Term Paper for Fin 6361 Stock Valuation

Term Paper for Fin 6361 Stock Valuation The goal of this assignment is to apply the fundamental analysis tools that we have studied in Chapter 6. First choose a publicly traded company that you would hypothetically want to analyze. Please get approval from me so that two students do not analyze the same stock. 1. Using a financial news website such as the following, look up the financial statements of that company. (There are other places to look; it’s your choice.) http://moneycentral.msn.com/investor/invsub/results/statemnt.asp or Yahoo.com/Finance or Reuter.com…… I would myself go to “ Mergent online” to get all financial information for a company. You can access UHV library online and connect to Mergent online. Please see below on “Mergent Online” for more detail. 2. Using the Dividend Discount Model, the Residual Income Model, the P/E ratio, the P/CF ratio, and the P/S ratio of chapter 6, perform valuations on or predictions of the firm’s stock price. In other words estimate the value of the stock that you have chosen. You need to perform the followings: a. For mature stock use the Constant Dividend Growth Model (g < k), find current dividends per share, D(0), from the income statement. Estimate the dividend growth rate, g, or find it on the ratios/statements pages. Estimate the discount rate, k, using the CAPM and other methods. Once you have all of these variables, then estimate the stock value. Then perform a sensitivity/scenario analysis, See Royal Dutch Stock Valuation file. b. If your stock is a growth stock (g>k), then you need to use two or three stage dividend growth model. (See EBay or growth stock estimation file). Note: If your stock is a mature stock, then you do part a above; if your stock is a growth stock, then you CANNOT do a but must do b above. So depending on what type of stock you choose you should either perform part a or b, you cannot do both. c. Residual Income Model: Find or estimate the EPS growth rate. Find book value per share on the balance sheet. Use the discount rate k from part a or b above and estimate the value of your stock according to residual income model of chapter 6. d. P/E ratio: Find current EPS, and then estimate the value of your stock using the average (Historical) P/E ratio. (Use the average P/E of the last 8 to 10 years). The best place to get historical or average P/E is the Morningstar.com. You may (If you decide) use approximate average P/E by looking at the P/E graph from: http://bigcharts.marketwatch.com And under interactive charts and advanced chart you can plot The P/E ratio. e. P/CF ratio: Find current cash flow per share (CFPS), and then estimate the value of your stock using the average P/CF ratio. The best place to get historical or average P/E is the Morningstar.com f. P/S ratio: (Stock price/Sale per share). Find or estimate the current Sale Per Share (SPS), and then estimate the value of your stock using the average P/S ratio. The best place to get historical or average P/S is the Morningstar.com 3. Now for the fun part! You now have as many as five different estimates of the value of your chosen stock; compare your estimates with the current market price of your stock. Which of these methods estimate is closest to market value? Make a prediction about whether the stock is underpriced or overpriced (i.e. whether you should buy it or short it). Explain why you think it is either undervalued or overvalued. 4. Format of your term paper: Word file: a. Cover page: Include your name, the assignment (Valuation of XYZ Company) course number and then date of submission. b. Introduction. Why you picked the stock, general description of the economy, the industry in which your company belongs and the strength and weakness of your company. (Top down, from Economy to industry to firm) c. Valuation: describe in detail each method of valuation. This section must have many sub-sections for each method of valuation. Clearly show your five (a or b, c, d, e, and f) stock price valuation and compare them to the current market price. Show all works. d. Conclusions on whether the stock is overvalued or undervalued. Do the results of your calculations agree with other current information that you may know about the company? e. References Note: You can finish writing this paper after we go over chapter 6. ALTERNATIVE PAPER: If for some reason you prefer to get a real life experience, here is an alternative term paper. Develop a business plan for “Star War Coffee” Assume you will try to raise venture capital funds for your project; you project is to start an upper class coffee house in Houston to compete with Starbuck. Your first store will be in Houston. Develop a very realistic detailed business plan for your project. . Project your costs and cash flows for seven years. Then you need to show your project to venture capitalist for funding. The amount of funding needed should be clear and based on your forecasted cash flows. Minimum number of page for this project is 10 pages, maximum 50 pages. ==================================================== Extracting Historical Financial Statements From Mergent Online (UHV Library) Once in Mergent, enter the company name or symbol for the company you are looking for in the company Search box. I used Intel, for this presentation. From the results list, choose the company, and you will see this page: Then click Refresh. You will have to scroll out to the right to see what you have, but for me, the results go to 1982, although that far back, you get very limited data. You will need to play around with the options to get what you may want. Look above the drop-down boxes, and below the tabs and see that you can select As Reported, Prelims, Standardized, Restated, Ratios and Analysis. For this class please use Standardized version. You can also get the historical ratios of the company simply by selection ratios (Small red box) Also, how much history you get depends, of course, on when the company went public, how much data Mergent actually has, and so forth. Even EDGAR only required electronic filing as far back as the mid 90s, so anything prior to that was entered manually into Mergent as they could I’m sure. So for example, I also tried Amazon.com and the history went to 1995. It will vary for each company. ================================================

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