Aim of Project:

.    The project resembles the CFA Institute Research Challenge .   CFA Institute Research Challenge

.    Your task is to research and analyze a public company assigned to you and write a full equity RESEARCH REPORT with a buy, sell, or hold recommendation.

Data Collection:

1.   Collect the company’s income statements and balance sheets for the last 3-5 years. You will find that there is no standard format in reporting financial statements. Each source provides the financial statements in different formats.

Data sources: Please refer to the data resources file for FMV.

2.   Research and select a set of peer firms comparable to the company.  Collect the relevant data

(such as current price, market capitalization, enterprise value, EV/EBITDA, P/E, P/B, and etc.) on the selected comparable firms.

Data sources: Please refer to the data resources file for FMV.

Schedule of Tasks and Grading Criteria:

You will be submitting the components of your Project in TWO stages by a specified deadline.  If you log in to your Blackboard site, you will see Assignments on the left banner menu. Select

Assignments and then click Project Submission. Then, upload your file by the deadline specified. No late submission will be accepted (the site will be shut down at the deadline time).

I.      Stage I:  Submit Parts A & B on the 4th class date (session 4).

The filename should be Group #_lastname_first name_XXX_StageI, where XXX is your company’sticker symbol.

   Part A (10%):  Gathering and organizing past financial statements

Your task is to import the company’s last 3-5 years income statements and balance sheets into a spreadsheet and organize them in a format ready for analysis.

o Each company includes different line items in its income statement and balance sheet. Your statements should resemble them as much as possible. You may want to consolidate some line items at your discretion. (*If you do so, use a footnote to indicate which items have been consolidated). If a line item carries small values and you think that the line item is not important for forecasting the company’s future cash flows, you can add the line item to another similar line item. Major line items should not be

omitted. Even if small line items are consolidated, the values of net income, total assets, and total liabilities and equity should be unchanged.

o You may find that values don’t add up exactly. For example, when you add all values of asset line items, the sum may not be the same as the total asset value shown on the balance sheet.  It happens because of rounding error or possibly faulty data. When the difference is small, you can ignore that.

o Include the original income statements, balance sheets and cash flow statements as reference.

o Please be sure to indicate the data source from which your data is derived.

o Your part A worksheet should have the following 5 tabs labeled as follows:

> ISorig (contains the original income statements)

> BSorig (contains the original balance sheets)

> CFstm (contains the original cash flow statements)

> ISmod (contains the modified income statement)

> BSmod (contains the modified balance sheet)

   Part B (25%): Proforma statements and financial analysis

Your tasks:

i)    Develop the next five-year forecasted pro-forma statements (income statement and balance sheet) based on ISmod and BSmod from Part A.

ii)  Compute key financial statistics and ratios for the past and forecast years (See Appendix for the set of suggested financial indicators to compute)

Notes:

o Input (forecast) assumptions should be realistic and clearly explained. Provide a short explanation for each input variable by using a column labeled “Comment” next to the  variable or use "Insert Comment" function. For example, you pick a 60%

COGS/Revenues ratio. In the cell, you insert a comment like "avg of the last 5 years."

Note that determining the input variable assumptions by simply taking the average percentage of past years without considering the trend and unique characteristics of each line item should be avoided.

o Make sure that the balance sheet is balanced.

o You may find dividend and depreciation information from the cash flow statement.

o  Line items of Part B (the proforma) should be the same as line items of Part A (the modified statements, assuming that you did Part A correctly).

o Add the following 3 tabs to your Part A worksheet:

> ISproforma (contains the proforma income statement)

> BSproforma (contains the proforma balance sheet)

> Finratios (contains the key financial statistics and ratios)

II.      Stage II: Submit Parts C & D on the 7th class date (session 7).

The filename should be Group #_lastname_first name_XXX_StageII, where XXX is your company’sticker symbol.

   Part C (25%): Valuation and risk analysis

Your tasks:

i)    Value the firm and its equity using various approaches

ii)  Perform sensitivity/risk analysis

Notes:

o When computing FFCF, consider what items to include and to exclude.

o Use real data as much as possible. For example, use real data for stock beta, risk-free rate, the company’s bond rating and current market yield for the rating, etc. You can use your discretion (with proper justification) for some variables such as the market risk premium in the CAPM, terminal growth rate etc.

o If you were to use the firm’s WACC from published sources, you have to explain

specifically how the source calculated the WACC (showing the screen shot only is not acceptable). The bottom line is that you have to demonstrate that you know how to calculate the WACC.

o This Stage II excel file adds the following 2 additional tabs to the Stage I file: Ø VALUE (contains the valuation analysis including the components)

Ø RISK (contains the risk analysis)

   Part D (25%): WRITTEN REPORT (10 page limit)

o You may use the winning papers of past years ’ CFA Institute Research Challenge as a guide for putting together the report.

o Past research challenge champion reports are available via this link

https://www.cfainstitute.org/en/societies/challenge/past-champions

o Given time constraints, I do not expect you to write as comprehensive a report as that of past CFA Challenge papers.  Please follow the report guidelines below.

o Prepare your report from the perspective of an independent research analyst. Interpret the results of your financial and valuation analyses (in light of the firm’s business and strategy), discuss insights or practical questions that arise from your analysis and make recommendations that are supported by your analyses.

The following are guidelines for the written report:

o Maximum often (at least 1.15)-spaced pages of your research summary. The cover and reference pages are not included in the 10 page limit.  You do not need to attach your   spreadsheet models as appendix to this paper.

o The report should include:

. A brief description of the company’s business and its competitive positioning

. A highlight of your financial analysis (from Part B) and valuation model (from Part C) and your interpretation of the results.

. A discussion of the chief insights (including investment risks, drivers of

uncertainty, opportunities, etc.) you derived from your financial analysis and  valuation model about the firm’s current and expected financial performance.

. Your ideas, if any, to improve the investment opportunity.

. Your recommendation and why.

o The paper starts (or ends) with your recommendation of whether you would advise your boss (or clients) to buy/sell/hold the company (or stock).  The Crystal Ball simulation  results provide the value distribution and the percentage of under or overvaluation.

o Please be sure to cite all sources (data, works of others, etc.) that you use in your report. Otherwise, it is considered as plagiarism.

o Your report will be graded for content (thoroughness and quality of analysis) as well as organization/presentation.

o Upload two files to Canvas via the assignment submission links:

1)   the written report (either Word or PDF file), and

2)   the Excel file that includes all your spreadsheets (from Parts A, B and C).

Note:  You may ask me clarifying questions about the project but please do not ask me to review your file prior to its submission as this will be unfair to other students.