The goal of financial analysis is to use financial data to evaluate the current and past performance of a firm and to as
Posted: Thu Apr 28, 2022 2:00 pm
The goal of financial analysis is to use financial data to evaluate the current and past performance of a firm and to assess its sustainability. There are two important skills related to financial analysis. First, the analysis should be systematic and efficient. Second, the analysis should allow the analyst to use financial data to explore business issues. Ratio analysis and cash flow analysis are the two most commonly used financial tools. Ratio analysis focuses on evaluating a firm’s product market performance and financial policies; cash flow analysis focuses on a firm’s liquidity and financial flexibility.
In Project 1, you are required to analyze the company’s financial statements. In doing so, you should follow the structure outlined below, and make use of the material covered in-class.
Part One:
You must structure the report according to the following sections:
Section 1: Introduction (1 page max)
In this section, you should outline the purpose and context of the analysis, describe your sources of data and explain if any adjustments were made to the financial statements before proceeding with the analysis.
In addition, each group member should write a paragraph explaining her/his contribution to this project and the parts that they worked on.
Section 2: Background Information (three pages max)
This section aims to set the context of the analysis and it should include the following sub-sections:
Section 2: Ratio Analysis (15 pages max)
This section is where you apply the knowledge that you have learnt in the classroom.
First, you start by presenting the different financial statements of the company for the past five years. These should be in neat, clear and well-structured tables.
Compare ratios for a firm over several years, and perform horizontal common size analysis. The analyst can hold firm-specific factors constant and examine the effectiveness of a firm’s strategy over time.
Compare ratios for the firm and other firms in the industry, and perform vertical common size analysis. Examine the relative performance of a firm within its industry, holding industry-level factors constant.
Compare ratios to some absolute benchmark, if you are able to identify such benchmarks.
Section 3: Cash Flow Analysis (two pages max)
The ratio analysis discussion focused on analyzing a firm’s income statement (net profit margin analysis) or its balance sheet (asset turnover and financial leverage). The analyst can get further insights into the firm’s operating, investing, and financing policies by examining its cash flows. Cash flow analysis also provides an indication of the quality of the information in the firm’s income statement and balance sheet.Cash flow analysis can be used to address a variety of questions regarding a firm’s cash flow dynamics:
Section 4: Forecasts
Using all the information that you have extracted so far, forecast the company’s financial statements for the next 5 years. You must state and clarify all the assumption used to make the forecast. You are not constrained by a specific forecasting procedure but you need to be systematic and logical. Financial ratios are very useful in this regard, so make sure you integrate them into your chosen-forecasting procedure.
Part Two
You should apply all the valuation methods that we learned in class and interpret the results. You must submit the excel file that shows your work.
For this submission, the following must be included:
1. DuPont analysis based on the material covered in class, with a brief interpretation of the results. (if not covered in part 1)
2. Z-score calculations with a brief interpretation. (if not covered in part 1)
3. Beta estimation with the steps and work clear in the Excel file.
4. Expected cost of equity estimation using CAPM and a reasonable explanation behind the assumptions.
5. WACC estimation with the steps and assumptions outlined.
6. Valuation using the dividend discount model with a clear explanation of how the growth rate was estimated.
7. Valuation using the discounted free cash flow model, with the assumptions outlined.
8. Valuation using the relative market techniques covered in class
9. Valuation using the residual income approach.
10. A clear conclusion and recommendation based on the analysis conducted in part 1 and the results of part 2
In Project 1, you are required to analyze the company’s financial statements. In doing so, you should follow the structure outlined below, and make use of the material covered in-class.
Part One:
You must structure the report according to the following sections:
Section 1: Introduction (1 page max)
In this section, you should outline the purpose and context of the analysis, describe your sources of data and explain if any adjustments were made to the financial statements before proceeding with the analysis.
In addition, each group member should write a paragraph explaining her/his contribution to this project and the parts that they worked on.
Section 2: Background Information (three pages max)
This section aims to set the context of the analysis and it should include the following sub-sections:
Section 2: Ratio Analysis (15 pages max)
This section is where you apply the knowledge that you have learnt in the classroom.
First, you start by presenting the different financial statements of the company for the past five years. These should be in neat, clear and well-structured tables.
Compare ratios for a firm over several years, and perform horizontal common size analysis. The analyst can hold firm-specific factors constant and examine the effectiveness of a firm’s strategy over time.
Compare ratios for the firm and other firms in the industry, and perform vertical common size analysis. Examine the relative performance of a firm within its industry, holding industry-level factors constant.
Compare ratios to some absolute benchmark, if you are able to identify such benchmarks.
Section 3: Cash Flow Analysis (two pages max)
The ratio analysis discussion focused on analyzing a firm’s income statement (net profit margin analysis) or its balance sheet (asset turnover and financial leverage). The analyst can get further insights into the firm’s operating, investing, and financing policies by examining its cash flows. Cash flow analysis also provides an indication of the quality of the information in the firm’s income statement and balance sheet.Cash flow analysis can be used to address a variety of questions regarding a firm’s cash flow dynamics:
Section 4: Forecasts
Using all the information that you have extracted so far, forecast the company’s financial statements for the next 5 years. You must state and clarify all the assumption used to make the forecast. You are not constrained by a specific forecasting procedure but you need to be systematic and logical. Financial ratios are very useful in this regard, so make sure you integrate them into your chosen-forecasting procedure.
Part Two
You should apply all the valuation methods that we learned in class and interpret the results. You must submit the excel file that shows your work.
For this submission, the following must be included:
1. DuPont analysis based on the material covered in class, with a brief interpretation of the results. (if not covered in part 1)
2. Z-score calculations with a brief interpretation. (if not covered in part 1)
3. Beta estimation with the steps and work clear in the Excel file.
4. Expected cost of equity estimation using CAPM and a reasonable explanation behind the assumptions.
5. WACC estimation with the steps and assumptions outlined.
6. Valuation using the dividend discount model with a clear explanation of how the growth rate was estimated.
7. Valuation using the discounted free cash flow model, with the assumptions outlined.
8. Valuation using the relative market techniques covered in class
9. Valuation using the residual income approach.
10. A clear conclusion and recommendation based on the analysis conducted in part 1 and the results of part 2