ChapterTool KitChapter 1212912Corporate Valuation and Financial .docx

ChapterTool KitChapter 1212/9/12Corporate Valuation and
Financial Planning12-2 Financial Planning at MicroDrive,
Inc.The process used by MicroDrive to forecast the free cash
flows from its operating plan is described in the sections
below.Setting Up the Model to Forecast OperationsWe begin
with MicroDrive's most recent financial statements and selected
additional data.Figure 12-1 MicroDrive’s Most Recent Financial
Statements (Millions, Except for Per Share Data)INCOME
STATEMENTSBALANCE
SHEETS20122013Assets20122013Net sales$ 4,760$
5,000Cash$ 60$ 50COGS (excl. depr.)3,5603,800ST
Investments40-Depreciation170200Accounts
receivable380500Other operating
expenses480500Inventories8201,000EBIT$ 550$ 500Total
CA$ 1,300$ 1,550Interest expense100120Net
PP&E1,7002,000Pre-tax earnings$ 450$ 380Total assets$
3,000$ 3,550Taxes (40%)180152NI before pref. div.$ 270$
228Liabilities and equityPreferred div.88Accounts payable$
190$ 200Net income$ 262$ 220Accruals280300Notes
payable130280Other DataTotal CL$ 600$ 780Common
dividends$48$50Long-term bonds1,0001,200Addition to
RE$214$170Total liabilities$ 1,600$ 1,980Tax
rate40%40%Preferred stock100100Shares of common
stock5050Common stock500500Earnings per
share$5.24$4.40Retained earnings800970Dividends per
share$0.96$1.00Total common equity$ 1,300$ 1,470Price per
share$40.00$27.00Total liabs. & equity$ 3,000$ 3,550The
figure below shows all the inputs required to project the
financial statements for the scenario that has been selected with
the Scenario Manager: Data, What-If Analysis, Scenario
Manager. There are two scenarios. The first is named Status
Quo because all operating ratios except the sales growth rate are
assumed to remain unchanged. The initial sales growth rate was
chosen by MicroDrive's managers based on the existing product

lines. The growth rate declines over time until it eventually
levels off at a sustainable rate. The other scenario is named
Final because it is the set of inputs chosen by MicroDrive's
management team.Section 1 shows the inputs required to
estimate the items in an operating plan. For each of these
inputs, Section 1 shows the industry averages, the actual values
for the past two years for MicroDrive, and the forecasted values
for the next five years. The managers assumed the inputs for
future years (except the sales growth rate) would be equal to the
inputs in the first projected year.MicroDrive's managers assume
that sales will eventually level off at a sustaniable constant
rate.Sections 2 and 3 show the data required to estimate the
weighted average cost of capital. Section 4 shows the forecasted
growth rate in dividends.Note: These inputs are linked
throughout the model. If you want to change an input, do it here
and not other places in the model.Figure 12-2MicroDrive's
Forecast: Inputs for the Selected ScenarioStatus
QuoIndustryMicroDriveMicroDriveInputsActualActualForecast1
. Operating Ratios20132012201320142015201620172018Sales
growth rate5%15%5%10%8%7%5%5%COGS (excl. depr.) /
Sales76%75%76%76%76%76%76%76%Depreciation / Net
PP&E9%10%10%10%10%10%10%10%Other op. exp. /
Sales10%10%10%10%10%10%10%10%Cash /
Sales1%1%1%1%1%1%1%1%Actual Historical FinancingAcc.
rec. / Sales8%8%10%10%10%10%10%10%20122013Inventory /
Sales15%17%20%20%20%20%20%20%Long-term
debt$1,000$1,200Net PP&E /
Sales33%36%40%40%40%40%40%40%Short-term
debt$130$280Acc. pay. /
Sales4%4%4%4%4%4%4%4%Preferred stock$100$100Accruals
/ Sales7%6%6%6%6%6%6%6%Market value of equity = (Price
x # shares)$2,000$1,350Tax
rate40%40%40%40%40%40%40%40%Total$3,230$2,9302.
Capital StructureActual Market WeightsTarget Market
Weights% Long-term
debt22%31%41%28%28%28%28%28%See the box to the right

for calculations of the actual capital structures, based on market
values, for the past two years.Percent long-term debt31%41%%
Short-term debt3%4%10%2%2%2%2%2%Percent short-term
debt4%10%% Preferred stock0%3%3%3%3%3%3%3%Percent
preferred stock3%3%% Common
stock75%62%46%67%67%67%67%67%Percent market value of
equity62%46%3. Costs of CapitalForecastTotal100%100%Rate
on LT debt9.0%9%9%9%9%Rate on ST
debt10.0%10%10%10%10%Rate on preferred stock (ignoring
flotation costs)8.0%8%8%8%8%Cost of
equity13.58%14%14%14%14%4. Target Dividend
PolicyActualGrowth rate of
dividends11%4.2%5%5%5%5%5%12-3 Forecasting
OperationsThe figure below shows the forecasted items for the
operating plan. For convenience, we repeat the inputs of
operating ratios.Section B1 shows the sales forecast. Each
year's sales is equal to the previous year's sales multiplied by
the forecasted sales growth rate.Section B2 shows the
projections of operating assets and operating liabilities. The
operating asset for a particular year is equal to the product of
that asset's ratio in Section A1 and that particular year's
projected sales. The operating liabilities are projected in a
similar manner.Section B3 shows the projections of operating
income. The COGS and other operating expenses are equal to
the product of the ratio in Section A1 and that particular year's
projected sales. Depreciation is equal to the product of the ratio
in Section A1 and that particular year's projected net PP&E.
EBIT is net sales minus COGS, depreciation, and other
operating expenses. NOPAT is EBIT(1-T), where T is the tax
rate. Section B4 shows the projections of free cash flows.
NOWC is equal to operating CA (i.e., cash, accounts receivable,
and inventories from Section B2) minus operating CL (i.e.,
accounts payable and accruals from Section 4). Total capital is
equal to the sum of NOWC and net PP&E (from Section B2).
Section B5 shows the results of the operating plan. The first
rows in Section B5 report the target WACC (calculated as

shown in Chapter 9), the return on invested capital, and the
growth rate in FCF. The horizon value, value of operations, and
estimated intrinsic stock price are calculated using the FCF
valuation model as present in Chapter 7.Note: Do not change
inputs here because these inputs are linked to the ones in Figure
12-2. If you want to change inputs, do so in Figure 12-2.Figure
12-3MicroDrive's Forecast of Operations for the Selected
Scenario (Millions of Dollars, Except for Per Share Data)Status
QuoIndustryMicroDriveMicroDrivePanel A:
InputsActualActualForecastA1. Operating
Ratios20132012201320142015201620172018Sales growth
rate5%15%5%10%8%7%5%5%COGS (excl. depr.) /
Sales76%75%76%76%76%76%76%76%Depreciation / Net
PP&E9%10%10%10%10%10%10%10%Other op. exp. /
Sales10%10%10%10%10%10%10%10%Cash /
Sales1%1%1%1%1%1%1%1%Acc. rec. /
Sales8%8%10%10%10%10%10%10%Inventory /
Sales15%17%20%20%20%20%20%20%Net PP&E /
Sales33%36%40%40%40%40%40%40%Acc. pay. /
Sales4%4%4%4%4%4%4%4%Accruals /
Sales7%6%6%6%6%6%6%6%Tax
rate40%40%40%40%40%40%40%40%Panel B:
ResultsActualForecastB1. Sales
Revenues201320142015201620172018Net
sales$5,000$5,500$5,940$6,356$6,674$7,007B2. Operating
Assets and Operating
LiabilitiesCash$50$55$59$64$67$70Accounts
receivable$500$550$594$636$667$701Inventories$1,000$1,100
$1,188$1,271$1,335$1,401Net
PP&E$2,000$2,200$2,376$2,542$2,669$2,803Accounts
payable$200$220$238$254$267$280Accruals$300$330$356$38
1$400$420B3. Operating IncomeCOGS (excl.
depr.)$3,800$4,180$4,514$4,830$5,072$5,326Depreciation$200
$220$238$254$267$280Other operating
expenses$500$550$594$636$667$701EBIT$500$550$594$636$
667$701Net operating profit after

taxes$300$330$356$381$400$420B4. Free Cash FlowsNet
operating working
capital$1,050$1,155$1,247$1,335$1,401$1,472Total operating
capital$3,050$3,355$3,623$3,877$4,071$4,274FCF = NOPAT –
Δ op capital−$260$25$88$128$207$217B5. Estimated Intrinsic
ValueTarget WACC11.0%11.0%11.0%11.0%11.0%Return on
invested capital9.8%9.8%9.8%9.8%9.8%9.8%Growth in
FCF252%45.1%61.7%5.0%Horizon Value:Value of
operations$2,719+ ST investments$0=$3,814Estimated total
intrinsic value$2,719− All debt$1,480Value of Operations:−
Preferred stock$100Present value of HV$2,267Estimated
intrinsic value of equity$1,139+ Present value of FCF$453÷
Number of shares$50Value of operations =$2,719Estimated
intrinsic stock price =$22.78
Diamond’s Post
Main force:
Divorce is my key force in this research project. While breaking
down this project into segments. I decided to have
married/divorced patients. These patients will be in 2 set of
groups.
Subjects:
Number 1 group will be married couples; age 30-50, has kids,
was married for 2-5 years and has a full-time job.
Number 2 group will be divorced couples; age 30-50, has kids,
was married for 2-5 years and has a full-time job.
Method:
I am researching the qualitative methods.
These patients will go through interviews that include
questions. All the questions from the interviews will be the
same. For each group there will be 2 different interviews.
Number 1 group will be asked questions that include (the first
year in their marriage). Then the next interviews questions will
be present. (today)
Number 2 group will be asked questions before their divorce.

Then the next interviews questions will be present. (After the
divorce).
Training Experience:
A trained therapist will find the results through the answers.
The implications of this study are each interview answers could
be similar or different from both groups. This study will show
(what leap up to all group decided to fill for divorce.)
What form of qualitative data will be used during the
observations? How will performance be measured?
Qualitative data can be observed and recorded. This data type is
non-numerical in nature. This type of data is collected through
methods of conducting natural groups.( Neuman, W. L.
(2017). Understanding research
Testing Methods:
Also, there are several ways to segment qualitative methods.
For this study, qualitative method into narrative or case study.(
Neuman, W. L. (2017). Understanding research
Conclusion: This research proposal understands that couple's go
through hardships. If we show each group of married couples
their problems. While giving them helpful resources and
solutions. Each person can be responsible for saving their
marriage. Each person will have a chance to learn more deeper
about the other partner. Creating a loving home and strong
healthy marriage. This study is to show these couples to identify
their problems by working through them. while communicating
and listening to trained professionals. This research proposal
can work with couples around the world to end divorces.
Shannoe Post
The affects and advertisement on our food purchases is an
influence some of aren’t even aware of. From commercial ads

that appeal to the youth to ads that appeal to the health guru all
the way to how a floor display is set up all have an impact on
what we purchase. The way an ad may come across showing us
how much protein is in a breakfast bar is enough to go out and
purchase it without looking at how high the sure and sodium
intake is. The way an ad has the power to put Disney Frozen
characters on yogurt and we are now out buying it for our two
year old with no idea what is even in the food. Floor models and
displays have the same power as an ad. Knowing where and
what height and dimensions believe it or not makes or breaks a
majority of the purchases off of the display. Another influence
is brand, this is not just the food label but the super markets
themselves. We see a commercial that our favorite celebrity is
now in an ad for Safeway and although we have never shopped
there and have no idea what it’s like we now only buy from this
super market. The same can be said for food label packages, just
because Beyoncé shared a milk ad we go out and purchase it not
even knowing if she ever even tried it, we are just taking the ad
at face value. We can easily be influenced when it comes to
being a consumer in the food market. It is important to do your
research and not shop based on brand and appeal. A package can
sure look good and be appealing while the inside is waiting to
destroy your health.
https://getpopspots.com/blog/thefactsbehindgroceryadvertising/
All four projects are due by 11:50am on Mar 16 th,2020
(Monday)FIN 430 — Finance Theory and PracticeStock
Valuation project
The purpose of the project is to estimate and justify: (1) an
intrinsic (fundamental) value for the company of your choice
and (2) the fundamental price/share of equity in the firm. You
should attempt to justify that you have calculated your best
estimate of the firm’s stock price. You may compare your
values (ratios/prices/calculations, etc.) to those you find on the
internet, but your work should be your own and your job is to

calculate these figures. All calculations/ratios/values are
assumed to have been calculated by you own. You should not
substitute those figures for yours and using such figures from
other sources is plagiarism. All of your reports (including table,
graph, figures, reference, etc) should not be longer than 25
pages.
You may use up to three different methods to calculate firm
stock value (the FCF method is most important and you have to
include this analysis in your project). The three methods that
we study for valuing corporations include:
1. Free Cash Flow Method (or discounted cash flow
method). This method requires you to produce pro forma
financial statements as based upon the additional funds needed,
percentage of sales and constant ratio methods (see “Financial
forecasting” in the index). The pro forma statements are then
used to calculate the free cash flow as based upon the
formulas/examples in the: "Financial Statements, Cash Flow
and Taxes," "Financial Planning and Forecasting Financial
Statements," and the "Corporate Valuation," chapters in the
text. The FCF is discounted back to the present by the WACC,
which leads to the firm value as follows. Note that the present
value of the FCFs = the Value of Operations (see the CH 7 and
the formula runs as followings).
Value of Operations (Enterprise Value )
+ Value of non-operating assets (one example would be
marketable securities)
= Total Firm value
- Value of Debt [we use the book value of ST and LT debt;
though theory suggests that the market value
- Value of Preferred Shares [if any]
= Value of Equity
÷ Number of Shares of Common Stock outstanding
Price per share
This price per share is your estimate of the fundamental value

of the firm stock, which you would then use to argue that the
firm is either currently over/under/fairly valued according to the
market, i.e., by comparing your price/share to
the current market price/share. Warren Buffet calls this
estimate the "intrinsic value" of the firm. Remember that you
may consider the efficient market hypothesis in relation to your
price estimate.
2. Dividend Growth Model (Multi-stage growth model)
3. Comparables (Stock Price Multiples Model): This method is
relatively easy and provides some useful valuations that often
set the ranges for the stock price. The course packet lecture
entitled “Using Stock Price Multiples to Estimate Stock Price”
describes this method. You may use either a direct competitor
or industry averages. For example, if you are analyzing Ford
Motor Corp. it would be appropriate to use GM as a comparable
firm (and/or the auto industry). Note that sector/industry ratios
can be obtained on Yahoo.finance [look under profiles, then on
the left hand side under Financial Links you should
see competitors]. Many different financial ratios can be used,
although the P/E and Price/CF ratios are common. Another
alternative is to create your own "industry" averages from a
diverse group of firms within the industry. You are limited
only by your creativity; and a great deal of information is
available on the Internet. The goal should be to calculate
fundamental values by yourself.
General Guidelines (Mandatory)
The major focus of the project is to calculate and justify your
estimate of the price/share of equity using the FCF
Method. Many other elements of the project are necessary in
order to complete a satisfactory project. Minimally, these
include:
An example is given on CH12 (page 489- 495).
Completing 5-year pro-formas for your firm. The pro formas

serve as the central element of your project. Many steps lead up
to the pro formas, and many important steps follow from the pro
forma. All of your estimates should include
appropriate justification/ support/ explanation. Many of the
estimates of growth rates and ratios needed below should be
calculated using regression analysis.
Growth. You will need to calculate the historical growth
in dividends or in revenue for your firm (in order to obtain an
estimate of future growth). The method for estimating growth
is illustrated by an example of dividend growth for Firm XXX.
– the related file is provided on Blackboard (BB) by the name
of “Growth estimate sheet”.
Data Needed to Construct the Pro Formas
* Dividend data: You can attain the historical data from
https://www.dividata.com/
* An Excel spreadsheet that you use to construct your pro
formas. An excel file is provided on BB and here under the
name: CH12 (Figure 1-3) . This file “automatically” completes
the 5 years of pro formas for you; given that you have input the
data and assumptions correctly.
* 2 years of the firm’s historical financial statements,
including annual balance sheets, income and cash flow
statements (these form the basis of your pro formas). You may
also want to download 5-10 year historical data to do a better
estimate. This data may be downloaded at Mergent-
Online (available through the university library) or through the
SEC official site:
http://www.sec.gov/edgar/searchedgar/companysearch.html
NOTE: While you may want to read or skim the 10Ks for your
company, you need not construct the 10 years of financial data
from the 10Ks. Rather, using either SEC site or MergentOnline,

you are able to download the 5-10 years of financial statements
directly as a file which can be read by Excel. Should you have
difficulty, please contact me.
* Estimates of the company’s current and future (long-term
normal – gn ) sales growth (this should be completed in the
same manner that you calculate dividend growth for a company)
– you may use the Growth estimate sheet available on
Blackboard as a guide. Use the 10 years of financial
statements for the historical sales figures.
* A justification of your choice of constant or non-constant
ratios when completing the pro-formas (the base case should
usually be the constant ratio approach as discussed in the text).
* An estimate of the firm’s target capital structure (see the
guideline below about Calculating a Firm’s WACC) – note that
you need these weights both for the WACC.
* An estimate of the firm’s dividend payout policy.
* The firm’s tax rate.
Steps to Take after Completing the Pro Formas
* As mentioned above, the goal is to calculate the firm’s
value (in the end, your estimate of the stock price/share). This
requires that you calculate the firm’s FCFs (free cash flows) as
discussed in the relevant chapters in your text (CH2 and
CH12). This should be a relatively easy procedure, and should
be done on the same Excel spreadsheet as your pro-formas (see
CH12 (Figure 1-3)).
* You also need to calculate the Continuing Value (or
terminal or horizon values) as discussed in CH6 - see the related
equation (it is analogous to the constant growth part of the
supernormal growth model)! This is a crucial part of the
project, because the continuing value of the firm will typically
be the largest proportion of any firm’s current value.
* To discount the FCFs back to the “present” (to the date
of your last historical financial statements) you need to have
an estimate of the firm’s WACC(note that this includes the

weights of debt and equity, the costs of debt and equity, the
latter of which is calculated by using the CAPM, with your
estimate of the firm’s beta). Again, see the guidelines of
WACC Calculation about Calculating a Firm’s WACC, and also
review the “Four Mistakes to Avoid” (see the index to your
text).
* Once you have completed these steps, you are then ready
to follow the general steps described above to calculate your
estimate of the stock price/share.
Improving the Quality of your Project (Optional)
Other elements are left up to you, in terms of how complete
and/or creative you want your project to be. Some of these
elements must be completed in order to earn a higher than
average or satisfactory evaluation for the project. You
may/should include these other elements if you believe that they
will improve your “case” for your estimate of the price/share
for your firm. For example, a SWOT analysis is often used in
business. For this project, it may be useful, but only if you can
connect the main conclusions of the SWOT analysis to your
evaluation of the firm.
The most important extensions include:
* Using ratios that are not a constant percentage of sales
when constructing the pro formas (the basic percent of sales
method is described in the Financial Planning and Forecasting
Financial Statements chapter of the text). The relevant
procedures are either discussed in the text or are available on
spreadsheets that come with the text and/or are on the text's
homepage (listed in the syllabus). The firm’s profit margin has
a very important impact on firm value. If you use the most
recent profit margin in the pro formas, you may not be
providing an accurate longer-term picture of the firm’s
operations. As a result, it may be useful or even crucial to

analyze this ratio and/or others when constructing the pro
formas.
* Sensitivity analysis. How does your estimate of the
price/share change with changes in the firm’s WACC, the firm’s
short or long-term growth rates, changes in the firm’s profit
margin(s) and so on. The amount of work that could be done
here is almost limitless, so good projects would demonstrate
good judgment in which sensitivity analyses they conduct.
* Scenario analysis. This is similar to sensitivity analysis,
but discrete scenarios (e.g., a recession or a boom) are analyzed
instead.
* Ratio analysis. Ratios can be used as diagnostic tools in
evaluating the “health” of a firm. Note that such analysis would
typically include comparisons of your firm’s financial ratios to
the industry standards (or averages). These averages are
available on the Yahoo.finance site
under: Profile/Competitors (Sector or Industry). Ratio analysis
by itself is not very useful in terms of valuation. It provides a
diagnostic view of the company which may be helpful in terms
of analyzing the better and poorer practices of a company. In
order to make ratio analysis relevant for this project, it must be
tied directly to the firm's valuation. For example, if a
company's current Inventory Turnover is very poor, the group
can suggest that it should get better into the future, and then
make the necessary adjustments (which may require changes in
the formulas) in the pro forma sheets, to see how improving the
inventory turnover would increase the firm's value.
Advanced Elements of the Firm Valuation Project If you
attempt any of the following, you should connect the additional
analysis directly to the base case for your firm valuation
project.
* Managerial/Strategy Analysis. You may view your job of

this project as the managers of the firm. In completing the
project, you may recognize that the company is either
performing some function very well or very poorly. It is
perfectly appropriate to make suggestions for improving or
maintaining the operation of the firm.
* Marketing Analysis. Future sales typically depend upon
marketing. Projects which focus on companies for which this
may be particularly important may consider analyzing the
marketing policies of the company in order to determine how
those policies affect firm value.
FIN 430 — Finance Theory and PracticeProject Assignments
Calculating the Weighted Average Cost of Capital (WACC)
for your Company
For use in Conjunction with the Firm Valuation Project
First ensure that you have read relevant pages in the text. Some
important sections would include the following, but you may
also double-check the references in the text by using the index
[see: Cost of Capital and Target (optimal) Capital Structure,
etc.]:
The important Chapter in the text is the one entitled "The Cost
of Capital," – with a particular focus on the section entitled
“The Weighted Average Cost of Capital” and the section “Four
Mistakes to Avoid” at the end of the chapter.
The WACC formula discussed below does not include Preferred
Stock. Should your company use PS, be sure to adjust the
equation for it, and see the section in the chapter on the Cost of
Preferred Stock.

The WACC formula that we use is:
WACC = wdrd(1-T) + wsrs
We need to know how to calculate:
1. rsthe cost of common equity. Use the Security Market
Line (SML) – this is why you learn how to calculate a
company’s beta and also why you learn how to find the
appropriate risk-free rate and market-risk premium. For a
review, see the section the text, The CAPM Approach.
2. The weights (wd and ws – note that: wd + ws = 1; so you
only have to calculate one of them). We need to calculate the
weight of debt and the weight of equity (for the cost of debt,
this simply means: what proportion of the firm’s financing is by
debt?). There is a lot to say here, simplified as Theory 1,
Theory 2 and Practice:
a. Theory 1: Theory says that we should use the target
weights along with the market values of both debt and equity
(see the Four Mistakes to Avoid). But the market value of debt
is typically difficult to calculate, because we need to know the
YTM (which is rd) for all of the company’s debt, but we cannot
calculate the YTM without having the current prices of the
company’s outstanding bonds, and most company’s bonds do
not trade (i.e., they will not have up-to-date or current prices –
remember how to calculate the price (value) of a bond on your
calculators?!). As a result, at least for the group project, we go
to Theory 2.
b. Theory 2: Theory also says that we should use the
TARGET weights, but this is a management decision, and as
“outsiders” we do not have access to the thoughts of the CFO or

CEO. So we should look instead to the historical pattern of the
use of debt (mix of debt and equity), and this is one reason that
you should have about 10 years of financial data.
c. Practice: Since we cannot “work” according to the strict
theory of finance, we have to estimate the relevant weights. As
a result, we will use the formula:
wd = Book Value of Debt / [Market Value of Equity + Book
Value of Debt]
The book value of debt is calculated by adding up ALL of the
debt on the balance sheet. This will typically be the sum of
Notes Payable, Current Portion of LT Debt and Long-Term
Debt.
The market value of equity is the “Market Cap,” and equals the
number of (common) shares outstanding multiplied by the
price/share. Note that the “timing” of this value should
coincide with the book value of debt. For example, if you
calculate the book value of debt as of 12/31/19, then the market
cap should also be calculated for that date. Be very careful
about using the reported Market Cap on Yahoo.finance – it may
not have the same “timing.”
3. r d; the cost of debt. There may be more than one
acceptable approach to calculate or estimate a company’s cost
of debt (be sure to read the text!). One relatively
straightforward method is to discover the company’s debt rating
(e.g., by Moodys). This can usually be found on the company’s
10K (see the link on my homepage) and doing a word search for
‘rating’ or ‘debt rating.’ For a discussion of bond ratings, see
the text (look in the index). If you can find the debt rating for
your company then you can carry out the following steps (if you
cannot find a bond rating for your company, you might try to
estimate/guess what it is by considering your company’s beta
and comparing the bond ratings for companies with similar

betas). If you are not able to find a bond rating readily, you can
register (forfree) at Standard & Poor's and at Moody's to find
company ratings. You may also find other interesting and
useful information there. For a general discussion of what the
ratings mean, see the information from these rating agencies on
my homepage at the Bond Rating link.
Once you have the actual bond rating or an estimate you can
then find or estimate your company’s cost of debt by going to
Yahoo.finance and clicking on the Bonds/Rates
link(http://bonds.yahoo.com/rates.html). Look at the yields for
the 20 year Corporate Bonds by rating. If your company’s bond
rating is listed, you’re in luck. If it is not listed then you can
estimate the cost of debt. For example, if the AAA yield is
6.50%, the AA yield is 6.75% and the A yield is 7.00%, you can
see a pattern (equation). For every increase in risk (from AAA
to AA), there is a 0.25% increase in the yield. If your company
has a BB rating, then it is two steps “below” the A rating, so
you should add approximately 0.50% more to the 7.00% for the
A rating, giving you a cost of debt for your company of about
7.50%. Note that this approach assumes a linear equation for
the cost of debt (which may not be strictly true).
Another simple way is to look at the average cost of debt for
the firm: Pre-tax cost of debt = annual interest payment / total
interest-bearing debt. Please use the average cost for last three
years.
4. The corporate tax rate ( T ). Be sure to read the section in
the text on Corporate Income Taxes (Chapter 2). The correct
tax rate for a company is the marginal tax rate for the future! If
you expect your company to be very profitable for a long time
into the future, then the tax rate ( T ) for your company should
probably be the highest marginal tax rate applicable for
corporations. But there are times when companies can obtain
long-term tax breaks so that their tax rates may be lower than

the stated (regulated) tax rate. Consequently you may want to
calculate several/many historical effective tax rates for you
company. The effective tax rate is the actual taxes paid divided
by earnings before taxes (on the income statement). You can
calculate/consider these rates for the past 5-10 years and then
compare this effective tax rate to the legally mandated highest
marginal corporate tax rate. If the past historical effective rate
is lower than the marginal tax rate, there may be a good reason
for using that lower rate in your pro formas.
5. r cs; the cost of common stock
You can use CAPM model to predict the cost of common
stock. The equation runs as followings:
ri = rRF + (RPM) bi
In order to use this model, first you should estimate the beta
of your stock. Please refer to the guidelines of beta calculation
for more information. Please use the average 10 year Treasury
bond rates as the proxy of risk-free rates.
.
Estimating Beta for your stock
For use in Conjunction with the Firm Valuation Project
a) Collect historical price data.
You will begin by collecting historical stock price data for the
company. Historical stock prices are available on the internet

through at the http://finance.yahoo.com website. At this
website you will put the ticker symbol for your company in the
symbol box and press “go”. At this point you will see a page
that has financial information about your company. On the left-
hand side of the screen there will be a series of option which
you can choose to get more information about your company.
At this point you want to look under “quotes” and choose
“historical prices”.
At this point, you will be given some options about the time
period and frequency of the data you are collecting. You want
monthly data beginning January 1, 2015 and ending December
31, 2019. Once you have specified this time period, push the
“get prices” button. After the historical price information
appears, you will see an option “download to spreadsheet” at
the bottom of the historical price table. Select this option to
bring the information into an excel file.
b) Collect historical S&P500 data.
We would like to compare the activity of an individual
company’s stock price to how stock prices are doing in the
market overall. We will use the S&P500 as our benchmark for
overall stock market performance. Just as we gathered
historical stock prices, we can gather historical S&P500 data
using the http://finance.yahoo.com website. To do this, use the
same procedure as above, but instead of using your company’s
ticker symbol, type “^GSPC” in the symbol box. Collect
monthly S&P500 data for the January 1, 2015 and ending
December 31, 2019 time period and save the information in an
excel file.
Now that you have the information in an excel file, you can use
your excel skills to manipulate it as you need. We will be using
the “adjusted close” column for both of your company stock and
S&P500.
c) Calculate monthly returns.
Monthly returns report gains or losses in percentage terms. For
example, we will look at our sample company Valero Energy,
VLO. Assume that I bought VLO stock at the beginning of

January for $23.09 per share. If I wanted to sell the same share
one month later, at the beginning of February, I would have
been able to sell it for $22.76. Thus, I would have lost $0.33.
Looking at percentage returns gives us an ability to compare
how poorly (or well) this VLO investment did relative to other
investments. For example, let’s take a hypothetical company,
Roadrunner Enterprises. Assume that Roadrunner’s stock was
selling for $200 a share at the beginning of January. By the
beginning of February, the stock was selling for only $199. If
you had bought one share of Roadrunner stock over this time
period, you would have lost $1.00. In absolute (dollar) terms,
you would have lost more on the Roadrunner investment.
However, looking at percentage returns, we get a different (and
more accurate) picture.
VLO Returns:
(P2-P1)/P1 = (22.76-23.09)/23.09 = - 0.01429 or -1.429%
Or P2/P1 -1 =22.76/23.09 – 1 = -1.429%
Roadrunner Returns:
(P2-P1)/P1 = (199-200)/200 = -0.005 or -0.5%
This allows us to compare different investments relative to the
amount of money we have invested in the stock. For example,
if we had had $10,000 at the beginning of January and invested
it all in VLO, we would have lost ($10,000)*0.01429 or
$142.90. If, instead, we had invested the money in Roadrunner,
we would have lost only ($10,000)*.005 or $50.
Using excel, calculate monthly returns for both your stock and
the S&P500 for each month beginning January 1, 2015 and
ending December 31, 2019. Calculating these returns will
require the “Adjusted Close” for each month-end from
beginning January 1, 2015 and ending December 31, 2019.
d) Manipulate Data and Regression Analysis.

There are several methods for calculating a regression in excel.
Please use two different methods we introduced in the class for
this project. (1) using the formula to solve beta. (2) Running the
regression : draw the characteristic line and show the equation
(please see the instruction below for the second method).
For this assignment, we will use the charting capability to
calculate beta for our stock. You will begin by choosing the
“insert” option above the excel spreadsheet. You will choose
“chart” and then “XY (scatter)” for the type of chart. The chart
wizard will guide you through the process.
You will want to choose the “series” option to tell excel what
data you want to use. Be sure to use your S&P500 return
column for your “X value” and your stock return column for
your “Y value”.
This process will give you a scatter graph that plots your
stock’s return and the S&P500 return. However, it does not
give you a regression line or slope. To get a regression line,
you will need to click your left mouse key to make several of
the data points turn yellow. With your mouse pointing to one of
these yellow data points, right click your mouse. Choose “add
trendline”. We will use the default (linear) trend line.
However, you will want to choose “options” so that you can
place “display equation on chart”.
You may find that your regression equation is difficult to read
if it is placed over the data points. You can move this equation
to the side of the graph (it is in a text box) so that it will be
easier to read.
Make sure that you have properly labeled your graph and that
your graph has a title.

You have been assigned a company to research (please check
the excel list for the firm you are assigned to). During this
quarter you are expected to analyze a firm’s financial
statements, stock price, WACC, and valuation. Project 1
focuses on the financial statement analysis.Due date: TBA
Goals for this assignment:
· Gather financial statements
· Calculate financial ratios
· Financial performance analysisProject 1: Financial Statement
Analysis
a) Collect financial statements.
Financial statements are available on the internet through at the
http://finance.yahoo.com website. At this website you will put
the ticker symbol for your company in the symbol box and press
“go”. At this point you will see a page that has financial
information about your company. On the left-hand side of the
screen there will be a series of options that you can choose to
get more information about your company. Under the heading
“financial statements” you will see an option for “income
statement” and “balance sheet.” You want annual statements.
The financial statements for the past 3 years should be
available. (Depending on the fiscal year for your company,
these might be 2017, 2018, and 2019 or 2016, 2017 and 2018.).
b) Calculate the financial ratio.
Calculate the ratios listed at the end of this document from the
financial statements of your company for the most recent 3
years. To do this, you will need to make a spreadsheet, (on
Excel or other), that essentially copies certain lines of your
various financial statements onto the spreadsheet. Then, make

spreadsheet formulas to calculate each financial ratio that is
required.
c) The DuPont decomposition Analysis.
Using the ratios you calculate above to conduct the DuPont
Decomposition analysis for each of the three years for your
company. The DuPont Decomposition is composed of
ROE = NI/Equity = NI/Sales *Sales/Assets * Assets/Equity
Therefore, you should include a total of twelve calculations
(four ratios for each of the three years). You can present the
ratios in the following format.
Year
ROE
Operation Management
Asset Management
Leverage Management
NI/Equity
NI/Sales
Sales/Assets
Assets/Equity
2017
2018
2019

d) Check information of M&A located in the company’s 10k
Once you have made these calculations, read the MA&D located
in the annual report, as well as the footnotes to the various
financial statements. These are the pieces of information that
management wants you to know, (or is required to tell you!), in
addition to “the numbers.”
e) Make observations.
Write a 2 page summary in which you describe what you
observe about the financial ratios for your company (double
spaced). And you can also discuss the most interesting and
relevant changes from one year to the next from your
calculations. After reading the session of ‘Management
discussion and analysis’ (M,D&A) and footnotes, you should
have a good idea of why certain ratios and figures changed from
one year to the next. If certain changes are not explained, try to
think of reasons why the figures might have changed. For
example, did one part of an equation change in greater
proportion than another part? (i.e. did a numerator grow much
faster than a denominator?) Why might that have occurred?
These observations will vary greatly depending upon the
company you are analyzing. Some things you may want to
consider are:
Has the company drastically increased or decreased its use
of debt?
1. Has the company’s liquidity position changed over the three
years?
1. Has ROE been rising or falling? If so, what has contributed
to this change?
1. What trends do you see developing in the data?
1. Do you see any major changes in the financial status of the
company over the time period?
The goal with this project is to not only give you a chance to
calculate the ratios that accountants and analysts frequently use

when evaluating a company, but to also make you look for
reasons, (i.e. “drivers”), for those changes and to think of your
own reasons if none are given. If you only do the calculations
but do not discuss why certain changes took place, then you
haven’t achieved the goal of the assignment. Therefore, do
your best to go past the numbers!
f) Report Submit
In the end, you will hand in: (1) your page with cogs, assets,
sales etc.,. that you copied from your financial statements, (2) a
sheet of your calculations, labeled so that I know which
calculation is which, (3) a print out of your formulas, and (4)
your 2-3 page report on those calculations. (You can print out
your Excel formulas by choosing “Tools” then “Options” then
the “View” tab, then under “Windows options” check the
“formulas” box. This might mess up the layout of your page, so
don’t try to make it look pretty. Just print out the formulas,
then uncheck the box to make your spreadsheet go back to
normal). Keep it in mind that you are expected to be a business
person in the future and your report should look professional.
Required ratio calculations, (in their simplest form), are listed
below:
A. Profitability Ratios:
1. Return on Assets (net income/total assets)
2. Return on Sales, (aka profit margin percent) (net
income/sales)
3. Assets-to-Equity (total assets/stockholder’s equity)
4. Return on Equity (net income/stockholder’s equity)
B. Efficiency Ratios:
1. Asset Turnover (sales/total assets)
2. A/R Turnover Rate (sales/accounts receivable)
3. Inventory Turnover Rate (COGS/average inventory)
4. Fixed Asset Turnover (sales/average fixed assets)
C. Leverage Ratios:
1. Debt Ratio (total liabilities/total assets)
2. Debt-to-Equity Ratio (total liabilities/stockholder’s equity)

3. Times Interest Earned (earnings before interest and
taxes/interest expense)
D. Liquidity Ratios:
1. Current Ratio (current assets/current liabilities)
2. Working Capital (current assets – current liabilities)
These ratios are explained in your textbook, so if you don’t
understand why a particular calculation is important or relevant,
you can look up more information there.
2

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