Finance 4050 Valuation Term Project – Outline
Style Matters
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Things to include:
o Executive summary (Conclusions –e.g., great company, but stock is overvalued); both
overall for entire presentation and for each unit
o Table of Contents; also on a unit basis
o Index to Paper (Include page numbers)
 List Appendices in the Index
o Bibliography
o Appendices (supporting data and other information should be in an appendix)
Things to worry about:
o Sources – minimum of 20
o Directly attributable quotes from industry – minimum of 8
o Tables, Figures and Charts must have appropriate titles
 May require color printing in order to be meaningful.
o Proper citations are required. (Under no circumstances should anything be copied
without identifying the source with a proper citation of the source materials.)
o In all cases, you and your group members need to decide what needs to be
communicated and develop an effective presentation. Write, edit, rewrite, edit and so
until satisfied with the presentation.
Suggestion About the Presentation:
o Much of the paper is about data and the analysis and/or conclusions
 Develop tables, charts, figures and exhibits that show what you want the reader
to examine – include in the paper.
 Put tables, figures and charts in the text body if you want the reader to examine
it or if you refer to the data. Put the material in an appendix if it is supporting
material.
o Develop and present analysis
 Avoid describing what can be seen in the table, chart, figure or exhibit.
 Focus on interpretation, analysis, insights, and drivers of value.
 Relate numbers to what has happened to the firm/industry/economy
Submit
o Paper copy
o Electronic Copy for checking vs. Turn-it-in.com.
8/27/08
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Notes about the project & its evaluation:
1. Responsibility:
a. Each group member is responsible for each unit of the paper.
b. The paper is an integrated whole.
2. Tables/Figures/Charts/Exhibits
a. Should be used to effectively present information
b. Must have titles and, where applicable, source references.
c. Must be in the body of the text if referring to materials.
d. If Tables/Figures/Charts/Exhibits relevant to the presentation are stuck in an
appendix and the reader is referred to look at Table such and such in the
appendix, this is not an acceptable professional approach and your paper is in
trouble.
e. Materials that are not used to present the story should be in an Appendix to the paper.
3. Appendices
a. Each appendix should be number, e.g., Appendix A
b. They contain materials that the reader might like to look at, but are not needed to tell the
story developed in the paper.
c. Should be at the end of the paper.
4. Page Numbering
a. Pages must be numbered.
b. Pages numbers should follow from one unit to the next.
5. Within a unit, use major and minor headings to show topics covered and tell reader that you are
moving from one subject to another.
6. A paper or section of the paper with just tables/figures/charts is unacceptable. Must have text
to go with the information.
7. Papers should have
a. Table of contents (Unit Titles and Major Sections) with page numbers.
b. Proper citation of source materials and direct quotes.
i. Direct copy of text should have “” and citation of source materials.
c. An Executive Summary at the beginning of each unit
d. Bibliography
8. Once done, look over the final presentation to make sure that it is a professional
presentation. If it is not, do it over until you get to be what you want.
Structure of the Paper: (Subject to Change)
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The paper is broken into seven “Units.”
o Unit 1: The Company, Industry and Competitors.
o Unit 2: Financial Performance Analysis
o Unit 3: Cost of Capital, Capital Structure Analysis and Distributions
o Unit 4: Financial Statement Forecasts
o Unit 5: Cash Flow Valuation
o Unit 6: Relative (Multiples) Valuation Analysis
o Unit 7: Summary and Conclusions
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Unit 1: The company, industry and competitors.
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Opening Exec Summary – Unit 1; Table of Contents – Unit 1
Section 1: Business description (See 10K – Annual Report)
Section 2: Brief company history
o Focus on recent events – (events that have or will affect value)
 Acquisitions – divestitures
 Expansion – contraction announcements
 New products
 Law suits
 Events (possible, probable or for sure that impact cash flows and firm value)
Section 3: Products and Competition
o Major products
 Where produced – Where sold
 Show how each product area contributes to company sales and profits.
 Identification of major cost components.
o Competitors
 Market share data
o Competition (how do firms compete?)
 Price – quality – service and so on.
 Who is the “dominant company” in this industry and why is it the dominant
company?
Section 4: Corporate control (Management and share ownership)
o Management qualifications
 Brief description of the “key” people in the firm.
 Background
 How long have they been with the firm?
 Compensation [salary and options]
o Share ownership and compensation plans (compare with comparable companies)
Signals / implications??
 Executive compensation plans
 Total compensation = salary + bonus + options
 Compare with 2 or more similar companies
 Members of the board of directors (insiders or outsiders)
 Insider – Institutional Share ownership
 Compare with “comparable” companies. (Why is this important?)
 Are insiders buying – holding – selling (recent data)
 Compare with “comparable” companies
Section 5: The future
o Financial analysts
 Analyst earnings and sales estimates
 Analyst’s buy/sell/hold recommendations.
 Positive or negative earnings surprises?
 Use brokerage (analyst) reports
o In general, what is going to happen to the company (sales, profits, share price,
and so on) over the next five to 10 years?
 expert opinions (forecasts)
 your opinion (forecast)
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Unit 2: Financial Analysis (historical)
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Opening Exec Summary – Unit 2
Table of Contents – Unit 2
Two major sections
o Stock price (return) performance over the past 5+ so years
o Financial Performance over the past 5+ years
Objectives for each section:
o Relative to the comparable firms and or index, determine whether your firm is
superior, similar or inferior.
o Speculate about the reasons for your performance conclusion.
o Indicate whether you believe the past performance will or will not continue into
the future.
Section 1: Stock price performance
o Need to compare/contrast company with
 comparable companies and/or portfolio of comparable companies
 market
o Absolute Performance
 Arithmetic mean/standard deviation/coefficient of variation
 Geometric Mean Return (monthly or annualized)
 $100 grows to _____
Section 2: Financial Performance (three parts)
o Part 1: Growth Performance
 i.e., Yahoo Growth Rates (company, comparables, industry, sector and market)
o Part 2: Financial Performance
 i.e., Yahoo Financial Ratios (company, comparables, industry, sector and
market)
 Financial Condition Ratios/ Profit Margin Ratios/ Management Effectiveness /
Efficiency Ratios
o Part 3: DuPont Analysis – Company and Industry
 Calculations, Analysis, Commentary on DuPont components as it affects
company’s and industry’s ROA and ROE
o Part 3: Altman’s Z-Score Analysis – Company and Industry
 Calculations, Analysis, Commentary on Z-Score components as it affects
company’s and industry’s likelihood of financial distress
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Unit 3: Cost of Capital, Capital Structure Analysis and Distributions
o Opening Exec Summary – Unit 3
o Table of Contents – Unit 3
o Three major sections:
o (1) Debt, (2) External Equity, (3) Internal Equity Components:
 Discussion / analysis on:
o Relevant Costs of each component
o Relevant Financial ratios (debt)
o Factors/ issues affecting, including for equity: CAPM – Beta, relevant
risk-free Treasury, and risk premium; Unlevering /relevering Beta for
change in Capital Structure to target?
o Weights: BV/MV/Target
o Descriptive presentation /discussion analyzing the firm’s capital, its capital structure, and
industry’s
o Cost of capital
 Historical numbers
 Your forecast numbers
o Distributions (Dividends and Share repurchases) to shareholders and vs. Plowback Rate
 Historical numbers
 Forecast of future behavior.
Unit 4: Financial Statement Forecasts
o Opening Exec Summary – Unit 4
o Table of Contents – Unit 4
o Section 1: Presentation of final forecast parameters/ assumptions.
Historical versus your forecast
Present/Discuss Basis for/Defend using your research to support
o Section 2: Presentation of your pro forma financial statements
Historical and Pro Forma
Present/Discuss projections
Use of Fade graphs and commentary
o Section 3: Presentation of Financial Ratios
Historical and Pro Forma
 Present/Discuss/Defend (what the forecast has done to the company relative to
what it was in the past)
 Include Financial Condition Ratios/ Profit Margin Ratios/ Management
Effectiveness / Efficiency Ratios
 DuPont Analysis – Based on Company Forecasted Financials
 Calculations, Analysis, Commentary on DuPont components as it affects
company’s ROA and ROE at one-year forecast and Horizon point
 Altman’s Z-Score Analysis – Company Calculations, Analysis, Commentary on
Z-Score components as it affects company’s likelihood of financial distress at
one-year forecast and Horizon point
9/`17/08
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Unit 5: Cash Flow Valuation
*Exec Summary Unit.5
*Table of Contents Unit 5
*Present, discuss, defend, analyze, and comment on the cash flow valuations and
methods.
*Drivers of Value; items affecting each method
*Compare to market value.
*Articulate/discuss what makes respective methods /stronger/better/not as good for your
firm.
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Unit 6: Relative (Multiples) Valuation Analysis
o Opening Exec Summary Unit 6;
o Table of Contents Unit. 6
o Show the list of minimum of 10 comparable companies.
 State procedures/strategy used to identify companies with comparable financial
characteristics
o Show and discuss the list of companies and their associated current valuation multiples
o Show multiples valuation of the company
o Discuss results, validity, issues, compare to analysts.
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* Multiples Analysis Format can be used as per class slides from
Website instead of below
Valuation
Ratios
Ticker
JNJ
PG
DG
SHW
Average
Std Dev
Median
S&P 500
Sector
Industry
Co.
I Price
Price
to
Cash
Flow
Price to
Free
Cash
Flow
5.58
8.06
4.40
5.05
7.54
7.08
5.79
15.91
17.72
14.51
13.53
19.70
7.42
17.89
24.77
29.75
42.15
15.30
40.00
40.29
29.75
3.23
1.29
2.21
4.09
3.31
4.32
16.39
12.78
15.40
26.40
20.23
24.77
3.40
5.67
16.60
25.10
Price
to
Sales
P/E
Ratio
Beta
19.42
22.14
21.70
17.83
25.69
8.95
23.75
0.18
-0.15
1.06
0.69
0.57
0.42
0.49
3.88
2.81
0.96
1.15
3.38
2.49
2.81
23.16
18.81
19.93
1.00
1.03
0.87
20.64
1.12
$58.90
Price
to
Book
$58.90 $58.90 $58.90 $58.90
Sales
Book
Cash Flow
Free Cash
Flow
$3.55
$2.35
EPS
$Value
$2.85
$17.32 $10.39
Values were obtained using Multiple = Price/$Value Relationship
Co.’s Multiples Valuation:
P/E
Ratio
Estimated Value
Using
Median Sample
S&P500
Sector
Industry
$67.77
$66.09
$53.68
$56.87
Price to
Sales
Price
to
Book
Price
to
Cash
Flow
Price
to Free
Cash
Flow
$48.59
$55.96
$22.35
$38.29
$60.09
$42.49
$34.38
$44.88
$63.46
$58.15
$45.35
$54.64
$69.81
$61.95
$47.47
$58.13
Beta
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Unit 7: Summary and Conclusions
I. CASH FLOW METHODS:
Value of
Operating
Assets
NonOperating
Assets
Firm
Minority
Debt
Preferred
Interest
Stock
Equity
A Share
Cash Flow Valuation Method
Entity Valuation
APV
$33,484 $1,374 $34,859
$31,125 $1,374 $32,500
$978
$978
$0
$0
$0 $33,880 $115.23
$0 $31,521 $107.20
FCFE
$33,966 $1,374 $35,341
$978
$0
$0 $34,363 $116.87
$16,907 $1,374 $18,282
$978
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Based Actual Share Price
$17,304 $58.85
2) Based on Closing price ($58.85)
Shares outstanding 294.03 (Millions of shares)
II. MULTIPLES ANALYSIS:
Multiples Values and Prices: Present most relevant multiples determinants and prices.
For both CF methods and Multiples, briefly recap best estimators of value, their
strengths, and relevant drawbacks of methods that are not as strong determinants of
value.
Once done, look over the final presentation to make sure that it is a professional
presentation. If it is not, edit and refine until desired results obtained.
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