MBA 542: Managerial Finance, Spring 2017
Company Analysis & Valuation Report
STUDENT NAME: .
Submitted to Dr. Chen Liu through email: Chen.liu@twu.ca
Due May 6 @ 10pm
Please attach (1) this report, (2) Valuation excel file, and (3) Excel files of financial statements from Seeking Alpha in one email.
1. Background of your company:
(1) Brief business description: include the general sector, specific industry, what does the company do, the main activities through which the company generates revenue.
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(2) List the company’s five main competitors, if your company does not have five competitors, list top three. Comment on the company’s competitive advantage, focus on what the company does better than its competitors and how long you think the company will keep the competitive advantage. Or if the company is not doing better than its competitors, discuss the situation and whether you see the potential for your company to improve.
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(3) Whether and to what degree will your company affected by President’s Donald Trump’s economic policy. (Business tax cut, immigration, etc, Google it)
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(4) Your company’s stock history in the past 3 years: download your company’s daily stock price in the last 3 years along with S&P 500 in the last 3 years (April 18 2014-April 18 2017). Calculate the average return and standard deviation of your company’s stock and S&P 500. Insert a graph on your company’s return and S&P 500 return in the past 3 years. All your calculation should be done on the sheet “Stock Price (3yr)” on the Excel.
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2. Company Analysis
First of all, get the financial statement from the last two years, copy & paste balance sheet and income statement to the excel sheet “Ratios”. Then do all your calculations from there. For stock price, just find the price at the financial statement report day.
(1) Short-Term Solvency: Calculate the company’s current ratio, quick ratio, and defensive interval ratio (DIR); and comment the company’s overall short-term solvency.
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(2) Long-Term Debt Policy: Calculate the company’s total debt ratio, EBIT interest coverage ratio, cash coverage ratio. Comment on the company’s capital structure.
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Based on both the trade-off theory and the pecking-order theory of debt, should the company use high or low level of debt?
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Trade-off theory: tax shield benefit (high profitability, high tax bracket) vs financial distress cost (profitability, risk, tangible assets).
DELL:
· profitability is very low, do not need to borrow a lot to provide tax shield;
· because profitability is low, financial distress probability is high;
· risk is high, because of competition;
· tangible asset okay.
should use low debt (note: this is too brief, more details)
Pecking-order theory:
· Dell does not have enough internal money (low profit margin) have to use external money if they have to
· Use debt first. It is cheap for Dell to borrow because it is a large company.
· Also, information asymmetry is low if Dell ends up issuing additional stocks, it will not reduce its current stock price too much.
Give advice to the company in terms of its debt policy—should the company reduce its debt, issue more debt, or stay in the current situation, explain your answers in details.
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(3) Asset Utilization: Calculate and comment on the company’s total asset turnover, NWC turnover, and fixed asset turnover. If you see any problem, suggest two ways through which the company could improve its asset utilization; if you don’t see any problem, you don’t need to make any suggestion.
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(4) Profitability: Calculate and comment on the company’s gross profit margin, operating margin, and net profit margin. Suggest two ways through which the company could improve its profit margin, if necessary; if you think the company’s current profit margin is fine, you can also suggest two ways to keep it or even further increase it
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Calculate and comment on the company’s ROA and ROE.
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(5) Creditors’ decision: If you work for a bank and the company approaches you for debt financing. Which ratios are important considerations? Will you issue loans to the company? Why?
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Debt ratio: 80% very high
Interest coverage (Times interest earned and cash coverage ratio): 23 –good, but be careful because debt ratio is very high
Short-term solvency: current & quick ratios good; DIR & conservative DIR very good.
(6) Shareholders’ decision: If you are a stock investor, which of the ratios you calculated above are important considerations? Would you consider buying the company’s stock? Why? (here, just make decisions without looking at DCF valuation, just by looking at ratios)
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1. P/E ratio: 6.72 (S&P 500 is around 16) very low either low growth potential or undervalued, have to check with g.
2. Growth rate (g): 42% (if calculate g=retention ratio * ROA = 8.4%, medium to high growth)
Judging from PE and g, the company is undervalued!!! (but this undervaluation judgement is only based on PE)
3. ROE: 42% high, but extremely high risk from 80% debt ratio.
4. Net Profit Margin: too low
5. Dividend matters to some degree, esp. for income investors.
(7) Operating Cycle and Cash Cycle:
Discuss at least 5 ways through which your company could reduce its cash cycle. Please note that we discussed a complete list of ways to reduce cash cycle in class, but not all items would be applied to your company—choose the ones that will work for your company and discuss in details how each way could be achieved.
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(8) Short-Term Finance Policy
Should the company use a high or low level of current assets? Compare your answer with the company’s current situation, what can you find?
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· Growth potential: low if in PC, high in game computers & other innovative areas more cash & marketable securities
· Cost of borrowing: low because it is a large company, but given 80% already, hard to raise additional debt more cash & marketable securities
· Account receivables: low in PC (mostly individual customers), if they do business service, extend credit relatively high A/R, esp. business service
· Inventory: carrying cost for inventory is high (electronics & computers, hard to handle); also their strategy on customized computers relatively low inventory
· Compare what they should have vs. what they actually have, consistent.
Should the company rely more on short-term debt or long-term debt? Compare your answer with the company’s current situation, what can you find?
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PC: short term, short-term debt
Expansion to business service: need to do a lot of R&D, may need some long-term
Credit market condition: (1) relative short-term vs. long-term rate, (2) cost of carrying cash, (3) liquidity of commercial paper market, if very liquid, low rollover risk.
3. Valuation:
DCF Valuation: do the valuation on the spreadsheet, but you need to justify the following
(1) Key value drivers and your assumptions behind them: annual revenue growth rate, annual pre-tax operating margin, annual sales to capital ratio
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(2) Consider the risks of your business—what might change and how it would affect your valuation
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4. Valuation Enhancement:
From a CEO/CFO’s perspective, understand your value driver and suggest how the company could increase its value
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5. Recommendation:
Make a recommendation (buy, sell, hold) of your stock
Your recommendations should be both from long-term investors’ perspective and short-term investors’ perspective
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