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1316 ADVANCE CORPORATE FINANCE

PROJECT

Firm Requests: Due October 4, 2023

Final Paper: Due December 4, 2023

Presentations: December 4 and December 6, 2023

Project Requirements:

The Corporate Executive Office (i.e. ME!!) is particularly interested in your advice in the following areas:

1. Cost of Capital. In particular:

a. Under the current capital structure, what is the appropriate corporate-wide cost of capital of a firm? (Quantitative question)

b. Should this single rate be used for all of the investments and capital budgeting proposals by a firm? (Qualitative question)

2. Valuation. In particular:

a. What is the fair (intrinsic) value/price of corporate shares?

b. What would have been your recommendation to possible investors in a firm regarding buying or staying away from holdings?

3. Capital Structure. In particular:

a. What is the best target capital structure for a corporation in light of its operations and the competitive forces affecting its future? Please, use at least two approaches to determine the optimal capital structure of a corporation for the robustness of your results and recommendations.

b. Is the company sacrificing value with its current structure? How much, if yes.

4. Payout Policy. In particular:

a. Access the current payout policy of the firm, including the dividend policy.

b. Should the company make any changes to its current dividend policy? If not, why? If yes, make substantiated suggestions. (Qualitative question)

The first step for this project is to select a firm to analyze from the list of selected SP500 firms in Appendix C. Firm requests are due by October 4, 2023, and firm assignments will be made shortly after. Please rank and submit, in writing or by email, your top 2 desired firms since individual firms might only be assigned to one group.

After you have received your firm assignment, your task is to calc u late WAC C, value the firm, and assess the optimal corporate capital structure and its dividend policy.

You will obviously face several uncertainties and doubts along the way; that’s normal! My hope is that, in the process, you will learn not only how to value a firm, and design optimal financing and payout policies, but also how to meaningfully communicate your analysis to others.

PROJECT WRITEUP GUIDELINES

These projects are expected to be professional work, and presentation is as important as the content. In general, I should be able to pick up the project and follow the analysis easily without referencing the assignment. I expect that these projects will take you several hours. At a minimum:

o All text should be typed and presented in a case-like format. You should include a cover page with the project title, and names of group members. The project report should be stapled or submitted in a folder.

o Since the Corporate Executive Office is very busy, your report should begin with a summary memorandum up to 1 page.

o the report should have at least three sections:

1. Introduction: Explain and motivate your research project. Discuss expected results. The reader should get the big picture about your project after reading the introduction. 2. Data and Analysis: Discuss the project and procedures used in detail. This part can consist of several subsections. These subsections should be labeled and must contain a brief description immediately preceding the spreadsheet and qualitative analysis. Effective use of tables, graphs, and other visuals is encouraged, whereas extensive footnoting is not. Critical assumptions in your analysis should be clearly identified.

3. Conclusion: Summarize your results; keep it brief.

o Tables and figures must be clearly labeled and must contain a description of the analysis. Each table or figure must fit legibly on one page, or be separated in a logical manner. Tables and figures may either be incorporated into the text or included separately in the Appendix. Make sure you refer to each table and figure within the text.

o Your write-up should be double-spaced, and should not exceed 13 pages, not counting tables.

The overall project will be evaluated in light of the completeness of the analysis you choose to do, the techniques you choose to employ, and the impact of the results you choose to present in your written report.

Additional Information regarding Project Submission

Please include the following with your final project write-up.

1. The electronic copy of calculations in excel (it should be uploaded on Canvas one per group)

2. Teammates’ Input Assessment in a sealed envelope or folded paper with your name on it. Please assign each of your team members (including you) a corresponding percentage for his/her input into the project. Please utilize provided template.

ANALYSIS

COST OF CAPITAL

1. Analysis of corporate cost of capital should incorporate finding separately cost of debt,

common and preferred equity, based on the financing choices of the company. 2. You must use regression analysis to assess the beta of the company.

3. You may choose a published source for the estimate of market premium; make sure it is referenced in your write-up.

VALUATION ANALYSIS

Your valuation analysis must be organized into two separate parts (these are explained in detail later):

I. Constructing Cash Flows

II. Firm valuation

Much of the analysis is qualitative. You should use quantitative analysis to complement your qualitative analysis and to further explain the answers to the issues listed on pages 4 and 5 .

I have listed several data sources in Appendix A; you will need to use some or all of these in your analysis. Remember that you will have to justify your assumptions and explain your analysis in your project report. Your write-up should be professional, i.e., brief and to the point. Your grade on this project will be determined by how persuasive you are in presenting and defending your analysis. If you use others’ recommendations and predictions (such as those of professional stock analysts), make sure you formally cite them.

Constructing Cash Flows

1. Projecting Sales: Using the last 17 years (if available) of financial data (2005-2022 or 2023) provided in the COMPUSTAT North America database, analyze the firm’s historical real sales growth. In case that only 2022 financial statements are available to your firm, use the last 16 years of financial data (2005-2022). If your firm has less than 8 years of past financial data, choose another firm.

You must determine the answers to the following questions: Would you categorize the firm as a high or low growth firm? Why? Where in the life cycle is your firm? Can you anticipate what may cause it to move to the next stage in its life cycle?

Using the results of the sales growth analysis and any other information you find helpful (news, articles, etc…), project the nominal sales growth rate for the firm for the next ten years. Assume that the firm’s growth stabilizes after that. Explain how you came up with your estimates for each year. In your analysis, you should project the sales growth from the firm’s existing operations. In other words, if the company has had some acquisitions, the value of those should be compensated for by the price they paid. Assume that there will be no more major acquisitions.

2. Projecting Line Items in FCFFs: For this class, we are going to project components of FCFs directly, by relying on past financial statements but without explicitly relying on projected financial statements. To facilitate your analysis, I have provided some suggestions in Appendix B. Not all of these suggestions may be relevant to your project; so use them selectively. There are many instances in which you must make your own assumptions about the ratio or growth rate to use, by looking at historical ratios. For each of these, you should explain your assumption and why you chose it.

Firm Valuation

1. Projected Cash Flow: Using FCFF line items developed above, project the firm’s free cash flow for each year.

2. Firm Valuation. Given your estimate of corporate-wide WACC, and projected FCFF, get the intrinsic value of the firm.

Once you have the intrinsic value of the firm, use the sequential valuation technique to

compute the firm’s stock price. (You may also assume that the market value of debt is equal to the book value of debt for firms with investment-grade debt. If the company is rated

below investment grade, estimate MV of Debt. Clearly state your estimate of the firm’s stock price.

CAPITAL STRUCTURE ANALYSIS

There are five approaches available to you to assess the optimal corporate capital structure. Some of them have been covered in class; the rest is well presented in your textbook. Please utilize at least two approaches to access the optimal debt level in the capital structure. You do not need to rehash the mechanics of the method used, however, you may choose to mention critical assumptions utilized during particular methods if any. After you have conducted a quantitative analysis, please provide your feedback as to whether the current capital structure should be perturbed and why or why not.

DIVIDEND POLICY ANALYSIS

To address this question please rely on the information in lectures and textbooks on dividend policy. A very good structure as to how to approach dividend policy analysis will be presented during our Northboro Machine Tools case discussion.

APPENDIX A: DATA RESOURCES

A) INFLATION

Monthly U S A CPI data can be obtained from the St. Louis Federal Reserve’s website http://research.stlouisfed.org/.This is a valuable tool in doing financial analysis. We’ll be using the Consumer Price Index (CPI) For All Urban Consumers – not seasonally adjusted.

B) BASIC FIRM-SPECIFIC INFORMATION

All public information is here. Start with the current stock price and ticker.

http://finance.yahoo.com

http://moneycentral.msn.com

http:///finance.google.com

You should go to your firm’s website to obtain the annual financial reports. Usually “investor relations” link will provide the annual reports. Read them and you will learn a lot about your firm.

C) BALANCE SHEET AND INCOME STATEMENTS

Past statements older than 3 years are not publicly available. Use WRDS (Wharton Research Database) to obtain them. I created an account for 4FA3 so that you have access to that database.

i) Go tohttps://wrds-www.wharton.upenn.edu/

ii) Click on “Members login”. The login id is “corpfin1316” and the password is “CorpFin2022#”

iii) Choose COMPUSTAT North America

iv) Choose Tools/ Financial Statements - Annually Updated

v) Choose Statements/Complete Financial Statements

vi) Date Range: 2005-2022. Annually.

vii) Search by ticker symbol; you must find your firm’s ticker symbol.

viii) Once the output is ready click on the .htm file. In addition to t h e income statement and balance sheet, you will find other useful statements as well. You may use the additional financial information in constructing your pro-formas.

ix) Sometimes you will see letters instead of numbers. Here are the meanings.

. = Not Available Figure - data is not available

.S = Semi-Annual Figure - appears in 1st and 3rd quarters of the year to indicate that data in the 2nd and 4th quarters represents semi-annual figures rather than quarterly figures.

.A = Annual Figure - appears in the 1st, 2nd, and 3rd quarters of the year to indicate that data in the 4th quarter represents an annual figure rather than quarterly figures.

.C = Combined Figure - appears if data has been combined into another data item.

.M = Not Meaningful

.I = Insignificant Figure - appears if data has been reported by the company as insignificant.

D) INTEREST RATES AND ECONOMIC DATA

US Current Treasury and corporate bond yields are available in

h t t p s : //f i n a n c e . y a h o o . c o m/b o n d s

For historical, corporate and treasury yields check the Board of Governor’s website

https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15

orhttps://fred.stlouisfed.org/

Interest rates and yields, CPI, GDP, etc.

http://www.forecasts.org/data/index.htm

You can also find economic indicator data from World Bank or IMF websites.