Final Project
General Comment
Your project is due on the last scheduled lecture for this course. You have an option of turning it in before the deadline for comments that may help you to improve on it. The project must be typed, 12 pt type size, with a cover boldly showing your name, title, course, and date. At least 15 pages, and at most 30 pages long. All Excel spreadsheet must be included, and also emailed to me with all the formulas intact.
Instruction
1. Select a publicly trading company you are comfortable with, e.g. DDE (Dover Downs)
2. Go to SEC and enter the name of the company you have selected into the box Company Name to search for its filings
3. Look for its most recent 10K filing and download it. If it has interactive option, click on it and download the excel file (all) to save yourself the trouble of manually copying or typing the numbers into Excel.
4. After properly formatting and/or re-arranging the spreadsheets to create positive visual impressions, do the following:
A. Ratio Analysis: Analyze the company's financial statements using both trend and comparative (peer group) analyses, paying attention particularly to liquidity, profitability, valuation, efficiency, and capitalization ratios.
Use commonsizing to help with your analyses. Interprete your results, and if you can, identify what you consider to be management's strategy. (Example below)
|
Liquidity/Financial Health
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2005-12
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2006-12
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2007-12
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2008-12
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2009-12
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2010-12
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2011-12
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2012-12
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2013-12
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2014-12
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Latest Qtr
|
|
|
Current Ratio
|
1.31
|
1.42
|
1.21
|
1.65
|
1.82
|
1.46
|
1.52
|
1.45
|
0.44
|
0.45
|
0.51
|
|
|
Quick Ratio
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1.11
|
1.25
|
1.06
|
1.41
|
1.57
|
1.24
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1.25
|
1.19
|
0.36
|
0.36
|
0.38
|
|
|
Financial Leverage
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1.65
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2.24
|
2.51
|
2.39
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2.18
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2.03
|
1.92
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1.81
|
1.66
|
1.60
|
1.55
|
|
|
Debt/Equity
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0.26
|
0.77
|
1.03
|
1.07
|
0.89
|
0.71
|
0.61
|
0.52
|
-
|
-
|
-
|
|
The above example shows a company with deteriorating liquidity and financial health. In the absence of additional information, it appears as if debt had been used to shore-up liquidity since current ratio and quick ratio fell off a cliff in 2013 after debt had been paid off, and they never recovered.
Unless this is an industry peculiarity, a current ratio persistently less than 1, in this case, less than 0.50, portends trouble down the road in terms of the ability to meet day-to-day expenses. Is the company now debt-free because its poor financial state prevents it from getting a willing lender, or is this management's strategy to maintain some financial flexibility in a challenging business environment?
Of course, we can not answer any of these questions with the incomplete picture we have here, and we cannot say for certain what is responsible for deteriorating health - whether this is this company's peculiar situation or industry headwind - or comment on the appropriateness of any strategy without looking at other ratios, including profitability and peer group comparisons. [Financial leverage is total asset/ shareholders' equity. It measures the degree to which total asset is funded with equity and retained earnings].
B. Valuation and Financial Modeling: Determine cost of equity, weighted average cost of debt (use yields to maturity), and WACC.
For beta, use Yahoo value. For risk free rate, use 30-year treasury, and for risk premium, use 7%. Build a five-year projected financial statement, and use DCF (with your projected cashflows) to estimate fair value for the stock price. How does this compare to the current market price? Calculate EVA for each of the last three years. Compare the trend to the trend observable in the stock price. What do you think?
C. Capital Structure Analysis: Analyze the company's capital structure by building a model that analyzes the effect of alternative structures (California Pizza is a guide).
Can the company increase shareholders' wealth by restructuring its capitalization? What do you think is an appropriate capital structure? Can you calculate optimal capital structure using method used in the class?
D. Share Price Analysis: Go to Yahoo Finance and print your company's share price over the last 5 years, superimposed on S&P 500 and two of the peers you used in the ratio analysis section. How did the stock perform relative to the market? To its peers? Can you explain the result using your earlier analyses?
E. Conclusion: Summarize the management strategy of your selected company viz a viz your analyses. Provide a brief comment and make a list of recommendations you will like management to consider.