Guidelines of report structure Part 1

Requirements
Pick a company from the list given on the course web site. 1. Introduction Company background (one-half to two-thirds of a page) o What does the company do? o What industries is it in? o Does it have a long-term business record? o Etc. Economic outlook for company (one-half to two-thirds of page) o What are the prospects for the company in the short-to-medium term given the state of the economy? o How has the global financial crisis, continuing concerns over Europe, changes in the Chinese economy and in Malaysia affected the company? o Etc. Industry Overview and Issues (one page). o How competitive is the industry? o Does the industry face any particular challenges? o Etc. 2. Company Analysis Company problems using SWOT analysis (i.e., strengths, weaknesses, opportunities, threats (one-half to two-thirds of a page) Company performance using financial ratio analysis (one page) o Use the standard ratios that you have covered in accounting and other earlier courses in the area Comparisons to competitors or the industry average (one-half to two-thirds of a page) o How does the company compare (on the basis of ratio analysis) to its peers/competitors? o Thomson One Banker will generate a peer set which you can easily locate (in the menu on the left-hand side of the screen) Summary of the outcomes/recommendations of a report by professional security analysts (half a page) o What is the general view of the analysts summarised on Thomson One Banker? 3. Summary/Your overall assessment of the company as a potential investment (good or bad) (half a page) On the basis of your initial analysis and review is the company doing well enough for you to be interested in considering it as a potential investment?

4. References Make sure these references are there, are done correctly (Harvard style), and placed within the body of the report.

Part 2
Requirements
Company Valuation (alternatives): Note that to value the company that you will first need to estimate the cost of capital (WACC), so really you would look at capital structure and the cost of capital first. It will also be useful if you consider some of the potential problems that arise in doing valuations. I would suggest that you look at Fernndez, P., and A. Bilan (2007), 110 common errors in company valuations. This is available at: http://ideas.repec.org/p/ebg/iesewp/d-0714.html 1. Valuation using free cash flow to the firm (FCFF) plus explanation. constant growth model plus explanation differential growth (multi-stage growth) model plus explanation as an extension. 2. Valuation using relative valuation techniques price-earnings ratio (P/E) plus explanation price-book value ratio (P/BV) plus explanation other relevant ratios plus explanation. Companys capital structure and company cost of capital: 1. Estimate the company weighted average cost of capital (WACC) by estimating the required return on each component of capital estimating the weighting in WACC of each component of capital. You need to be clear about your derivation of each of the key values used in your estimates (e.g., whether market values or book values and why). [Hint: This assumes that you have already downloaded the basic financial data and ratios on your company from Thomson One Banker.]

Hints & Tips

Q1: How do I estimate the company WACC? Step 1: Compute the beta of the companys stock using regression, the SLOPE function, or the COVAR and VARP statistical functions in Excel (you may wish to consider whether to use risk-free data to get the risk premium before estimating beta, which you can source from the Bank Negara web site http://www.bnm.gov.my/, check under the Rates & Statistics link). [Hint: You will need to have estimated the returns on the stock and the index to do this part of the exercise, using the data that you have downloaded from Thomson One Banker for both the company and index.] Step 2: Look for a current risk-free rate (or one for the appropriate time period).

[Hint: Go to the Bank Negara web site http://www.bnm.gov.my/ (which you may have done in Step 1) to look for the yield of long-term Government Bonds.] Step 3: Consider what the appropriate market risk premium should be. Are there alternative sources of estimate for this purpose? For discussion of recent estimates you should look at Dimson, E., Marsh, P. and Staunton, M. (2011), Equity Premia Around the World. [Hint: Go to the SSRN web link for this paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940165.] You may use the World average risk premium relative to bills in your model. Step 4: Apply the CAPM formula to compute r (companys market cost of equity or discount rate on equity): r = risk free rate + beta (market risk premium). Step 5 Compute the companys market cost of debt. [Hint: Look at the current market rates for companies with similar credit ratings or other characteristics such as size and gearing. If you get stuck, and there really is no information, then assume that market and book values of debt are the same. Step 6: Compute the companys cost of preference shares (where present). [Hint: Assume that the market has correctly priced this security.] Step 7: Compute the weight for each category of capital for each company. [Hint: Find market not book values, unless absolutely necessary for the debt component.] Step 8: Compute the companys WACC. Q2: How do I perform a valuation using the constant growth FCFF? For FCFF you will need to focus on cash flows to all investors and therefore average capital cost. [Hint: In determining the value of equity it is common to assume that market value of debt equals book value of debt, although this is not strictly true.] Step 1: Estimate FCFF over the last five or so years using appropriate company data. Step 2: Estimate the growth rate in FCFF using sensible alternatives that might include: using the historical growth rate using the industry growth rate using competitors (or peers) growth rates. Step 3: Apply the Constant growth FCFF model, where Value = Current FCFF x (1 + growth rate)/(WACC growth rate). Step 4: Compare this estimated value with the current market value of stock and debt. If the estimated value is lower than the current market value, the company is considered overvalued. Q3: How do I perform a valuation with a two-stage or three-stage FCFF model? The key points here are: You have to estimate how long high (or low) (and intermediate) growth period(s) will last. [Hint: You may simply assume 3 or 4 years.]

You have to estimate a constant growth rate after the high (and intermediate) growth period(s). [Hint: You may use the most logical of the constant growth rates used in the earlier FCFF valuation exercise.] Q4: How do I perform a P/E valuation? Step 1: You look for the current price (or price at the relevant date) of the stock. Step 2: You compute the expected earnings-per-share (EPS) as: Expected EPS = Current EPS x (1 + growth rate). Step 3: You divide the current price by the expected EPS to get a P/E multiple. Step 4: You compute the P/E multiple of the industry by taking the average P/E of several large competitors. [Hint: You can also do a P/E valuation based on the most recent dividend (although it is not forward looking).] Step 5: You compare your stocks P/E with the industry average P/E: if the stocks P/E is lower than the industry average P/E the stock is considered undervalued. Q5: How do I perform a P/BV valuation? Refer to Q4: it is almost an identical process to that of the P/E model, although P/BV is not forward looking.

References
Make sure these references are there and are done correctly (Harvard), placed within the body of the report, or the assignment gets an automatic mark of zero. [Note: If your report is clear, I should not even need to look at your spreadsheet calculations, which of course must be good for both your group and the markers.]