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Corporate Finance Project – Instructions FINANCE COURSE PROJECT 2020 Analysis of firm performance: Instructions The required analysis can be accomplished in 6-7 pages long document (excluding tables, graphs, etc.). (But it CAN be shorter.) The project is due by 11 PM on April 12, 2020. I suggest you start working on the projects ASAP. I will also appreciate if you keep me informed about your progress, problems, etc. General instructions: A) READ THE INSTRUCTIONS COMPLETELY! B) The class project for this course will involve the performance analysis of a particular company. C) The company you select to analyze must have at least two (or more) distinct divisions (called “Segments” by accountants), so that you can successfully persuade me divisions of the company are subject to at least two different divisional WACCs!! Since you will be asked to compute divisional EVA, your company has to report unique accounting information for each of its divisions. You can search the Internet or, preferably, the actual 10 K filings (downloadable, e.g. through MSN Money, or the Edgar database: http://www.sec.gov/edgar/searchedgar/webusers.htm ) for “segment” information. D) A few helpful hints on how to select a company (but these are just hints – you can potentially select any company you want): 1. Once again, your company selection may easily rely on your personal judgment. 2. Just in case you are generally unfamiliar with US firms, the file “US_Segments_2018.xls” (posted on Blackboard) can help. It contains segment information for a large sample of U.S. firms (alternatively, you may get a list of many U.S. companies from file Finance Megaset posted earlier in Course Resources). The file contains so-called “industry SIC codes” for firm divisions, which economists have used to identify how close/far various industries are. Hint: usually, if divisions have different first two digits of division industry’s “Primary SIC code” (Column “I” in the Excel document), it is more likely the divisions operate in different industries. Do not pick companies with sizable divisions without assigned SIC code (such as “Other”, “Eliminations”, “Headquarters”,…). How “sizable”? Say, over 15% of firm’s sales or assets is “too much.” 3. However, before selecting your company, you should check whether it has sufficient data. !! Since you will be asked to compute divisional EVA, your company has to report unique accounting information for each of its divisions. You will need AT LEAST sales, assets, and operating profits (i.e. EBIT) for each of your divisions. 4. Ultimately, It is your responsibility to make sure that the company you eventually select to analyze has sufficient information on divisional performance! You will not get any confirmation/approval/additional hints from me. E) You will be allowed to work in groups on this project. A group can have AT MOST FOUR members (and I’ll be more stringent when grading joint work). Group members do NOT have to be from the same section (morning vs. afternoon). No two groups will be allowed to analyze the same company. The firms can be claimed on “first come, first served” basis. To claim the company of your choice, you should go to the Blackboard course “EMBA Course Project Spring 2020” (All EMBA students should have access to that course by now): a) Click “Project Selection Forum” link. b) In that forum: - DO: Click on “Create Thread”. In the “Subject” of the message, write the name of the company you want to analyze. Click “Submit”. Make sure that your post got through. - DO NOT: Reply to any of the previous posts or write the name of your company as the “Message” of the post. The idea is that all the students clearly see the names of previously claimed companies without the need to click on the messages or watching through a growing list of replies. The posts not conforming to my requirements do not count, and the student’s choice will not be considered. - IF YOU WORK WITH SOMEBODY ELSE: Only one person shall post the selection. But, in the subject line, right after the name of the company, put “X” to indicate that this company will be analyzed by more people. Also, put the names of the group members as the “message” (NOT “subject”) of the post. You will not be allowed to add the group members once the company selection is submitted! So, FIRST decide if you want to work with somebody, THEN pick the company jointly. d) In order for you to be able to analyze a company, your choice must be different from all those previously posted in the “Project Selection Forum” forum. NOTE: THE LIST OF CLAIMED COMPANIES CAN BE SEVERAL PAGES LONG! You CANNOT modify your post, but you HAVE TO delete your post if you decide to select a different company. Naturally, if you delete your post, you are back at the end of the line, and your new choice has to differ from all those posted before your new pick. F) BLOCKED COMPANIES: Appendix A (at the end of this document) contains firms that cannot be selected. It is your responsibility to make sure that your choice is not on the list of blocked firms. G) Output: You will be asked to write a case report. You may present your tables, exhibits in the text (especially if the tables are small) or at the end of the document. The report has to be clearly written, and professionally organized (remember – since an increasing number of employers want the applicants to include a recent business analysis project as a part of applicant’s portfolio, I WILL grade the clarity of your project presentation!). I want to see your discussion in clearly marked sections, with appropriate section titles, etc. The most important results should be clearly marked (for example, in bold letters) If you can present your results in a tabular form, do it. I DO NOT want to see lengthy paragraphs without clear reasoning. At the end of your project, you will need to attach the copy of the Balance Sheet and the Income Statement you used for your analysis. I *think* the project questions can be successfully addressed within 6-7 typed pages (not including tables, exhibits etc) – BUT, you can make the project longer (or shorter). H) The whole project must be submitted on the Blackboard as a SINGLE document in MS Word format (*.doc). NO EXTRA ATTACHMENTS, SPREADSHEETS, etc. allowed!!! When submitting your file, you must include your name and the name of the assignment in the file name. If Jane Doe was submitting an assignment, the filename would be: doej_nameofthecompany_2020.doc Also, make sure to include your name, course name, and page number in the header or footer of the document. ONE SUBMISSION PER GROUP is perfectly sufficient. Project assignments: 1. Provide background information (~ 1 paragraph) on your company. This should include the following: · a description of its products, customer base, major suppliers, etc.; (Note: this introductory paragraph should serve as a mere introduction to your project. It will have a very limited impact on your final project grade. Don’t spend too much time on answering this point! Yes, you can lift it from Wikipedia, firm website, etc. – with citation, of course) 2. What is your firm’s (company-wide) cost of capital? What is the cost of capital of its divisions? (In this section, I will require you to add the capitalized value of company’s Operating Leases to the value of company’s debt when computing the company-wide cost of capital.) Most ideally, I’d like your results to be presented in a simple tabular form, such as: CompanyDivision1Division2 NoteNoteNote Cost of Equity: Rf Beta MRP Re Cost of Debt: Rd Cost of Capital We Wd Tax rate WACC Where “Notes” would be numbered and consecutively adressed below the table. (“notes” would contain all relevant details, internet links, etc. for your parameter selections). 3. Analyze the performance of your company: compute the Economic Value Added (on company-wide level) of your company. For the company-wide EVA, I want you to compute and discuss both Market Value- and Book Value-based EVAs. For the EVA discussion, I want to see your results presented in organized table(s) – NOPLAT calculation followed by Invested Capital computation, followed by an estimate of EVA. 4. Based on your analysis, provide a final assessment of company’s performance. Answer question: Based on EVA, has your company been run efficiently? Did it create or destroy value recently? Helpful data hints: See the document “Finance Data Sources on the Internet” (see Blackboard). IMPORTANTLY – You WILL be able to utilize WACC and EVA industry data from files “Cost of Capital by Industry Sector” and “EVA and Equity EVA by Industry” on damodaran.com (http://www.stern.nyu.edu/~adamodar/pc/datasets/wacc.xls ; http://www.stern.nyu.edu/~adamodar/pc/datasets/EVA.xls ). HOWEVER, note the following: 1) Those two spreadsheets will still require you to input some data (see the spreadsheets) 2) Very importantly, Damodaran utilizes a very simplistic and crude method for estimation of Cost of Debt in the WACC spreadsheet. As the result, I think some of the industry WACC estimations may be imprecise and/or biased. It is thus possible that occasionally, utilizing those estimates in your analysis may give you results that “don’t make much sense.” For example, I will require you to show that your divisional WACCs estimates can be consistent with the company-wide WACC (that is, the weighted average of divisional WACCs is close to the company-wide WACCs). If you use the estimates from the above spreadsheets, it may be quite difficult for you to conform to this requirement. 3) The short version of the previous point – use the above spreadsheets AT YOUR OWN RISK. Even though I allow you to use them, I’d still advice you to do the following when estimation divisional WACCs: a. Either come up with several pure play companies, compute their WACCs, and average the WACCs to get the estimate of the divisional WACC, or b. Get the estimates of typical industry’s beta (to get the typical industry’s Re), and typical industry’s leverage. For the cost of debt, you will still have to get a few pure plays to see what is the typical Rd for companies similar to your division. Helpful hints for firm analysis (this will become really handy once you start analyzing your company): Relation between RE and RD: In the real world, RE should actually be *sizably larger* than RD. The difference in rights upon bankruptcy and the legal enforceability of creditor claims simply creates quite a large difference in risks. Remember that when computing cost of debt, you should not focus on stated interest rates (as they may reflect the higher interest rates in general when the firm was issuing those debt obligations in the past), but the market-determined YTM or estimate of YTM ( =