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Project Outline – SPRING 2024

CORPORATE FINANCE      (FINC 614)

Stock Valuation and Risk Analysis

You are a financial analyst assigned to judge which company has better valuation at the current market price level.  For this project, you are to use Capital IQ and select two corporations in the same industry and compare their stock values and risk.    

 Specifically, you must do the following:

1. Select two firms within the same industry and gather information on recent stock price, and forecast EPS and DPS (from CIQ Estimate), and Credit Rating under Fixed Income (from Cap IQ) all other data relevant for stock valuation.

   2. Look up the yield (YTW) for the long term bonds for both firms. (Choose the highest yield)

3. Estimate the theoretical values of the stocks by using either the Dividend Discount Model or Earnings Equilibrium Model.  For Dividend Discount Model, you will need to estimate future growth rate.  Projecting growth rate is most challenging, which might be estimated in many different ways.  It can be computed using the PEG ratio provided by yahoo under Statistics (see Stock Intro PPT).

4. Compare the degree of under or overvaluation for both stocks.

Try to gather all your data on same day or otherwise the data will not match. Afterward, do the calculation for all the variables and organize the result in the format as described by the tables below:

To value the stock, we assume the stock will be sold on the first day of 2027.  

Example:  Assume 2027 projection is given in CIQ Estimate for your company. Then you will sell the stock on January 1, 2027 or Dec 31, 2026  (both dates are same for purpose of valuation)

To estimate the value, discount DPS (not EPS) for each year up to and including 2026. You can estimate the selling price for Dec 31, 2026 using the Earnings Equilibrium Model.

Slide 9  in DivDiscApplied PPT explains how the selling price is determined.

 Use normalized EPS (say $3 for 2027) as estimate for the long term EPS. In this example, the projected selling price on January 1, 2027 under the Earnings Equilibrium Model would be:  $3/required return.

In the next section, evaluate the risk of firms with debt or leverage ratios.

First, estimate the LT debt amount from Balance sheet in CapIQ  =

LT Debt and Lease + Current Portion of LT Debt and Lease

Book Asset =  LT Debt from above + Equity (BV) in Balance Sheet

Market Asset =  LT Debt from above + Equity(MV) as in Market Cap   

                                                            (Note: Market Cap = stock price per share x shares outstanding)

Use the above estimated assets to calculate the ratios* in the table below:

Table 1. Debt ratios and Risk

The debt ratios above help with analyzing financial risk of the two firms.

You can also calculate DFL (not DOL because you do not have fixed operation cost data).

Table 2. Valuation ratios

Note: EV Ratio is explained in ValuationRatio PPT in Week 1 Folder.

Table 3. Undervaluation Percentage

Calculation steps for the numbers with asterisk* in the above tables should be clearly shown in the appendix.

Format of paper:

The paper is comprised of 5 parts with approximate length as follows:

1. Objective of this project. ( ½ page)

2. Introduction of your firms                       (2 pages total or 1 page per firm)

3. Complete the calculations of data and organize them in the three tables as described above ( 1 or 2 pages)

4. Analyze the degree of leverage and risk in Table 1 for the two firms (1 page)

5. Analysis of the data in the Table 2 and 3 (analyze calculation result and explain which stock you would choose to invest if you must choose only one.)  Explain your decision clearly.  ( 1 page)

6. Conclusion (highlight of what you have learned)     ( 1 page)

7. Appendix- Show calculation of variables with asterisk in the tables in Part 4. (2 or 3 pages)

8. Footnote for citations and/or reference             ( ½ page)

The paper (except for the reference page) should be double spaced.

Keep in mind this is strictly a paper on stock selection, not company evaluation. After all, there are strong companies that makes poor investment, and vice versa. The content and the quality of the paper are more important than the quantity.  

Two students can work together in this project by discussing and helping each other. Both students will receive the same grade for the project. Each member calculates the valuation and risk of one firm and then both members get together to compare and analyze their results.  Both members must contribute to the last part (comparison of the valuation for the two stocks) of the project. There should be at least two meetings.  The first meeting is for planning and selecting an industry.  The second meeting is for comparing and analyzing the results of the two firms.  

No need for both partners to submit the paper separately. After completion, make sure both names are written on paper and submit it by either student as PDF file to Assignment in Sakai.  I hope you will learn something good from working together on this project.  Please consult me if you have any question.