Corporate Finance and Financial Statement Analysis

P

ART

1:

U

SING

F

INANCIAL

S

TATEMENTS

F

OR

E

QUITY

V

ALUATION

(50

MARKS

)

Part 1 of the assignment i

s 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 that incorporate financial statement information into

equity val

uation 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,

at the end of 20

10

, using the actual

-

real

-

financial results

reported by the firm in 20

1

1

and 201

2

.

Ticker

Firm Name

CAG

ConAgra Foods, Inc.

MRK

Merck & Co. Inc.

UTX

United Technologies Corp.

WMT

Wal

-

Mart Stores Inc.

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 a commentary on the usefulness of the two techniques that you

use, substantiating your conclusi

ons with the results from the valuation.

4)

You must prepare a concise written

account

for this part of the assignment

and

you

are

also

required t

o include in your written report for Coursework Assignment 2

, as

Page

2

of

5

an appendix, the

entire

set of all the annual

financial statements for the chosen firm

for the period 20

10

-

201

2

. Please note that NO other appendices are allowed.

5)

Your written

account

must contain clear references to the relevant portions of the

financial statements for the firm being analysed, and

the relevant portions should be

highlighted.

Ex

-

post

validation means that you must explore the usefulness of the two valuation

technologies that you employ by comparing their respective

ex

-

post

estimates of the

fundamental (intrinsic) value of the firm’s equity with the actual market price of the equity at

the end of 20

10

. That is, you need to look back and convert the financial statement numbers

from 20

1

1

and 201

2

into an

ex

-

post

valuation of t

he firm’s equity at the end of 20

10

and

provide your conclusion on which of the two valuation techniques that you utilise is more

powerful at predicting

ex

-

post

the value of the firm at the end of 20

10

.

Please note that in this particular project there i

s no need for you to attempt forecasting pro

forma numbers, since you can treat the 20

1

1

and 201

2

actual numbers in the firm’s financial

statements as impeccable one

-

and two

-

year projections that can be used for valuing the

firm’s common stock at the end

of 20

10

.

Attention should be given to the valuation technologies that attempt to calculate the

fundamental (intrinsic) value.

The structure of the

written account

for Part 1 of the assignment

will provide an executive

summary, a brief retrospective

background on the firm’s business model, industry, economic

environment, and then will concisely outline an appropriate specification of payoffs based on

an analysis of the available 20

11

and 201

2

financial statements, an

ex

-

post

valuation and

comparison of the obtained estimates of the equity’s fundamental value with the market price

at the end of 20

10

, concluding with a discussion of the degree of usefulness of the two

valuation methods that you utilise from the perspective of a

n academic researcher.

Avoid applying equity valuation techniques mechanically, as the examiner will need to see

that you have the necessary understanding of the costs and benefits of alternative

technologies and are using the appropriate tools.

You mu

st briefly state the valuation assumptions that you use in valuing the firm’s equity and

critically interpret the valuation results, using evidence in the argument.

You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform y

our

conclusions.

You may round all computations to the nearest integer (or nearest percentage).

P

ART

2:

U

SING

F

INANCIAL

S

TATEMENTS FOR

C

REDIT

R

ISK

A

NALYSIS

(50

MARKS

)

Part 2 of the assignment is intended to help you develop practical skills of credi

t analysis.

The assignment provides you with

an

opportunity to evaluate the financial status of a

potential corporate borrower, using ratio analysis of the financial statements.

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

Page

4

of

5

The Form of the Report

The accompanying report on

Coursework

Assignment

2

, in a Word file, must

combine

BOTH Part 1 and Part 2 of the assignment

,

and

be presented in a single document

no

longer than

n

ine

typed

single

-

spaced A4 pages

using 12

-

point Times New Roman

(excluding references), with 1” (or 2.5 cm) margins (left, right, top and bottom).

Source data and all key calculations and workings, tables and charts

and

graphs

must be

fully integrated

and embedded within the text of the report.

You

are required to include in your written report, as an appendix, the

entire

set

s

of all the

annual financial statements for the chosen firm

s

for the period 2010

-

2012.

Should you select

to analyse two differen

t firms in Parts 1 and 2, you must then include,

as an appendix

,

respective annual financial statements for both firms.

Please note that NO other appendices

are allowed.

Keep the report short and to the point. Your report should be factually accurate and

analytical and should

succinctly sum up

the issues addressed in your coursework and where

relevant relate your findings to theory.

Think deep, b

e creative and write a persuasive report

that will offer a credible conclusion based on a thoughtful and thorough analysis.

List references in alphabetical order at the end of the report and cite them in the text of the

report using the Harvard style of

referencing. You must always give credit to the authorship

of the work that you use.

Ensure that your submission has been edited for correct spelling and grammar. Use Word’s

in

-

built grammar and spelling checker to help you.

Key

Skills

This assignment

will help you develop the following key skills:



Communication



Application of financial statement information in equity analysis



Application of financial statement information in

credit risk

analysis



Problem solving



Numeracy



Proficiency in Information

Communication Technology (ICT)



Time management

Learning Outcomes for Coursework Assignment

2

The assignm

e

nt will assess your ability to:



in the context of equity analysis, discuss and analyse financial statement information and

asset prices



understand

advantages and disadvantages of valuation technologies commonly used in

practice



set up valuation models of equities, using relevant valuation technologies



understand the effects of financial statement information on valuation and risk of financial

assets



analyse the business environment of a company



critically evaluate financial statements and reports to assess a company’s valuation.



understand the usefulness of accounting disclosures in the decision

-

making process, in

the context of credit risk assessme

nt

Page

5

of

5



in the context of

credit risk

analysis,

critically

discuss and analyse financial statement

information



understand advantages and disadvantages of credit assessment technologies commonly

used in practice

Submission Requirements

You are required to submit

ONE

printed and electronic

(digital)

submission

of your

coursework report.

The printed report must be submitted by placing it in the postgraduate assignment box by

17

:00 (

PM

)

Monday March 31

st

,

2014

.

You must complete and attach the standard assignment mark sheet.

You must submit the associated

Word

file via

a

Turnitin

dedicated

C

oursework Assignment

2

Dropbox on StudySpace by the deadline. Turnitin is a plagiarism checker. You can only

submit it onc

e. The Word file uploaded

must

be named as follows:



Name your file using your last name and the assignment number, for example

Holland

-

CW

2

.docx.

Your printed submission must include a printout of your report and

be presented as

follows:



Stapled

top left

corner (no need for binding or plastic cover).



Your Name and ID in the header; page number in the footer.

General Points

i)

Provide all the required information and follow the instructions (e.g. page count).

Answer the question directly and relevantly.

ii)

Write in proper sentences and paragraphs and avoid a ‘shopping list’ approach. Keep

the style formal and remember to draw conclusions. Use the spelling and grammar

check in Word. Poor grammar and spelling is unprofessional and unacceptable at

Master’s leve

l. As a result, make sure that you proof read your work and edit it

properly.

iii)

Do not copy the work of others or allow others to copy your work. Plagiarism is

cheating and will be penalised.

The general assessment criteria at Masters Level (Level 7)

are set out in a document titled

University Grade Criteria available in the Academic Guidance Area of Academic

Regulations:

http://www.kingston.ac.uk/aboutkingstonuniversity/howtheuniversityworks/policiesandregulations

Indicative Reading

For advice on approaches that can assist with the pr

oduction of your report on equity

valuation using financial statements please consult the relevant chapters in

Penman

,

S. H.

Financial Statement Analysis And Security Valuation

(Latest Edition), McGraw

-

Hill.

 

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