The specific objective of this graded written research exercise is to prepare an “executive level financial report” to the Chief Financial Officer (CFO) of a mythical company in which you are employed as a financial analyst. This report will pertain to the financial evaluation of a real, publicly-traded, company. It will require independent research (web-based or library), careful financial analysis, and the proper application of key financial theories and formulas. Dow-DuPont Company
that is to be analyzed for this project.
Alternatively, you can request approval of another publicly traded company. This request must be submitted before the end of the first week of the course. The request must include
identification of the company by ticker symbol and name
a reasonable and appropriate explanation of why you want to examine the alternative company
the source of the analyst’s report that will be used in the analysis (which must be submitted to me)
acknowledgement by you that all of the specific elements of the assignment (see below) will be prepared by you and included in the final research project report
Specifically, the primary question is: will Dow-DuPont Company
be financially viable over the next two to three years?
To assist you in your task, the CFO has provided the following general guidance. Since it is recognized that the industry is undergoing a major contraction, it is very important to comparatively evaluate Dow-DuPont Company
financial and stock performance trends against its Industry or major competitor.
HYPERLINK “http://www.morningstar.com” www.morningstar.com – To find the information for your company you need to type the stock symbol in the Quoteswindow to get into the company’s page.
HYPERLINK “http://www.marketwatch.com” www.marketwatch.com -To find the information for your company you need to type the stock symbol in the Searchwindow to get into the company’s page.
HYPERLINK “http://www.money.cnn.com” www.money.cnn.com -To find the information for your company you need to type the stock symbol in the Searchwindow to get into the company’s page.
HYPERLINK “http://www.finance.yahoo.com” www.finance.yahoo.com – To find the information for your company you need to type the stock symbol in theSearch window to get into the company’s page.
HYPERLINK “http://www.nyse.com” www.nyse.com – Click on Data, then click on Stocks (under Quotes), and type the name of the company or the stock symbol in the window “Keyword or symbol” to get into the company’s page.
HYPERLINK “http://www.nasdaq.com” www.nasdaq.com – To find the information for your company you need to type the stock symbol in the Search window to get into the company’s page.
YOUR SPECIFIC ASSIGNMENT
Using the information from the websites the students have to develop evaluation of the financial and stock performance for Dow-DuPont Company. (Totally 85% of the assignment grade)
-1—Background and Industry (one short paragraph).
-2—Analysis of the most significant financial performance results. (15% of the project grade)
Select of most significant financial performance results for the company. Create Dow-DuPont Company a table that contains the financial performance results for the last three years and for the major competitor or industry for the last year: Revenue, net income, working capital, and other financial performance results of your choice. Present the table with this information in your report.
Write about 1 page of the trend analysis of these financial performance results.
-3— Financial ratio analysis. (15% of the project grade)
Find financial ratios for the company for the last 1-3 years and its major competitor for the last year in the Internet.
Present the ratios as the table(s) in your project.
Write about 2 pages of analysis of the ratio results that you found. Compare the ratio results against the industry or main competitor. In your analysis you should answer the following questions:
How liquid is the company?
How is the company financing its assets?
Is management generating a substantial profit on the company’s assets?
-4- Evaluate Return on Equity for the company for the last three years using the DuPont analysis. (10% of the project grade)
Taking the information from the Income statements and the Balance sheets, calculate the company’s net profit margin, total assets turnover equity multiplier, and return on equity using the DuPont formula for the company for three years. Show your calculation!
ROE = Net profit margin x Total assets turnover x Equity multiplier
= Net income/Sales x Sales/Total assets x Total assets/Common equity
You can use Revenue instead of Sales.
b. Compare the results to main competitor. For the major competitor you can use ratios from the Internet or calculate them for the last year.
Write about 1 page of analysis of the results that you received. In your report please answer the question: If the management of the company would like to improve their return on equity, what should the management of these companies do?
-5- Evaluate other areas of financial analysis: capital spending, Beta values, credit rating service valuations (if possible), bond rating valuations (if possible), etc. (10% of the project grade)
1) Find the data for capital spending. How much did THE COMPANY spend on research, development, and engineering in the most recent year? How did this compare with the previous year?
2) Find the current beta for the company and its major competitor in the Internet. Find credit rating service valuations (if possible), bond rating valuations (if possible).
Write about 0.5 page of analysis of beta values that you found. Compare the beta values against the main competitor. In your report please answer the question: How risky the company is?
-6- Collect and evaluate the data about stock performance of the assigned company’s for the last one year. (20% of the project grade).
1) Find the market ratios for the company for the last 1-3 years and its major competitor for the last year in the Internet.
Present the market ratios as the table(s) in your project.
Write about 1 page of analysis of the market ratio results that you found. Compare the market ratio results against the industry or main competitor. In your report please answer the question: Are the common stockholders receiving an adequate return on their investment?
Compare the P/E ratio of your company with the industry average. Is there a difference between these two numbers? Is the stock overvalued, undervalued, or properly valued? Why? In accordance with your findings, is it reasonable to buy the stock? Please explain your answers.
-2) Analysis of the historical stock prices trend for the last year.
Collect and evaluate the data about stock prices of the assigned company’s for the last one year for the company and its major competitor.
Create the chart(s) using the stock price chart tools on the websites or Excel. Present the chart(s) in your project.
Write about 0.5 page of analysis the historic stock prices trend for the last year.
3) Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on THE COMPANY stock. Note that you will need the risk-free rate and the market return. Show this information in your project.
1. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on stock. Note that you will need the risk-free rate and the market return.
a) To get the current yield on 10-year Treasury securities go to www.finance.yahoo.com -click on Markets – U.S. Treasury Bonds Rates. You will use the current yield on 10-year Treasury securities as the risk-free rate to estimate the required rate of return on stocks.
b) Between 1926 and 2014, the compound annual rate of return of S&P 500 is estimated a 10.5%. We will use this number as the market return.
c) Calculate the required return on the stock using the Capital Asset Pricing Model (CAPM) Security Market Line. Please show your work.
2. There are several methods how to calculate the growth rate. One of the possible ways is to calculate the sustainable growth rate as g = ROE *(1- Dividend payout ratio). You can find ROE and the dividend Payout Ratio on HYPERLINK “http://www.finance.yahoo.com” www.finance.yahoo.com under Statistics.
Calculate the company’s sustainable growth rate. Please show your work.
3. Apply Gordon model (constant growth rate model) to calculate the intrinsic (economic) value of the stock. Please show your work.
Please note that for some companies it is not possible to use Gordon model. If that is the case, please explain why it is not possible to use this model for your company. What other models is it possible to use?
4. Compare the result of your calculations with the current stock price. Is stock overvalued, undervalued, or properly valued? Why? In accordance with your findings, is it reasonable to buy the stock? Why? Please explain your answer.
-7- Develop a specific recommendation, with supporting rationale, as to whether
or not the assigned company’s recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment (about 1 page) (15% of the project grade).
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