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 this Coursework Assignment, 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.

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 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 this Coursework Assignment, 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).

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