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1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, as of the end of 2016, using the actual - real

PART 1: USING FINANCIAL STATEMENTS FOR EQUITY VALUATION (50 MARKS)

Part 1 of the assignment is intended to help you develop practical skills of Fundamental Analysis. The assignment provides you with an opportunity to apply valuation technologies that are commonly used in practice and that incorporate financial statement information into equity valuation models. The focus is on ex-post or backward validation of alternative valuation approaches.

Formal Requirements for Part 1

1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, as of the end of 2016, using the actual - real - financial results reported by the firm in 2017 and 2018: Ticker Firm Name (CAG) Conagra Brands, Inc. (EMR) Emerson Electric Co. (LOW) Lowe`s Companies, Inc. (MXIM) Maxim Integrated Products, Inc.

2) Your valuation should utilise TWO valuation technologies one of which MUST be either Residual Earnings Analysis or Earnings Growth Analysis.

3) You should supply an analytical commentary on the usefulness of the two techniques that you use, substantiating your conclusions with the results from the valuation.

4) You must prepare a concisely written report for this part of the assignment and are required to include in your written report, as an appendix, entire sets of all the annual financial statements for the chosen firm for the period 2016-2018. Please note that NO other appendices is allowed. Page 2 of 5

5) Your written report must contain clear references to the relevant portions of the included in the report financial statements for the firm being analysed, and those relevant portions of the appended financial statements should be highlighted.

Ex-post validation means that you must explore the usefulness of the two valuation technologies, which you employ, by comparing their respective ex-post estimates of the fundamental (intrinsic) value of the firm’s equity with the actual market price of the equity at the end of 2016. That is, you need to look back and convert the financial statement numbers from 2017 and 2018 into an ex-post valuation of the firm’s equity at the end of 2016 and provide your conclusion on which of the two valuation techniques that you utilise appears to be more powerful at predicting ex-post the value of the firm as of the end of 2016.

 Please note that in this particular project there is no need for you to attempt forecasting pro forma numbers, since you can treat the 2017 and 2018 actual numbers in the firm’s financial statements as impeccable one- and two-year projections that can be used for valuing the firm’s common stock at the end of 2016.

Attention should be given to the valuation technologies that attempt to calculate the fundamental (intrinsic) value.

The structure of a report for Part 1 of the assignment will include an executive summary with a brief retrospective background on the firm’s business model, industry, and economic environment. The report for Part 1 will concisely outline an appropriate specification of payoffs, based on an analysis of the available 2017 and 2018 financial statements, as well as describe an ex-post valuation and a comparison of the obtained estimates of the equity’s fundamental value with the actual market price at the end of 2016, concluding with a discussion of the degree of usefulness of the two valuation methods that you utilise, from an academic researcher’s perspective.

Avoid applying equity valuation techniques mechanically, as the examiner will need to see that you have the necessary understanding of the costs and benefits of alternative technologies and are using appropriate tools.

You must briefly state the valuation assumptions you rely upon in valuing the firm’s equity and must critically interpret the valuation results, using evidence in the argument.

You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform your conclusions.

You may round all computations to the nearest integer (or nearest percentage).

 

PART 2: USING FINANCIAL STATEMENTS FOR CREDIT RISK ANALYSIS (50 MARKS)

Part 2 of the assignment is intended to help you develop practical skills of credit analysis. The assignment provides you with an opportunity to evaluate the financial status of a potential corporate borrower, using ratio analysis of the financial statements.

Formal Requirements for Part 2

1) You are required to carry out an analysis of financial statement ratios that indicate the creditworthiness of a corporate borrower, that is, the corporate borrower’s ability to pay its debts on scheduled times, for ANY ONE of the firms listed below, over the period 2016-2018: Page 3 of 5 Ticker Firm Name (CAG) Conagra Brands, Inc. (EMR) Emerson Electric Co. (LOW) Lowe`s Companies, Inc. (MXIM) Maxim Integrated Products, Inc.

2) You should calculate the FOUR financial statement ratios that you identify as the most pertinent for credit risk assessment of your particular firm, making sure to address short-term liquidity, long-term solvency, and operating profitability. You must justify your choice of each of those four ratios.

3) You must supply a brief commentary on the dynamics of credit quality for the firm being analysed over the period 2016-2018 Your commentary must briefly outline entailing implications for pricing of the firm’s debt of the risk of debt default. You should discuss whether the credit risk of the firm - as implied by the four ratios – appeared to be improving, deteriorating, or remaining stable. You must substantiate your conclusions with evidence and offer plausible causes of any significant changes in credit risk detected through your ratio analysis.

4) You must prepare a concisely written report and are required to include in your written report, as an appendix, entire sets of all the annual financial statements for the chosen firm for the period 2016-2018. Please note that NO other appendices is allowed.

5) Your written report must contain clear references to the relevant portions of the included in the report financial statements for the firm being analysed, and those relevant portions of the appended financial statements should be highlighted.

 

 

 

In respect of Part 2 of the assignment, no particular structure is required, but you must take the perspective of an academic researcher.

You may round all computations to the nearest integer (or nearest percentage).


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