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Using Financial Statements for Equity Valuation and Credit Risk Analysis

Part 1: Using Financial Statements for Equity Valuation (50 Marks)

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 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 2018, using the actual - real - financial results reported by the firm in 2019 and 2020:

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 2018-2020. Please note that NO other appendices are 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 please Ex-post validation means that you must explore the usefulness of the two valuation technologies, which you employ, by comparing their resulting respective ex-post estimates of the fundamental (intrinsic) value of the firm’s equity with the actual (observed) market price of the equity at the end of 2018. That is, you need to look back and convert the financial statement numbers from 2019 and 2020 into an ex-post valuation of the firm’s equity at the end of 2018 and also 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 2018.

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 analy

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 2018-2020:

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 and support your choice of each of the four ratios you use.

3) You must supply a brief commentary on the dynamics of credit quality for the firm being analysed over the period 2018-2020. 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 – appears to be improving, deteriorating, or remaining stable over the analysisperiod. You  must substantiate your conclusions with evidence, and you are required to offer plausible causes of any significant changes in credit riskdetected 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 2018-2020. Please note that NO other appendices are 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 clearly highlighted.

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