TopAceEssays

Report Outline
I. Executive Summary
The executive summary must include:

1. A brief description to the company.
2. An Investment Recommendation (Buy, Sell, or Hold).
3. Report Highlight.
   Please support the executive summary with the relevant graphs that help the reader understand your
   investment thesis.
   II. Business Description and Industry Overview
   Provide an overview of the firm’s business and its relative position in the industry to which it belongs.
4. What is the nature of the firm’s business, its major products or services, the markets served, and its
   relative position (market share) in the industry? Who are the main competitors? Is there any significant
   share of revenues is generated internationally?
5. What are the major revenue/cost drivers (determinants of price, quantity sold, and cost elements) on
   the firm/industry level? What are the recent trends in sales cost of goods sold? Can they be linked to
   micro and/or macro factors?
6. What are the macro factors that affect the industry and how is your company positioned to respond to
   changes in these factors?
7. What are the demand/supply drivers for the industry? Are there any demand/supply related factors that
   affect the dynamics of the industry?
   III. Financial Performance and Growth Patterns
   Evaluate the financial health and performance of this company using the data for the last five years.
   Use ratio analysis to diagnose financial health of this company.
8. Use the relevant financial ratios in your analysis over the past 5 years, depending on the case. What
   strengths and weaknesses are indicted by the ratio analysis? Compare the financial ratios of your firm
   with industry and trace its performance over time, if applicable. In the appendix, report all the ratios
   for the last 5 years.
9. What does the ROIC and ROE tell you about the competitive position of the company? Show the threeway ROE decomposition and analyze the sources of ROE.
   IV. Risk and Required Returns
   What is the risk profile of this company? (How much overall risk is there in this firm? What are the
   sources of risk (market, firm, financial leverage, industry or exchange rate) and the required rates
   of return imposed by providers of capital?
10. Investment Risks: Highlight the major risk factors for the company (i.e. Business Risk, Operations
    Risk, Market Risk, etc.). For every risk element you discuss try to link it to company financials
    (margins, sales and assets turnover, etc.)
11. Risk Measurement: Run a regression of your firm’s stock returns against return on the market index
    using monthly data for 5 or 10 years to estimate stock beta and other regression parameters.

• What is your estimate of the firm’s beta and its significance? How precise is your estimate in a statistical
  sense? What does it tell you about the risk of the stock?
• What portion of the risk can be attributed to market factors and to firm-specific factors? What is its
  significance of this partitioning of risk for a diversified versus a non- diversified investor?
• Separate the risk of your stock into business risk (unlevered beta) and financial risk components. What
  portion of the risk is due to each factor and its significance?

1. Estimate Cost of Equity: Using the estimated beta, compute the required rate of return on equity
   investment in this company.
2. Estimate Cost of Debt: What is the firm’s marginal tax rate and after-tax cost of debt?
   The cost of debt can be determined based on the spread consistent with the bond rating for the firm’s
   straight debt or by computing the YTM on the firm’s long-term debt. What is the bond rating for the
   firm’s straight debt? If company debt is not rated, use the interest rate company paid on a recent
   borrowing.
3. Estimate the Firm’s Cost of Capital: Does the cost of capital reflect the investment risks you
   mentioned in point 1?
   V. Capital Structure Choices
   Analyze the existing financial structure of the firm and assess if it has too much or too little debt
   relative to the sector to which this firm belongs. The firm’s use of financial leverage involves a tradeoff
   between the benefits and costs of debt.
4. Analyze the financing mix of the firm. Is the firm using too much or too little debt relative to its
   industry? Compare benefits and costs of debt financing for your firm.

• What is the marginal tax rate of the firm relative to others? Does it generate other significant tax
  deductions?
• Assess the ability of the firm to service its debt, given its cash flows. Compute the interest coverage
  ratios.

1. Based on your analysis, is the firm operating in the optimal range of its capital structure or is it under
   or over levered?

• If it is over levered, is it facing high risk of bankruptcy given the current economic condition and the
  competition in the industry?
• If it is under levered, could it be a takeover target?
• Does the debt level affect the investment policy and growth opportunities?
• What is the relative position of the debt ratio compared to its long-term historical average? Is it suitable
  for the current condition of the firm? Is it suitable for the firm in the long-term?
  VI. Dividend Policy
  Evaluate the firm’s dividend policy with reference to the industry life cycle and relative to the sector
  to which the firm belongs.

1. Historical Perspective: What is the firm’s dividend payment track record?

• How much has this company paid in (a) dividends, and (b) repurchased its shares over the last three to
  five years?
• How does this firm compare with other firms in the sector in terms of dividend policy?
• What can be inferred about preferences of the investors in this firm from its dividend payment record?
• What does the dividend policy imply regarding the firm investment policy and growth opportunities?

1. Firm’s Cash Position and Investment Opportunities

• What is current cash balance of the firm?
• Does the management track record in terms of generating high returns on investments (ROIC > WACC)
  in place inspire confidence to entrust them with cash?
• Is the dividend payout of the company sustainable? Conduct an analysis of dividend safety.
• Would you recommend any change in this firm’s dividend policy? Explain.

1. Sustainability of Dividend Policy

• Is the firm’s dividend policy sustainable? Explain.
  VII. Valuation
  Select the appropriate model(s) to determine the value of this firm. You must state the key
  assumptions used in applying the models. Assumptions must be developed based on understanding
  the business model and industry dynamics.

1. What is the value of the firm based on the free cash flow model? What growth pattern (stable, 2-stage,
   H-model) is appropriate? Clearly state your assumptions.
2. What is your estimate of value of equity in this firm? How does this compare to the market price? How
   sensitive is your estimate to changes in the underlying assumptions? Conduct sensitivity analysis. And
   present it under your valuation section.
3. What is the PVGO? Is the stock fairly priced based on your analysis? Discuss the reasons for the
   divergence of your estimated value from market price.

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