FIN 300 CORPORATE FINANCIAL MANAGEMENT
PROJECT
FALL 2018
(THIS PROBLEM WAS ADAPTED FROM THE FUNDAMENTALS OF CORPORATE FINANCE TEXT BOOK)
This is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the vice president of equity. Everything has gone so well that they want to test your ability as an analyst. You are seated in a room with a computer and a list with the names of two companies – Caterpillar (CAT) and Microsoft (MSFT). Complete the following tasks:
1. Download the annual income statements, balance sheets, and cash flow statements for the last three fiscal years from MarketWatch (www.marketwatch.com). Enter each company’s stock symbol and then go to “financials.” Copy and paste the financial statements into Excel.
2. Find historical stock prices for each firm from Yahoo! Finance (finance.yahoo.com). Enter the stock symbol, click “Historical Prices” in the left column, and enter the proper date range to cover the last day of the month corresponding to the date of each financial statement. Using the closing stock prices (not the adjusted close). To calculate the firm’s market capitalization at each date, multiply the number of shares outstanding (see “Basic Weighted Shares Outstanding” on the income statement) by the firm’s historic stock price.
3. For each of the three years of statements, compute the following ratios for each firm:
Profitability Ratios
Operating margin (use operating income after depreciation)
Net profit margin
Return on equity
Financial Strength Ratios
Current ratio
Book debt-equity ratio
Market debt-equity ratio
Interest coverage ratio (EBIT ÷ interest expense)
Compare the ratios across the two firms. How do you interpret the difference between them?