Corporate Finance Course Assignment: Real-life Application of Basic Concepts

The bulk of this course is devoted to exploring the basic concepts of corporate finance in a "text book setting". As a result, you will not get a chance in most of this course to work on some real-life situations that will provide several additional complexities. The assignment is meant to make up for this deficiency. It is meant to give you a feel for the fact that the analysis that we discuss in class (and test in the exams) also has several additional dimensions in the form of specifics of the business and the accounting environment from which we gather our information.
•The project is to be done in groups.  
•Each group should have between 4 and 6 students
The objective of this project is to give you a chance to apply some of the material covered in this course in a more realistic setting. Good sources of information are Bloomberg, FactSet, Earning Calls, Investor Presentations, 10k Filings or Annual Reports, Industry Surveys, Analyst Reports to name some. All sources need to be cited appropriately; this includes webpages and presentations.
Your report should cover the following:
•Background and context (least important part of the project - typically 1 - 3 pages of your report):  o Describe the nature of the firm - their 1) general business and area of operation, 2) their recent performance (accounting performance such as ROE and ROA and stock performance), 3) the plans of the management for the nearer future, 4) the strategy of the management to overcome current obstacles and 5) possible risks involved for the future. Note, this list is not exhaustive but all points need to be addressed. You may want to include figures for better presentation.
•Bond pricing  o Select on straight Bond with maturity 2024 and one straight Bond with maturity 2030 of your firm. If those maturities are not available, choose Bonds with closest maturity to those years. Find the rating of each bond and the Corporate spread between a government bond and a bond with the respective rating. Find the price of the bonds applying the present value method from chapter 6 and compare it to the price the bonds are current trading at. Use the yield curve rates of treasury bonds (e.g. found on Bloomberg or the U.S. Department of the Treasury) plus the spread (e.g. found on Bloomberg) as respective discount rates. Explain, why the prices may not match. 3
•Cost of Equity Capital  o Estimate the firm’s equity Beta (with a regression analysis in Excel) using weekly data from the 1) past 52 weeks, 2) past 5 years, and 3) past 10 years, if available. If 10 years are not available use the longest available period.  
oUse the stock and index returns from CRSP or CFMRC for the market returns. Download risk free rates from the central bank website or Bloomberg for the risk-free rate.
oWhich equity beta would be most representative for the market risk of the firm and should be used in the estimation of the cost of equity? Provide a short reasoning.  
oWhat is the difference between equity and asset beta?  
•Cost of Debt Capital  
•Collect cost of debt for each component of debt listed on the annual report.  o For traded bonds collect YTM and market values from Bloomberg. o For non-traded debt estimate these values.
oIf you are able to, provide robustness tests using information from debt ratings / Z scores using comparable debt to compute implied cost of debt.
•Estimate the Capital Structure and Cost of Capital  o Choose one product market rival and compare the capital structure of the firm to its rival. o Estimate the cost of capital components and so the WACC  
oOptional: What are the cost of preferred shares – if applicable. In most such cases, you can use the stated rate.   
•Stock pricing  o Find the price of the stock applying the dividend discount method from chapter 6 and compare it to the price the stock is current trading at. Use the estimated dividends per share (e.g. found on FactSet or Bloomberg) for the next periods, when no more forecasts are available assume the dividends are growing with the industry growth rate (e.g. found on IbisWorld or Bloomberg). Use the cost of equity you calculated earlier. Explain, why the prices may not match.
oIf your firm is not paying dividends yet. Assume the firm will not be paying dividends for the next 2 years (including) and will then start paying dividends which are growing with the industry growth rate (e.g. found on IbisWorld or Bloomberg). What would be the Dividend in year 3 need to amount to, so it justifies the current stock price. Use the cost of equity you calculated earlier. Make an argument if the Dividends you calculated is reasonable and can be payed out of the earnings of the firm.
•Cash Flow  o Calculate the Cash flow you would use in an NPV valuation for the last reported annual period (annual). Assume Cash flows are accurate and assume further they are growing with the industry growth rate (same as in chapter 6 question). What would be the best-case and the worst-case stock price (NPV divided by number of shares outstanding (stock price)). Use the cost of equity you calculated earlier. Explain, why the current stock price may or may not be withing the boundaries you calculated.
•What is the firms present value of Tax Shield?
•When did the firm announce its last major change in dividend? Did it have any implications on the stock price? To answer this question, show the stock price 30 days before and after the announcement. Include also the market index CRSP or CFMRC in the graph. Make sure you identify the correct announcement date, e.g. using Factiva. Provide a short interpretation of the situation.
•When did the firm announce its last major change in capital structure (debt and equity)? Did it have any implications on the stock price? To answer this question, show the stock price 30 days before and after the announcement. Include also the market index CRSP or CFMRC in the graph. Make sure you identify the correct announcement date, e.g. using Factiva. Provide a short interpretation of the situation.
 
Alternative sources of data may be used if they are reliable – effective use of additional data sources can enhance your analysis. Alternative methodologies are encouraged and will only make your analysis stronger. If you have an idea you are encouraged to discuss it with the instructor.
Additional Details:
Your submission should be limited to a maximum of 20 pages or less of text  plus any annexures. Note that you should normally require considerably less than 20 pages to write up your results and therefore you should not feel pressured to use up all 20 pages. Concise and clear submissions are worth more than overly wordy ones. You also need to submit an Excel spreadsheet to show any extra work you may have done as well as basic calculations (such as beta, WACC etc.).