金融代写 BF3204 Financial Modelling

Division of Banking and Finance Nanyang Business School Nanyang Technological University

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BF3204 Financial Modelling Instructor: Charlie Charoenwong, PhD Email: Charlie@pmail.ntu.edu.sg

Trimester 1, AY2018 Office: S3-01c-104 Tel: 6790 4799

Part 1: Cost of Capital

Instruction

Project 1
Cost of Capital and Valuation
(Due on Sunday 14 October 2018, 11:59PM)

1. Each group choose 2 companies from the same industry group. Appendix A shows the industry groups available.

2. You should collect five years or more of the companies’ financial statements and information related to financial markets (e.g., stock returns, risk-free rates).

3. For the cost of debt, you first estimate it by using the historical cost of debt. For the 2nd method, identify the credit rating of the selected companies and choose a typical maturity for the debt of the company. Then collect bond data, fit a yield curve, and estimate the cost of debt from the yield curve. In addition you may use other methods that you have learned from previous courses or that you can provide a justification.

4. If possible, use Gordon model and the CAPM model to estimate the cost of equity. For the Gordon model, incorporate various methods (e.g., geometric, arithmetic and least square) to estimate the growth rate. When it is applicable, consider using the two-stage growth rate.

For the CAPM model, you should use at least 48 or more months of stock return series (dividend included) to estimate common-stock betas. You may estimate the betas with the industry’s approach, the academics’ approach or both. Make sure the return series computed correctly.

Besides the Gordon and CAPM models, you are encouraged to add other models for estimating the cost of equity.

5. Use the three methods learned in class to estimate the market risk premium. Consider using a long time period (e.g., 120 months) in estimating the market risk premium. Provide discussion on the choice of risk- free interest rate used.

6. Since many firms employ hybrid form of debt and common stock (e.g., preferred stock), you are encouraged to estimate them too if it is sizable. After estimating all components of capital, you compute the weighted average cost of capital (WACC) based on both market value and book value weights.

7. Use the beta estimated in Step 4 to compute the unlevered (asset) beta, 􏰏􏰐1. Use 􏰏􏰐 and the CAPM equation to compute the required rate of return. Compare this rate to the WACC calculated in Step 6. Are they much different? Why or why not?

Part 2: Valuation

Description

This part of the project requires students to use the discounted future free cash-flow method in estimating the values of the companies and their common-stock values. Discount rates are based on the estimates in Part 1.

1 The unlevered beta can by computed by using Hamada Equation, bU  bL , where bU and bL are the unlevered beta 1(1T)DE

and levered (stock) beta, T is the marginal tax rate of the firm, and D/E is the debt to equity ratio.

Financial Statement Model

Start with analysing the historical financial statements and then build a simple model for the financial statements. You may modify any financial statement models we learned in class to fit the financial statements of the company. Of course, you are not limited to the models in the textbook. In short you may use any model you deem appropriate. But you must clearly explain and provide justification why the model you use is suitable for the company you are valuing. Do state the variable that takes the role of the Plug and provide justification.

Use the historical data to estimate sales growth and various financial statement relations (i.e., the input for the financial statement model). Because the past data may not well represent the future outlook of the companies, you should also use a forward looking approach. Do discuss why you choose one approach over the other.

For serious students, I strongly recommend you study Chapter 6 of Benninga’s Financial Modeling and more examples found in Chapters 6 & 7 of “Corporate Finance: A Valuation Approach,” by Benninga–Sarig2. Chapter 6 provides details of how to analyze a company’s operations (e.g., current assets/sales, fixed assets/sales, etc.). Chapter 7 goes at length on how to estimate a company’s sales growth rate, especially Exhibits 7.2 and 7.3 on page 204-5.

Valuation and Terminal Value Projection

You forecast free cash flows for five years plus the terminal value at Year 5. Before estimating the terminal value at Year 5, you may wish to read Section 7.5 on page 223 of Benninga-Sarig book. Though not required, you may like to try out a few methods suggested by the authors.

You may use either full- or half-year discounting. Select one and be consistent.

In addition you may try to value the companies by using other techniques such as PE ratio, Price to EBITDA ratio, Market-over-Book ratio and others. The details of these techniques are also available in Chapter 10, Benninga-Sarig Book.

Risk Analysis

Sensitivity Analyses – Select a few variables that you are interested to see their effect on the equity value per share. Plot the graphs and discuss the results and implications.

Scenario Analyses – Use your imagination to create a few interesting scenarios and estimate the equity values under these scenarios

Recommendation

Based on your analyses, please recommend which the common stocks of the companies should be bought, held, or sold.

Part 3: Submission

Report – The report should be succinct, well organized and designed. Start the report with an executive summary. The body of the report comprises the industry analysis, the company analysis, and the details on how to come up with inputs and assumptions used in the project. You should also discuss any limitations, cautions, implications, and buy-hold-sell recommendations. The length of the report should be around 15 pages excluding cover page, executive summary, outline, figures, and tables. Please hand in the hardcopy and upload the softcopy to Turnitin Project 1 – Report Only subfolder.

Presentation Video – Every member must take part in presentation with the visibility of the presenter. Dress properly when appearing on the camera. I encourage you to record the video in the recording room at LWN

2 Two copies of the book are reserved at Library 2.

Library3 or a communication lab in S3-B1c section. Make sure the video has a good angle, clear picture and voice. The presentation shall not be more than 25 minutes and the file size must be smaller than 750 MB. You will be penalized if the length or the size of the video file exceeds the limit. Please upload the video file to Project 1 – Video Only subfolder under Assignments.

EXCEL – Upload Excel files to Project 1 subfolder under Assignments. The files must be well organized.

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