FINANCE 321
STOCK VALUATION PROJECT
The project is an exercise in stock valuation. Working in groups, you will pick a company and estimate the value of its stock using the methods we’ve discussed. The project’s objective is to give you an opportunity to apply course concepts to a real-life situation. OVERVIEW You will analyze a stock and make a recommendation to the manager of your firm’s investment portfolio as to whether the stock is a good investment. The project has two parts: (1) You’ll estimate the company’s beta by doing a regression analysis of the company’s stock returns compared to those of the market. This will involve finding and downloading the needed data from the internet, using Excel to perform a regression analysis, evaluating the reasonableness of the result and considering any issues or adjustments that need to be addressed. (2) You’ll research the company and its industry and develop your estimate(s) of the value of the company’s stock. You’ll use your beta estimate and apply the three major methods we’ve discussed in class: (a) Dividend discount model (constant growth and varying growth) (b) Free cash flow (c) Multiples. You’ll compare the estimates you get from these methods with each other and with the stock’s current market price and indicate what you conclude about the value of the company’s stock and whether it is a good investment. DETAILS Your group’s report is due no later than March 11 before class starts. The format of the report is
described on the next two pages. The report should be submitted in hard copy.
The company you choose must be a publicly traded dividend-paying company for which there is a current report in Value Line. Value Line is available through the library; you can access Value Line online through the library’s website (in the “Databases A - Z” category). (We’ll be using General Motors as an example in class, so your company choice should be other than General Motors.)
Consistent with the university academic integrity policy, your submission should be your original work; sources of data and any material which isn’t original should be documented.
REPORT FORMAT
EXECUTIVE SUMMARY (five pages maximum):
Overall assessment of the company: Provide a concise assessment of the company and its industry, including the outlook for profitability and growth (1 page or less).
Key factors relevant to valuing the company: Discuss the factors which you think are most important in determining the company’s value and what you assumed about those factors (1 to 2 pages).
Discussion of valuation results: Referring to the summary exhibit (see below and next page), discuss the results of your valuations and what you conclude about the company’s value. Do you think it’s a good investment? Why/why not? (2 to 3 pages)
EXHIBITS showing your analysis (see next page for details):
1: Summary exhibit showing results of the different valuation methods, with dotpoints summarizing your conclusions
2: Beta, kE and WACC results
3: Dividend discount model valuations
4: Free cash flow to the firm (FCFF) valuation
5: Multiples valuation
OTHER ATTACHMENTS
Printout of your Excel worksheet showing data used for beta regression and the Excel regression output (graph/trendline, ANOVA table)
Copy of the Value Line page for your company
EVALUATION
Projects will be evaluated relative to:
Analysis: Understanding, analysis of company financial situation and business Grasp and use of relevant theory Discussion of alternative approaches, assumptions – their pros and cons Discussion of open issues, uncertainties
10 points
Clarity of presentation
Concise Consistent from section to section Easy to understand Logical order Clear writing
5 points
Total 15 points
EXHIBITS
You should prepare five exhibits which address the points listed below. (You may address other points you think are important as well.) A good way to format the exhibits is to have the calculations on the left and the related discussion on the right; if you would like to take a different approach to formatting, we should discuss it in advance.
Calculations Discussion (using dotpoints) 1: Summary exhibit Table recapping values from: Constant growth dividend discount models
Multi-stage dividend discount model
Free cash flow to the firm (FCFF) model
Multiple comparisons
How do your results compare to the stock’s current market value?
What causes the differences among the results from the different methods??
What are your conclusions about the value of the company?
2: Beta and discount rates Beta
Regression result Adjustments you made to regression result
Beta equation, kE WACC
Beta:
How does your beta compare to Yahoo’s, Value Line’s? What might cause any difference?
WACC assumptions (how you determined them):
Capital structure Interest rate on debt Tax rate
3: Dividend Discount Models Constant growth (show formula, inputs/result) Multi-stage growth (ditto)
What are the most important factors determining the stock’s value in this model? How did you estimate those factors? Which of the dividend discount models works better for this company?
4: Free Cash Flow to the Firm Table showing FCFF estimates Value per share calculation
What are the most important factors determining the stock’s value in this model? How did you estimate those factors?
5: Multiples Table showing the multiples you used and the
resulting values
How did you decide which multiples to use? How did you use them, e.g., to evaluate results from the dividend discount and FCFF models? to directly estimate the company’s value? What do they tell you?
