Objective: The objective of this project is 1) to learn how to find and use available research resources; 2) to get familiar with financial terminologies that practitioners often use; 3) gather relevant information about publicly trading companies, including their financial data and experts’ opinions;4) apply the corporate value model to estimate the firm value; and 5) to put together an investment report on a selected stock.

You are a financial analyst assigned to a company of your choice. Your company should be publicly traded with small to mid-cap (up to $20 billion market cap). Your choice must be approved by the instructor, and it is on the first-come-first-served basis. Note that there is a list of companies that you may not use for this project. See the list on CougarView. Your job is to produce an investment research report on the company for your clients so that they can make an investment decision.

i. The final project should be typed and up to 10 pages long (minimum 5 pages), excluding graphs and illustrations.

ii. An Excel file with relevant data and analyses is also required, but does not count toward the 10-page limit.

Available resources at CSU through the library’s website

Mergent Online

Lexis-Nexis Academic to assess company financial information and analyst’s reports like “Zack’s Investment Research.”

Hoover’s Company Profiles

Value-line investor survey

Most recent annual report – See the company’s website or SEC website http://www.sec.gov/edgar.shtml

You are also allowed to use other available resources such as Yahoo! Finance to understand the companies. Follow the suggested project layout shown below as a guideline for the project.

A SAMPLE layout of the project

(This is also the minimum requirement.)

- Executive Summary – summary of your most important findings in a couple of paragraphs
- Introduction of Industry and the companies

- Discussion on major players/competitions, major products and customers (markets), current market share, etc.

- Company Operations – understand the business, current and future

- Revenue generation: Discussion of major product/service lines – including revenue breakdowns (%) by major products – and their future perspectives
- Analysis of Expenses based on common sized income statement, including comparison with competitions as well as the trend.

- Cost of capital and risk assessment

- Find the beta from various resources (at least 3 beta estimates from different sources).
- Assuming the current market risk premium is 5.5 percent, find the cost of equity. You need to find out the current long-term risk-free rate.
- Find the outstanding bonds information. At minimum, you should find the list of outstanding bonds and their issue dates, maturity dates, coupon rates, and principal amounts. Find the most recent market value of bonds (and preferred stock, if any) so that you can estimate the cost of debt. Use the “cost of debt spread based on rating” spreadsheet to estimate the cost of debt.
- Find the WACC for the company given its current market capital structure.
- Use a separate worksheet for this cost of capital calculation.

- Equity valuation – Corporate Value Model and Relative Valuation

- Based on the most recent financial statements for the last 5 years, create a FCF table, which contains EBIT, NOPAT, NOWC, and Operating Capital, ROIC and FCF for each year (see below for example). Refer to the class handouts about FCF for definitions.
- Find other experts’ opinions on the company’s future perspectives, and provide a brief summary.
- Create pro-forma financial statements for the next fiscal year, and find the expected free cash flows for the year (FCF1). Identify additional funds needed (AFN) for the coming year. Refer to the class coverage on forecasting for details. You are expected to make adjustments based on your own assessment of the company’s future and/or on other experts’ opinions that you find appropriate.
- Using the entire period (past 5 plus 1 forecast), find the arithmetic average and geometric average of the growth rates for Sales, NOPAT, Op. Capital, and FCF. For the geometric average, if the FCF (or NOPAT) is negative in either beginning or ending year, use the next positive FCF.
- Forecast FCF for the next 9 years based on following assumptions. For year 2-6 (FCF2-6), assume the FCF grows at the average growth rate of NOPAT

(or Op. Capital) that you compute above. (Note FCF growth rates are very volatile because they depend heavily on investments in operating capital.) For year 7 – 10, use the midpoint between the average growth rate and the constant long-term growth rate, which you may assume to be 4%. Find the company value based on the FCF projection. • Develop two alternative FCF projections; optimistic and pessimistic one by changing the sales growth assumption and in your pro-forma statement. Describe your assumptions for each alternative. Find the company value for each alternative projection. - Conduct the relative valuation based on P/E, P/CF, P/S, and P/B: First find the ratios of your three close competitions; second, find the equity values based on each of the ratios.
- What can you say about a reasonable stock price range?

- Recommendations for both investors and for the company

- For investors – should they invest in the company? Why or Why not? You need to include your estimate of the stock price range as well as experts’ opinions
- For the company – What they should do or change to improve its operations, managerial efficiency, and ultimately the firm value.

- References