Differen.atedproducts
Compe..ve strategies
• Low pricestrategy
• Differen.a.ngstrategy /branding
• Focus / niche strategy

Financial analysis
• Sales / growth analysis
• Profitability and margin analysis
• Asset turn over analysis
• Free cash flow analysis
• ROE analysis
• Internal growth rate
Stock valua.ons models:
• Dividend Discount Model
• Residual Income Model
• The PEG ra.o method
Stock valuation analysis
• Create a stock data page (from yahoo/finance)
• Es.mate the stock discount rate using CAPM
• Es.mate growth rate: es.mated growth rate from yahoo
finance
/ or internal
growth rate
• Calculate stock valua.ons using the DDM
and RIM models
• Set weighted pricetarget
• Look up the stock PEG ra.o from yahoo finance

• Use the investment criteria to make buy
/sell decision
Investment buy criteria
To buy a stock:
• AMrac.ve industry
• Strong compe..ve strengths
• Sound compe..ve strategies
• Strong financial condi.ons
• Stock pricetarget: upside poten.al at least 20%
• PEG ra.o below market of 2.5
Team discussions items:
• Is the industry attractive: fast growing, high margin, high
return on capital,
growth stage of life cycle, etc.
• What are the company’s competitive strengths?
• What are the company’s competitive strategies?
• How are the company’s financial conditions?
• Does the price target from the stock valuation models provide
20% upside?
• Is the stock’s PEG ratio below market PEG ratio ?
• What’s the recommendation based on the buy criteria?
• What’s the risks involved in the company and its stocks?
Example: Apple Inc.

Stock Data:
• Stock Price: $128 (as of 11/18/14)
• Current dividend: $1.88
• Beta: 1.06
• P/Era.o: 17
• PEG ra.o: 17 / 12.7 % = 1.2
• Book value: $21.2 per share
• ROE: 35% (fy2014)
Apple Inc.
Company Compe..ve strengths:
1. Integrated products and services (one eco-system):
hardware, soaware,
apps store, iclouds, Pay, etc
2. Brand
3. Customer loyalty
4. Financial strength and profitability
5. Abilityto leverage current plaborm: Apple
Pay, Watch
6. Management
Apple Inc.
Compe..ve strategies:
1. Differen.ated products
2. Product quality and innova.ons
3. Integrated offerings: hardware, soaware and services

4. Third partydeveloper contents and apps
5. Company-own distribu.on network: retail stores
6. New products/ services: Pay
Apple valuations:
discount rate & growth rate
Apple Beta = 1.06
• Discount rate using CAPM:
k =
5% + 1.06 *6% = 11.4%
• 5-year growth rate es.mate: 12.7%
(yahoo/finance)
• For my models, will use 10% growth rate
Market valuations
S&P 500 index (SPY):
• Long term market risk premium: 6%
• Longer range risk free rate: 5%
• Market expected return = 5% + 1* 6% =
11%
From Yahoo/finance:
• Earningsgrowth rate long term: 7%
• PEG ra.o: 2.5

Apple Inc:
Perpetual DDM model
• dividend growth rate: 10% (assump.on)
• Discount rate: 11.4%
• Fair value = $1.88 (1+10%) / (11.4% -
10%)
•
= $148
( )
k)g :(Important
gk
D
gk
g1D
P 100 <
−
=
−
+×
=
Apple: RIM model
• Current book value per share: $21.2
• Current ROE: 35% (will use 25% as long

term ROE)
• long term growth rate assump.on: 10%
• Discount rate: 11.4%
• Fair value = $21.2 + (25% -11.4%) /
(11.4% - 10%)* $21.2
= $21.2 +
$206 = $227
0 0 0
ROE r
V B B
r g
−
= +
−
Apple: Setting price target and recommendation
• DDM fair value : $148
• RIM fair value: $227
• Weighted average pricetarget: $187
• Current price: $128
• Stock upside poten.al: 46%
• Apple PEG ra.o: 17 / 10 % = 1.7 (<
market PEG of 2.5)
• Investment recommenda.on: buy

Apple investment summary
Investment summary:
• AMrac.ve and high growth smart phone
industry
• Strong compe..ve posi.ons with leading market share,
integrated products and
services (one eco-system), strong brand and
customer loyalty
• Sound compe..ve strategies:premium pricing, new and
innova.ve products, one eco-
system
• Strong financial strength and profitability
• Stock upside poten.al over 20%
• PEG ra.o below market level of 2.5
Apple Inc.
Investment risk factors:
• Increasing compe..onfrom Samsung / google
android;
• BeMer and improvinglow end alterna.ve (Xiaome, etc.)
• Slowing smart phone market growth rate as
demand satura.on
increases
• Overseas components sourcing and products
manufacturing

• Risk of new product cycle
• Foreign government policy /restric.ons

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