Financial Statement Analysis

ACCOUNTG 441

 

Group Project

Submission link to your final project to be activated.


Objective:

 

The group project requires you to conduct a complete analysis and valuation of a business. A key feature of the project is that it requires you to identify and obtain the relevant information. Thus, in addition to being evaluated on your ability to apply the tools of analysis described in the course, you will also be evaluated on your ability to identify and obtain the relevant information. Your analysis should provide solid support for the assumptions and forecasts that drive your valuation.

 

Company choice:

 

You should choose a company on your own for the final project, with the following constraints.

  • The company has to be a publicly traded company whose securities are traded in the US exchanges. It can be a US domestic company or an international company, as long as it files its 10K or 10K equivalent (such as 20F for ADRs) with the SEC, following the US GAAP.
  • It can NOT be a company that any of the team members has had extensive insider experiences with (which includes previous employment or in-depth consulting relationship). However, to allow you to incorporate your industry-specific knowledge, you are allowed to pick a competitor company in the same industry as your previous employer(s) or client(s).
  • Your analysis should use only publicly available information. Do not use inside information obtained from personal company contacts etc.
  • All company choices need to be approved by me beforehand. You need to inform me of your choice no later than session 10.

 

 

Write-up Guideline and Requirements:

 

Your analysis should be guided, but not constrained, by the steps described in the course, briefly outlined below.  Depending on the company that you analyze, you may need to focus more on some parts of your analysis than the others.  For example, for a poorly performing company bordering on bankruptcy, you may focus relatively more on their survivability and less on their equity valuation.

 

  1. Business Strategy:  Briefly describe the company’s industry and specific lines of business, discuss its strategy for success and, most importantly, the sustainability of profits generated by the strategy. Based on this qualitative analysis, do you think the firm’s future return on equity will exceed, meet, or fall below, its cost of equity capital, and why? Please do not simply repeat the company overview from the 10K.  

 

  1. Financial Analysis: Use ratio analysis and/or cash flow analysis to evaluate the current and past performance of the business and assess its sustainability. You should definitely compare your company to some peers in the same industry. You should think about what comparable firm(s) to choose and why and provide at the minimal a comparative analysis of the ratios calculated above for the firm and the comparable firm(s).  If you believe the quality of the company’s financial reporting accounting has been compromised by the choices of the management, you should also explicitly state your concerns and reasons.

 

  1. Forecasting:  Forecast the firm’s future income statements and balance sheets. This is the heart of the project so provide specific justification for each major component of your forecasts. Is the forecast based on past trends, comparisons with other firms in the industry, an industry report (such as found at http://www.netadvantage.standardandpoors.com/  from the library’s web page), or your gut feel? How does your forecast for the next few years compare with analyst forecasts? Finding relevant data from outside the firm’s own financial statements to guide your forecasts is particularly valuable here, but please only access publicly-available data; do not use inside information that you may have gathered from personal contacts in the company.

 

  1. Valuation: Use the discounted cash flow model to produce and estimate of firm value. Focus on the value of a share of common stock in that company and compare your valuation to the market valuation, providing possible explanations for any differences. You may also want to conduct a sensitivity analysis by varying your discount rate and other crucial assumptions. Think about what discount rate to use.

 

Project Length:

 

I would like the project write-up to be a readily comprehensible and condensed report of your work (i.e., not a detailed compilation of all the information you collected and all the various valuation scenarios you considered). Accordingly, your write-up is limited to no more than five pages of text and five pages of supporting tables. Please cite any sources for data used in your financial analysis or forecasts, such as industry reports. Also please provide in your writeup the URL link to the firm’s 10K filing that you are analyzing.                          

 

Due Date:

 

You should submit your final project analysis, including a Word/PDF document for writeup, an Excel spreadsheet for pro forma, and a PowerPoint file presentation, electronically to the course website before the beginning of Session 12. You should also turn in a hardcopy printout of your writeups and powerpoint slides at the beginning of Session 12.

 

Presentation guideline:

 

Each group will be required to make a PowerPoint presentation during our last session(s).

 

You should present your analysis from the perspective of a potential investor. Your audience is the management team of a mutual fund company. They had hired you, as the financial expert, to provide advice on whether the fund should invest in the company your team analyzed. You should not assume your audience (the mutual fund management team) is completely informed about the company.  You can presume that your audience is knowledgeable about the basics, not necessarily the subtlety, of fundamental analysis.

 

Your presentation should contain a clear recommendation for buy or sell, with important risk factors outlined for the mutual fund management to consider. Your presentation should be organized to highlight the key points of your analyses. These key points should be relevant for your final recommendation.

 

Each presentation will have a maximum of 10 minutes, during which the audience is free to ask questions. All members of the presenting team can respond to questions.