CORPORATE FINANCE
The Term Paper
Spring 2010
Time frame for Valuation of Firm
Date You should be done with
Mar 1 Picked the firms for the project; make sure data is available
Mar 8 Corporate Governance; Stockholder Analysis
Mar 15 Financial Ratios and Competitive Advantage
Apr 5 Cost of equity; cost of debt; cost of capital
Apr 15 First part of term paper due (Hand in at the beginning of the class)
Optimal Capital Structure
May 10
Moving to the Optimal
May 24 Dividend Policy
Jun 7 Term paper Due (Hand in at the beginning of the class)
Required skills:
Excel
Information search
Active reasoning
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Websites might be useful for searching data
Damodaran
Bloomberg
Bondsonline
Yahoo!Finhance
S&P Compustat
新報資料庫 (Taiwan Economic Journal Database)
Picking your companies
Each person picks a company. The company should be publicly traded
and have at least three year of trading history and three set of annual
financial statements. There should be a common theme in each group. The
theme can be broadly defined. For instance:
an entertainment group can include movie companies, television
broadcasters and syndication companies.
An automobile group can include auto companies, suppliers to auto
companies and even an auto dealership.
In putting together the group of companies, try to pick as diverse a mix
of companies as possible (small and large, domestic and foreign,
closely held and widely held….)
Avoid the following:
Financial service firms (banks, insurance companies & investment
banks)
Money losing companies
Real estate investment trusts
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I. Corporate governance analysis
Is this a company where there is a separation between
management and ownership? If so, how responsive is
management to stockholders?
How does this firm interact with financial markets? How do
markets get information on the firm?
How does this firm view its social obligations and manage its
image in society?
II. Shareholder analysis
Who is the average investor in this stock? (Individual or
pension fund, taxable or tax-exempt, small or large, domestic
or foreign)
Who is the marginal investor in this stock?
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III. Financial performance analysis
Liquidity analysis
Asset management ability
Long-term debt management
Profitability
Market analysis
Du Pont analysis (strength and weakness)
IV. Risk and return
What is the risk profile of your company? (How much overall risk is there
in this firm? Where is this risk coming from (market, firm, industry or
currency)? How is the risk profile changing?)
What is the performance profile of an investment in this company? What
return would you have earned investing in this company's stock? Would
you have under or out performed the market? How much of the
performance can be attributed to management?
How risky is this company's equity? Why? What is its cost of equity?
How risky is this company's debt? What is its cost of debt?
What is this company's current cost of capital?
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V. Capital structure choice
What are the different kinds or types of financing that this
company has used to raise funds? Where do they fall in the
continuum between debt and equity?
How large, in qualitative or quantitative terms, are the
advantages to this company from using debt?
How large, in qualitative or quantitative terms, are the
disadvantages to this company from using debt?
From the qualitative trade off, does this firm look like it has
too much or too little debt?
VI. Optimal capital structure
Based upon the cost of capital approach, what is the optimal
debt ratio for your firm?
Bringing in reasonable constraints into the decision process,
what would your recommended debt ratio be for this firm?
Does your firm have too much or too little debt
relative to the sector?
relative to the market?
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VII. Mechanism of moving to the optimal
If your firm's actual debt ratio is different from its recommended"
debt ratio, how should they get from the actual to the optimal? In
particular,
should they do it gradually over time or should they do it right
now?
should they alter their existing mix (by buying back stock or
retiring debt) or should they take new projects with debt or
equity?
What type of financing should this firm use? In particular,
should it be short term or long term?
what currency should it be in?
what special features should the financing have?
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VIII. Dividend policy
How has this company returned cash to its owners? Has it paid
dividends, bought back stock or spun off assets?
Given this firm's characteristics today, how would you recommend
that they return cash to stockholders (assuming that they have excess
cash)?
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IX. Framework for analyzing dividend
How much could this firm have returned to its stockholders over the
last few years? How much did it actually return?
Given this dividend policy and the current cash balance of this firm,
would you push the firm to change its dividend policy (return more
or less cash to its owners)?
How does this firm's dividend policy compare to those of its peer
group and to the rest of the market?
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X. Valuation
What type of cash flow (dividends, FCFE or FCFF) would you
choose to discount for this firm?
What growth pattern (Stable, 2-stage, 3-stage) would you pick
for this firm? How long will high growth last?
What is your estimate of value of equity in this firm? How
does this compare to the market value?
What is the "key variable" (risk, growth, leverage, profit
margins...) driving this value?
If you were hired to enhance value at this firm, what would be
the path you would choose?
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Report Format
The report should be in an integrated format instead of having separate
reports for each firm and bound together. Having all the companies
discussed, by section.
Don’ t describe what should be common knowledge such as regression
procedure for estimating betas, but explaining why your firms have the
betas that you do is necessary.
Start each section with a table that summarizes your findings for that
section across the companies in your group.
Do not include the data sources that you used for your report (If you are
including your spreadsheet output, attach only the output pages and not
the input pages.)
Be brief.
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