CASE STUDY:

Choose a company (preferably in Nifty or Sensex) and analyze it under the

following heads:

Note: To understand corporate finance, try answering the following questions. Note that
you may not have the information to answer every question, but try to keep your focus on
the big picture.

I. Management Analysis

Understand the performance and reputation of the management

• Management
o Who is the CEO or MD of the company? How long has he or she been
CEO/MD?
o If it is a family run company, is the CEO/MD part of the family? If not, what
career path did the CEO/MD take to get to the top? (Did he or she come from
within the organization or from outside?)
o How much did the CEO/MD make last year? What form did the compensation
take? (Break down by salary, bonus and option components)
o How much stock and options in the company does the CEO/MD own?
o How has the company grown in the past? Good/Bad/Ugly.
• The Board of Directors
o Who is on the board of directors of the company? How long have they served
as directors?
o How many of the directors are insider directors? (i.e. employees or managers
of the company)
o How many of the directors have other connections to the firm (as suppliers,
clients, customers..)?
• Corporate Governance
o Does the firm have a particularly good or bad reputation as a corporate
citizen?

II. Stockholder Analysis

To understand the relationship between managers, stockholders and markets

• Who holds stock in this company?

o How many stockholders does the company have?
o What percent of the stock is held by institutional investors?
 o Does the company have listings in foreign markets? (If you can, estimate the
percent of the stock held by non-domestic investors)
• Insider Holdings
o Have insiders been buying or selling stock in this company in the most recent
year? Check BSEINDIA website.
• Financial Market Coverage
o How many brokerages follow the firm?
o How much trading volume is there on this stock?

III. Risk and Return

To understand the risk profile of the company, estimate the hurdle rates or cost of capital
for the firm, try answering the following questions

1. Risk Profile of the company?

 What has the company’s strategy when it comes to growth?
Aggressive or stable
 Has it chosen organic or in organic expansion?
 If the company has done acquisitions, whether it has been funded
through debt?

2. Cost of Equity
 Calculate returns on your firm's stock against returns on a market
index, preferably using monthly data and 3 years of observations
 Recent Beta of the stock (refer equity websites, or business
standard)
3. Estimating Cost of Debt
 What is the most recent rating for the firm?
 If your company has bonds outstanding, estimate the yield to
maturity on a long term bond?
 Does it have any recent borrowings? If yes, what interest rate did
the company pay on these borrowing?
4. Estimating Cost of Capital
o Weights for Debt and Equity
 What is the value of equity in the balance sheet?
 Estimate a value for debt as given in the balance sheet?
 What are the weights of debt and equity?
o Cost of Capital
 What is the cost of capital for the firm as per CAPM model?

IV. Measuring Investment Returns

 To analyze the quality of the firm's existing projects and get a sense of the quality of
future projects, try answering the following questions:

1. Accounting Returns on Projects

o What is the return on equity earned by the firm? Based upon this return, is
the firm picking good projects?
o What is the return on capital earned by the firm? Based upon this return, is
the firm picking good projects?

V. Capital Structure Choices

To analyze the existing mix of the firm’s capital structure and what kind of financing it
uses for its investment

• Financing Type
o How has the company financed its projects recently?
o Has it issued a Bond or QIP issue or GDR issue etc?
• Capital Structure
o How does its debt equity ratio look in the last few years?
o Relative to the sector to which this firm belongs, where does it debt equity
ratio stand?

VI. Dividend Policy

To analyze how much the firm has returned to its stockholders

• Historical Dividend Policy

o How much has this company paid in dividends over the last few years?
o How much stock has this company bought back over the last few years? What
were the free cash flows (PAT) to equity that this firm had over the last few
years?
o How much cash did the firm actually return to its owners over the last few
years? In other words calculate dividend payout ratio?
• Comparing to Sector and Market
o Relative to the sector to which this firm belongs, does it pay too much or too
little in dividends?
o Relative to the rest of the firms in the market, does it pay too much or too little
in dividends?