Guidelines For The Security Analysis Project Report

Guidelines For The Security Analysis Projectyour Report Graphs Table

Your report, graphs, tables, and calculations must be processed on MS Excel. You should have a cover page including your group name, names of group members, stock symbol, and firm name. Address the following questions in one sheet. Submit one Excel file per group via Canvas. Do not submit other file types.

Paper For Above instruction

The project involves conducting a comprehensive security analysis divided into two main parts: fundamental and industry analysis, and valuation analysis. The aim is to evaluate an assigned firm's financial health, industry position, and stock valuation using various quantitative methods grounded in financial theory.

Part I: Fundamental Ratio and Industry Analysis

Begin with an executive summary of the assigned firm, highlighting its core business functions, recent performance, and strategic positioning. This synthesis provides contextual understanding for subsequent analysis.

Next, investigate the industry in which the firm operates. Identify the industry classification, specify the different business lines the firm is involved in within that industry, and analyze the industry's overall health and trends that could impact the firm's performance.

Perform a comparative analysis of key financial statistics for both the firm’s stock and the industry. Select at least five informative metrics such as Price-to-Earnings (P/E) ratio, market capitalization, dividend yield, Return on Equity (ROE), etc. Explain, compare, and analyze these statistics to assess the firm's relative financial standing and industry benchmarks.

Part II: Valuation Analysis

The second part focuses on stock valuation using dividend discount models (DDM) and related financial techniques.

Begin by collecting relevant market data: monthly adjusted stock prices of the assigned firm and the S&P 500 index over a period exceeding ten years from Yahoo Finance. Obtain the three-month T-bill rate (TB3MS) from the FRED economic data series, noting it is annualized. Calculate stock returns and market returns based on this data.

Compute descriptive statistics for the risk-free rate, stock returns, and market returns—including mean, median, standard deviation, maximum, and minimum—to understand their distributional properties.

Run a regression of the stock’s returns on the market returns using Excel’s Data Analysis ToolPak. Interpret the regression coefficients, t-statistics, and R-squared. Use this to estimate the firm's beta, a measure of systematic risk.

Estimate the expected return of the stock via the Capital Asset Pricing Model (CAPM). Detail your estimation process, including assumptions about the average annual risk-free rate (between 1%-3%) and the market risk premium (between 5%-9%). Discuss your rationale for these estimates.

Next, estimate the firm’s short-term and long-term growth rates based on historical dividends, ROE, dividend payout ratio, and GDP growth. Provide detailed calculations, differentiating between short-run growth (projected over five years) and long-run growth (from year six infinitely onward). Discuss the differences observed between these growth rates.

Apply both the constant dividend growth model (Gordon Growth Model) and the multi-period dividend discount model to value the stock, providing detailed calculations and interpreting the valuation results.

Conduct a sensitivity analysis illustrating how the stock value fluctuates when varying discount rates and growth assumptions within reasonable bounds.

Compare your estimated stock value with the actual stock price as of March 31, 2021. Determine whether the stock appears undervalued or overvalued and suggest a trading strategy based on your valuation findings.

References used should include credible financial sources such as the Wall Street Journal, academic texts (e.g., Bodie, Kane, and Marcus), Yahoo Finance, and U.S. government economic data sources, properly cited.

References

  • Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (11th ed.). McGraw-Hill Education.
  • FRED Economic Data. (2021). Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org
  • Yahoo Finance. (2021). https://finance.yahoo.com
  • U.S. Bureau of Economic Analysis. (2021). National Income and Product Accounts. https://www.bea.gov
  • Wall Street Journal. (2021). Financial news and market data. https://www.wsj.com
  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
  • Lewis, C. M. (2019). Financial Analysis and Valuation: An Integral Approach. Wiley.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.
  • Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427-465.
  • Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. The American Economic Review, 48(3), 261-297.

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