Financial Analysis and Valuation
Financial Analysis and Valuation
Academic Level: –
Volume of 10 pages (2750 words)
Assignment type : Coursework
1. Brief explanation of what the company does and where it operates.
2. Performance data: profitability, position and KPIs.
3. Competitor analysis and comparative size to competitors.
4. Risk analysis – see Annual Report and make your own comments.
Remember file naming convention
Person 1: perform analysis
Create a spreadsheet for your company to calculate the value of equity using the discounted cash flow model. Refer back to the lecture slides (2-47 to 2-51) and Penman for the process to follow. In summary:
1. Forecast free cash flow to a time horizon and discount to present value. [Or use historical cash flows if you do not feel confident forecasting at this stage*].
2. Calculate continuing value at time horizon and discount to present value.
3. Add 1 and 2 together.
4. Subtract net debt.
Your spreadsheet must be able to calculate the value of equity for different required rates of return and different growth rates so your formulas must refer to variables for the growth and discount rates where these values can be entered.
Please make your spreadsheet look beautiful and format it properly for printing.
* If you use historical cash flows, you will need to research the market cap for the year in which you are discounting back.
Person 2: Write up analysis
Reflect on the discount rate that you applied to the net cash flows, and the growth rate you assumed for calculating the continuing value. Outline why you chose each. Explain what happens to the value of equity when you adjust the values for growth and required return.
Critically evaluate the DCF model as a basis of valuing equity. For example, compare your calculated value of equity with the company’s current market capitalisation. Explain why the figures differ. What happens to the value of equity if you use a different year to calculate continuing value?
This is very similar to the work you did for CA-02 (Discounted Cash Flow valuation), except that you will now substitute earnings for net cash flow.
Using forecast earnings data (analysts’ or your own estimates of future performance), calculate the market’s implied growth rate for your company using the reverse engineered valuation model. Base your calculation on the residual earnings va
1. Critically evaluate the use of the model including an evaluation of problems determining an appropriate discount rate (required rate of return).
2. Compare your calculated value of equity with your company’s current market capitalisation and explain why the figures might be different.
1. Using the most recent copy of your company’s Annual Report and Financial Statements (this may be for last year), find the Statement of Changes in Shareholders’ Equity and paste it as an image into your report. If you do not paste in the original, your work cannot be marked.
2. Study the statement very carefully and explain in as much detail as you can what each entry in the Statement means and what impact each has on the Ordinary Shareholders.
1. Using a spreadsheet, reformulate the Statement of Changes in Shareholders’ Equity following the pro forma on page 262 of Penman.
2. If you have excluded items from the reformulated statement, list them and explain why they should not be in the reformulated statement.
3. Send a copy of the spreadsheet to me. The file name must begin with your student number and include the company name or ticker.
4. Paste a copy of your spreadsheet table into your report.
Note: Although the requirement is to reformulate the Statement of Changes in Shareholders’ Equity for one year, for your final report you will need to do this for at least the last 5 years so you may want to get this bit of work done now. You will not lose any marks if you submit only one year of data.
Reformulation looks like a mechanical exercise, but it requires a good knowledge of the business, an understanding of how the firm makes money. It requires you to evaluate management reports and the financial statements.
Download the financial statements from the company’s website, FT.com or from data analysis libraries. Read the notes to the financial statements to discover more detail.
Build a detailed spreadsheet using your company’s financial data for at least 5 years (preferably more) to produce reformulated balance sheets, income statements. You are not required to reformulate cash flows or Statements of Changes in Equity.
Produce comparative common-size and trend statements, based on your reformulated statements.
Later, you will be wanting to exchange data with other students studying companies in the same sector or industry as yours, so make sure you present these well. You are not required to produce any analysis on these figures at this stage.
Please email your spreadsheet to me making sure that the file name begins with your student number and contains your company’s ticker code.
Upload a one page summary of your reformulated statements to Turnitin. You will be given marks for how well presented your figures are and how well displayed they are on the page. Do not try to submit Excel files to Turnitin, as formatting is not preserved.
Profitability and performance
Using the data from your re-formulated financial statements, perform some analysis of the company’s profitability, asset turnover and returns. Use the ratios set out in the slides for Lecture 06 and try to create some additional ratios pertinent to your company or its sector.
Using the data from your re-formulated financial statements, determine historical average growth rates, suggest possible growth rates that might be suitable for forecasting future earnings growth. You could use sales growth, earnings growth, growth in net operating assets.
Try to “normalise” the historical growth. Is the growth rate declining, increasing or stable? What does this suggest about the growth rate you should use for forecasting a valuation.
Critically evaluate the use of various growth rates that you have calculated and suggest what you think is the most suitable for forecasting.
1. Using the forecast residual earnings model, calculate the current value of your company’s equity. You will need to forecast ROI for next year and you will need to understand whether you are calculating a levered or unlevered valuation.
2. Calculate a range of valuations of your company using different growth rates, and different rates of returns on net operating assets (RNOA).
3. Using the table of calculations in (2) above, determine the implied growth rate of the company at its current market price.
4. Explain the limitations of the valuation model you have used and why it may not produce a true value for your company.
Full valuation forecasts
Using the forecasting template on Slide 8-6 and Penman Chapter 16, pages 520-525, produce a set of forecast reformulated financial statements for your company.
Comment on the risk factors associated with the forecast methodology you have used, i.e., why might the forecast be wrong?