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Corporate Finance and Financial Statement Analysis

Corporate Finance and Financial Statement Analysis
Coursework Assignment 2: Using Financial Statements for Equity Valuation and in Analysis of Credit Risk
Module weighting: 50%
Submission deadline: 17:00 (PM) Monday March 31st, 2014.
Prepared by Dr Natalia Isachenkova (Room 311 in Kingston Business School)
This is an individual assessment contributing 50% of your marks for the module. You must submit an individual report.
The deadline for submission is 17:00 (PM) Monday March 31st, 2014.
The assignment consists of two parts that carry equal marks. You MUST attempt both parts.
PART 1: USING FINANCIAL STATEMENTS FOR EQUITY VALUATION (50 MARKS)
Part 1 of the assignment is intended to help you develop practical skills of Fundamental Analysis. The assignment provides you with an opportunity to apply valuation technologies that are commonly used in practice and that incorporate financial statement information into equity valuation models. The focus is on ex-post or backward validation of alternative valuation approaches.
Formal Requirements for Part 1
1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, at the end of 2010, using the actual – real – financial results reported by the firm in 2011 and 2012.
Ticker
Firm Name
CAG
ConAgra Foods, Inc.
MRK
Merck & Co. Inc.
UTX
United Technologies Corp.
WMT
Wal-Mart Stores Inc.
2) Your valuation should utilise TWO valuation technologies one of which MUST be either Residual Earnings Analysis or Earnings Growth Analysis.
3) You should supply a commentary on the usefulness of the two techniques that you use, substantiating your conclusions with the results from the valuation.
4) You must prepare a concise written account for this part of the assignment and you are also required to include in your written report for Coursework Assignment 2, as
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an appendix, the entire set of all the annual financial statements for the chosen firm for the period 2010-2012. Please note that NO other appendices are allowed.
5) Your written account must contain clear references to the relevant portions of the financial statements for the firm being analysed, and the relevant portions should be highlighted.
Ex-post validation means that you must explore the usefulness of the two valuation technologies that you employ by comparing their respective ex-post estimates of the fundamental (intrinsic) value of the firm’s equity with the actual market price of the equity at the end of 2010. That is, you need to look back and convert the financial statement numbers from 2011 and 2012 into an ex-post valuation of the firm’s equity at the end of 2010 and provide your conclusion on which of the two valuation techniques that you utilise is more powerful at predicting ex-post the value of the firm at the end of 2010.
Please note that in this particular project there is no need for you to attempt forecasting pro forma numbers, since you can treat the 2011 and 2012 actual numbers in the firm’s financial statements as impeccable one- and two-year projections that can be used for valuing the firm’s common stock at the end of 2010.
Attention should be given to the valuation technologies that attempt to calculate the fundamental (intrinsic) value.
The structure of the written account for Part 1 of the assignment will provide an executive summary, a brief retrospective background on the firm’s business model, industry, economic environment, and then will concisely outline an appropriate specification of payoffs based on an analysis of the available 2011 and 2012 financial statements, an ex-post valuation and comparison of the obtained estimates of the equity’s fundamental value with the market price at the end of 2010, concluding with a discussion of the degree of usefulness of the two valuation methods that you utilise from the perspective of an academic researcher.
Avoid applying equity valuation techniques mechanically, as the examiner will need to see that you have the necessary understanding of the costs and benefits of alternative technologies and are using the appropriate tools.
You must briefly state the valuation assumptions that you use in valuing the firm’s equity and critically interpret the valuation results, using evidence in the argument.
You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform your conclusions.
You may round all computations to the nearest integer (or nearest percentage).
PART 2: USING FINANCIAL STATEMENTS FOR CREDIT RISK ANALYSIS (50 MARKS)
Part 2 of the assignment is intended to help you develop practical skills of credit analysis. The assignment provides you with an opportunity to evaluate the financial status of a potential corporate borrower, using ratio analysis of the financial statements.
Formal Requirements for Part 2
1) You are required to carry out an analysis of financial statement ratios that indicate the creditworthiness of a corporate borrower, that is, the corporate borrower’s ability to pay
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its debts on scheduled times, for ANY ONE of the firms listed below, over the period 2010-2012.
Ticker
Firm Name
CAG
ConAgra Foods, Inc.
MRK
Merck & Co. Inc.
UTX
United Technologies Corp.
WMT
Wal-Mart Stores Inc.
2) You should calculate FOUR financial statement ratios that you identify as the most pertinent for credit risk assessment of your particular firm, making sure to address short-term liquidity, long-term solvency, and operating profitability. You must justify your choice of each of the four ratios.
3) You must supply a brief commentary on the dynamics of credit quality for the firm being analysed over the period 2010-2012. You commentary must briefly outline entailing implications for pricing of the firm’s debt of the risk of debt default. You should discuss whether the credit risk of the firm – as implied by the four ratios – appeared to be improving, deteriorating, or remaining stable. You must substantiate your conclusions with evidence and offer plausible causes of any significant changes in credit risk detected through your ratio analysis.
4) You must prepare a concise written account for this part of the assignment and you are also required to include in your written report for Coursework Assignment 2, as an appendix, the entire set of all the annual financial statements for the chosen firm for the period 2010-2012. Please note that NO other appendices are allowed.
5) Your written account must contain clear references to the relevant portions of the financial statements for the firm being analysed, and the relevant portions should be highlighted.
In respect of Part 2 of the assignment, no particular structure is required, but you must take the perspective of an academic researcher.
You may round all computations to the nearest integer (or nearest percentage).
Some Pointers to Data Sources and Spreadsheet Programs
You are encouraged to make use of various financial information resources such as Bloomberg, Datastream, Thomson ONE Banker, Yahoo!Finance, and Google Finance. Do not forget that the reports of firms listed for public trading in the United States are available via the SEC’s EDGAR database at www.sec.gov/edgar.shtml
The links page on the Penman website www.mhhe.com/penman5e has links to useful financial resources.
The Penman website www.mhhe.com/penman5e offers useful advice on spreadsheet modelling, too.
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The Form of the Report
The accompanying report on Coursework Assignment 2, in a Word file, must combine BOTH Part 1 and Part 2 of the assignment, and be presented in a single document no longer than nine typed single-spaced A4 pages using 12-point Times New Roman (excluding references), with 1” (or 2.5 cm) margins (left, right, top and bottom).
Source data and all key calculations and workings, tables and charts and graphs must be fully integrated and embedded within the text of the report.
You are required to include in your written report, as an appendix, the entire sets of all the annual financial statements for the chosen firms for the period 2010-2012. Should you select to analyse two different firms in Parts 1 and 2, you must then include, as an appendix, respective annual financial statements for both firms. Please note that NO other appendices are allowed.
Keep the report short and to the point. Your report should be factually accurate and analytical and should succinctly sum up the issues addressed in your coursework and where relevant relate your findings to theory. Think deep, be creative and write a persuasive report that will offer a credible conclusion based on a thoughtful and thorough analysis.
List references in alphabetical order at the end of the report and cite them in the text of the report using the Harvard style of referencing. You must always give credit to the authorship of the work that you use.
Ensure that your submission has been edited for correct spelling and grammar. Use Word’s in-built grammar and spelling checker to help you.
Key Skills
This assignment will help you develop the following key skills:
? Communication
? Application of financial statement information in equity analysis
? Application of financial statement information in credit risk analysis
? Problem solving
? Numeracy
? Proficiency in Information Communication Technology (ICT)
? Time management
Learning Outcomes for Coursework Assignment 2
The assignment will assess your ability to:
? in the context of equity analysis, discuss and analyse financial statement information and asset prices
? understand advantages and disadvantages of valuation technologies commonly used in practice
? set up valuation models of equities, using relevant valuation technologies
? understand the effects of financial statement information on valuation and risk of financial assets
? analyse the business environment of a company
? critically evaluate financial statements and reports to assess a company’s valuation.
? understand the usefulness of accounting disclosures in the decision-making process, in the context of credit risk assessment
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? in the context of credit risk analysis, critically discuss and analyse financial statement information
? understand advantages and disadvantages of credit assessment technologies commonly used in practice
Submission Requirements
You are required to submit ONE printed and electronic (digital) submission of your coursework report.
The printed report must be submitted by placing it in the postgraduate assignment box by 17:00 (PM) Monday March 31st, 2014.
You must complete and attach the standard assignment mark sheet.
You must submit the associated Word file via a Turnitin dedicated Coursework Assignment 2 Dropbox on StudySpace by the deadline. Turnitin is a plagiarism checker. You can only submit it once. The Word file uploaded must be named as follows:
? Name your file using your last name and the assignment number, for example Holland-CW2.docx.
Your printed submission must include a printout of your report and be presented as follows:
? Stapled top left corner (no need for binding or plastic cover).
? Your Name and ID in the header; page number in the footer.
General Points
i) Provide all the required information and follow the instructions (e.g. page count). Answer the question directly and relevantly.
ii) Write in proper sentences and paragraphs and avoid a ‘shopping list’ approach. Keep the style formal and remember to draw conclusions. Use the spelling and grammar check in Word. Poor grammar and spelling is unprofessional and unacceptable at Master’s level. As a result, make sure that you proof read your work and edit it properly.
iii) Do not copy the work of others or allow others to copy your work. Plagiarism is cheating and will be penalised.
The general assessment criteria at Masters Level (Level 7) are set out in a document titled University Grade Criteria available in the Academic Guidance Area of Academic Regulations: http://www.kingston.ac.uk/aboutkingstonuniversity/howtheuniversityworks/policiesandregulations
Indicative Reading
For advice on approaches that can assist with the production of your report on equity valuation using financial statements please consult the relevant chapters in Penman, S. H. Financial Statement Analysis And Security Valuation (Latest Edition), McGraw-Hill.
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