Financial Management Finc 850 Project Assignment Instruction

Financial Management Finc 850project Assignment Instructions We Will

Financial Management - FINC 850 Project Assignment Instructions We will form groups and your team will select several similar companies to study. Both firms will need to have common stock traded on a major exchange and you should have access to adequate financial information to complete the project. Avoid financial companies and companies in financial distress. Please confirm your selection with me. One of the two companies will be your focus and the other will be a major competitor and act as a surrogate company to compare results.

A surrogate company may be hard to identify in some situations, but there is always a company that will offer insight into your own firm. Yahoo and many other sites list company competitors. The entire project will be submitted at the end of the semester; the number of pages in each section is a suggestion only. 1. Section one should be a description of your companies, their major competitors, and the industries where they compete. (One page) 2.

Section two should provide a ratio analysis for both companies. Do not calculate ratios; find them on the web at Reuters.com. Provide an analysis of the strengths and weaknesses of the two companies compared to each other and their industry. (Several pages, include ratios in an appendix) 3. In Section three, compute the numbers for your two companies similarly to those in the Sample Problem Chapter 3 handout from class and the DuPont/Dow example file. Compute the values for NOWC, OC, NOPAT, ROIC, EVA, etc. for the past two years. You will need the financial statements from latest three years. For the early work, assume a WACC of 10% for your company. For the final submission, use the WACC computed in section 8. (One page)

4. Section four should provide information on your beta calculations using Excel as we do in class. Provide regression information from your output concerning the R squared and the significance of the beta coefficient. Go to Yahoo Finance and enter the historical prices section. Retrieve monthly information for your 2 companies and the S&P 500 (GSPC) for the past 61 months. Download the adjusted price from the right. Compute the % return from one month to the next; you should now have 60 observations. You may need to delete some dividend lines. The adjusted price accounts for the dividend return already. Gather four beta estimates from other sources and compare to your beta. We will compare everyone’s beta estimates later in class. Sources include Value Line, S&P, Google, Yahoo, Reuters, etc. (One to two pages; include regression line graphs in appendix. Do not include raw data.)

5. Section five should focus on the bonds for your companies. Select a surrogate long term bond (N > 20) from each company to act as a surrogate for all of their bonds (if possible) rather than one that will mature in seven or eight years, unless your company tends to issue shorter maturity debt. Let me know if this poses a problem and we can look at several alternatives. Provide summaries covering any important features of the bonds that would be relevant to an investor such as rating and call options. Mergent in the UD Library databases has this information; be sure to enter through the UD Library web page. Do not use convertible (cv) bonds or adjustable rate bonds. Debenture or bullet bonds are best choices. Gather current prices for the two bonds from finra.org online, or another similar source. Compute the Yield to Maturity and compare to the YTM from your source. It is important to do a reality check for each of your company's rates.

Determine if the YTM is an appropriate return estimate by comparing the two companies to each other and quoted averages for similar rated bonds. You may compare to other companies, as long as the maturity is similar, the features are similar, the rating is the same, and the bond is from the appropriate broad grouping (Industrial/Retail or Utility, no financials.) (One page)

6. Section six should provide information on the return estimated for the common stock for both companies (preferred stock too if either company uses it.) Provide summaries covering any important features of the stock that would be relevant to an investor. (There may not be any.) Determine the required rate of return for the company's stock. Use the DCF/Gordon growth/Dividend model, the bond yield premium method, and the CAPM. (For CAPM use the T-bond rate. You may use the average spread of 6% as well. See Chapter 9 for an excellent discussion.) You will need to gather information on expected dividend growth rates, etc. Sources can include any of the sites already mentioned and any other that you wish. Long term estimates are important, and I would like you to find at least two. MSN and Reuters provide this estimate. Yahoo also provides this. Gather relevant information from this material (any appropriate source) that will be useful in calculating market returns. Be sure to carefully develop your estimate of the growth rate. In addition to the single stage dividend model, also apply a two stage model. Compare results to the surrogate company. The surrogate company is more important in the stock and total company comparisons than with bonds because common stock should be compared to similar other companies. (2-4 pages; use appendices to summarize if you wish.) This is the most challenging section and you should provide an overview of the data you collected and the reasoning for the final choices that you make concerning the cost of equity provided by this model.

7. Section seven is a calculation of the respective debt, preferred and common stock weights. See the chapter 9 note for specific details. Be sure to use market value weights for equity. (One page)

8. Section eight should provide a cost of capital analysis. The handouts for Chapter 9 and DuPont and Dow Chemical will provide a guide to the assignment. Make any adjustments necessary to the return estimates provided in previous sections and provide a cost of capital estimate for both companies. As a check on the WACC estimate, apply the single stage free cash flow model to provide an additional estimate of WACC as was done in the Chapter 9 handout. Then, compute a break point for your focal company and determine whether they will need to issue stock next year to cover planned capital expenditures. Conclude this section with a comparison of the WACC for both companies. Be sure that you have presented a case to support your conclusions and the results are consistent. Also, compare each company’s WACC with the ROIC you computed in section two. (Two pages, use appendices to summarize if you wish.)

9. That’s it! The report should be 11-14 pages in length, not including any appropriate documentation. This is a general guide only. Please be sure to include copies of supporting documents that you have gathered so I can consult them. 10. This is an open-ended assignment and I hope you have fun with it. Remember, this is not an investment project and I do not want a lot of corporate detail. I do not want any buy or sell recommendations, etc.

Paper For Above instruction

Financial Management Analysis: Comparative Study of Two Firms and Their Industry

Introduction

The core objective of this project is to analyze and compare two publicly traded companies within the same industry, focusing on financial health, valuation, and capital structure. The project aims to provide a comprehensive evaluation based on financial ratios, market data, bond analysis, stock return estimations, and cost of capital computations. The selected companies are chosen based on availability of financial data and industry relevance, avoiding financial firms and distressed companies. This analysis will help understand each company's financial position and investment potential in a non-investment context.

Company Description and Industry Context

The first step involves detailed descriptions of the two companies, including their core business activities, market positioning, and competitive landscape. Major competitors are identified through sources such as Yahoo Finance and industry reports. The industry context provides insights into market dynamics, industry growth prospects, and key challenges.

Ratio Analysis and Industry Comparison

A ratio analysis encompasses liquidity ratios, profitability ratios, leverage ratios, and efficiency ratios gathered from Reuters.com and other credible sources. These ratios serve as benchmarks to compare each company’s strengths and weaknesses relative to their industry peers, highlighting areas of financial robustness or vulnerability.

Financial Performance and Valuation Metrics

Utilizing financial statements from the past three years, calculations are made for key performance indicators such as Net Operating Working Capital (NOWC), Operating Capital (OC), Net Operating Profit After Tax (NOPAT), Return on Invested Capital (ROIC), and Economic Value Added (EVA). The process involves applying valuation models like the Discounted Cash Flow (DCF), Gordon Growth, and Capital Asset Pricing Model (CAPM). The weighted average cost of capital (WACC) is initially assumed at 10% for early analysis, refined upon calculation.

Beta Estimation and Risk Assessment

Beta is estimated using regression analysis in Excel from monthly return data collected over 61 months from Yahoo Finance, including the S&P 500 index. Additional beta estimates are gathered from industry-standard sources such as Value Line and Reuters, compared for consistency. Regression outputs such as R-squared and significance are analyzed to evaluate systematic risk.

Bond Market Analysis

For bond analysis, surrogate long-term bonds from each company are selected, avoiding convertible or variable rate bonds. Bond features such as ratings, call options, and maturity are summarized, and current prices obtained from FINRA.org allow calculation of Yield to Maturity (YTM). The YTM is validated against market averages and industry benchmarks to ensure appropriateness as an expected return measure.

Return on Stock and Cost of Equity

Estimates of expected returns on common and preferred stocks are derived through multiple methods, including the dividend discount model, bond yield premium, and CAPM. Long-term dividend growth rates are estimated from analyst forecasts and historical data. Results from single-stage and multi-stage models are compared, with particular emphasis on selecting rational growth assumptions based on industry outlook and company stability.

Capital Structure Weights

Market value-based weights of debt, preferred stock, and common equity are computed to accurately reflect each company's capital structure, ensuring realistic valuation and cost calculations.

Cost of Capital and Financial Planning

The combined data feeds into comprehensive WACC calculations, adjusting return estimates as necessary. A single-stage free cash flow model is utilized for cross-validation. Additionally, capital expenditure plans inform the computation of the company's future financing needs, including whether equity issuance is anticipated. Cross-company WACC comparison evaluates relative financial efficiency and risk.

Conclusion

This project combines quantitative financial analysis with strategic insights, offering a detailed picture of each company's financial status within their industry context. Through ratio analysis, valuation techniques, bond and stock return assessments, and cost of capital calculations, it provides a holistic view necessary for informed decision-making. The findings underscore the importance of financial stability, risk management, and strategic capital planning in fostering long-term competitive advantage.

References

• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley & Sons.
• Ross, S. A., Westerfield, R., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill Education.
• Reilly, F. K., & Brown, K. C. (2011). Investment Analysis and Portfolio Management. Cengage Learning.
• Yahoo Finance. (n.d.). Historical Price Data. https://finance.yahoo.com
• Reuters. (n.d.). Financial Ratios. https://www.reuters.com
• FINRA. (n.d.). Bond Prices & Yields. https://finra.org
• Valueline. (n.d.). Equity Reports. https://www.valueline.com
• S&P Global. (n.d.). Market Data and Beta Estimates. https://www.spglobal.com
• Damodaran, A. (2017). Narrative and Numbers: The Value of Stories in Business. Columbia Business School Publishing.
• Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Cengage Learning.