Choose two companies in the same industry that meet the following requirements:
Preferably a U.S. firm
Have publicly traded bonds
Have publicly traded equity shares in the U.S. stock market for at least 5 years
Have paid dividends for the past 3 years
NOT a bank or financial institution
Not Apple
You will be completing an analysis as if you were recommending a stock purchase to your client. Presentation is important. An outline of requirements is available below (do not complete your paper in outline form). Your paper must be completed as a report and must be typed with MS word and submitted in Word or PDF format (please double-space). Do not scan anything handwritten and attach to your project. Make sure you properly reference your data sources and information in footnotes throughout your project. Include your return and price data, formatted neatly, as an appendix to the paper. Also, include your financial statements as an additional section in your appendix. Grading rubrics are available on D2L. You should find the following internet sites useful: Bloomberg Terminal in BPMC 312, finance.yahoo.com, www.marketwatch.com, www.Reuters.com, www.Bloomberg.com, www.Investorpoint.com, www.morningstar.com (also accessible through WCU), www.moneycentral.msn.com, www.mergentonline.com (accessible through WCU), finra-markets.morningstar.com, and https://www.google.com/finance. Many other resources are available and can be used, as well. You are welcome to come review prior “A” projects in my office during my office hours.
At minimum, you must ensure the following information is available for both of the firms you select.
61 consecutive months (most recent) of adjusted closing prices for your firms and the S&P500 stock index
60 months of returns (most recent) for each firm and the S&P 500 stock index
Amount outstanding, YTM, and price of at least 1 bond issue per firm
Minimum 3 years of financial statements (balance sheets, income statements) for each firm
Industry measurements for each of the ratios you will be analyzing
Part I (20% of total project grade):
Overview
Provide an introduction regarding what your project is about and give your choice of two companies and their industry (this can be done in the context of a preface or a business letter to a client).
Analysis of recent developments and recent history
Industry analysis
Management changes, change in board of directors, corporate governance, lawsuits, new investments, mergers and acquisitions, stock splits, new stock issuance, new bond issuance, etc.
Part II (40% of total project grade):
Financial Statement Analysis
Provide three years of financial statements (balance sheets and income statements) for each company.
Convert your three years of financial statements to Common Size Statements (scaled by sales or assets)
Briefly (1-2 pages) compare your firms’ trend and position by analyzing financial statements and common size statements.
Ratio Analysis
Verify and document that financial ratios are available for the industry. If not, which ones are missing? How will you calculate them?
Calculate two years for each company and locate the current industry ratio.
Compare the ratios of the competitors with each other and with the overall industry. Provide an explanation of what the ratios indicate about the performance and financial health of the companies.
Include the name of each ratio, the formula, and related numbers, their meaning, and significance. Lay out the information so that it is readily understandable to the reader.
Liquidity ratios
Current
Quick
Debt management ratios
Total debt
Debt/equity
Interest Coverage or TIE ratio
Asset management ratios
Inventory turnover
Accounts Receivable Days or Days sales outstanding
Total asset turnover
Profitability ratios
Profit margin
ROA
ROE
Market valuation ratios
P/E
Market to Book
3. DuPont analysis
Calculate the components and document your calculations for three years. What does each component measure?
Graph and analyze the trend overall and by component.
Compare the most recent DuPont equations to that you construct for the industry.
Part III (40% of total project grade):
Collect and report publicly traded bond data
YTM, price, amount outstanding should be reported
Calculate the overall cost of debt using the weighted average YTM
Provide 61 months of stock price data, adjusted closing prices and 60 returns for each,
a. Graph the last five years of monthly prices for each stock.
Graph the last five years of returns for each stock and the market (S&P 500) (2 or 3 graphs, total).
You are to graph in Excel, not download graphs from the internet.
Required Return, Expected Returns and Cost of Capital
a. Use the CAPM to determine required return for each stock.
Calculate the market risk premium (data on the risk free rate will be provided)
Calculate betas by regression analysis
Compare your numbers in i) and ii) to those assigned by analysts
b. Use the growth model to determine expected returns.
Find the appropriate growth rate (document!)
Calculate the expected return
c. Based upon these formulas, calculate each company’s WACC.
Overall recommendations and conclusion, including which stock you would buy, if either. Include all of the information in this report in your decision.
VERY IMPORTANT BELOW!!!!!
Make sure the firms you selected satisfy the following requirements
The two companies you have selected are in the same industry
Most finance websites will have information about firms in the same industry. This is a good way to check whether your two firms are in the same industry. An example of Apple, Inc. is here. Below the chart of stock prices, you will see a list of related firms. Below the list of firms you will see a link to the industry that Apple, Inc. is a part of.
Preferably a U.S. firm
As long as the next two requirements are satisfied, you can work on a non-U.S. firm
Both of your firms have publicly traded bonds
A good place to check this information is finra or morningstar (Access through the library website)
Both of your firms have publicly traded equity shares (stocks) in U.S. stock market for at least 5 years
Any finance website will give you this information. Some websites will let you download *.csv files, which should make your data collection easier. Here is an example for Apple, Inc.
Both of your firms are not a bank or financial institution
This is to make your life easier
Your firms can NOT be Apple
This is to avoid 30 different reports on Apple
You are genuinely interested in the firms you selected
OK ok, you are sort of interested in at least one of the firms you selected.
Remember, you are going to be researching these firms for a whole semester. Might as well choose firms a firm that you will enjoy studying.
Both of your companies have paid dividends for the past 3 year.
Final instructions. You will need to write about 20 pages for the analysis and the recomendations.
