Corporate Finance and Financial Statement Analysis
2: Using
Financial Statement
s
for
Equity Valuation and
in
Analysis of Credit Risk
M
odule weighting
:
50%
Submission deadline:
17
:00 (
PM
)
Monday March 31
st
,
2014
.
Prepared by Dr Natalia Isachenkova (Room 311
in Kingston Business School
)
This is an individual assessment contributing 50% of your marks for the module. You must
submit an
individual report
.
The deadline for submission is
17:
00 (
PM
)
Monday March 31
st
,
2014
.
The assignment consists of two parts
that
carry equal marks. You
MUST
attempt both parts.
P
ART
1:
U
SING
F
INANCIAL
S
TATEMENTS
F
OR
E
QUITY
V
ALUATION
(50
MARKS
)
Part 1 of the assignment i
s intended to help you develop practical skills of Fundamental
Analysis. The assignment provides you with
an
opportunity to apply valuation technologies
that are commonly used in practice and that incorporate financial statement information into
equity val
uation models. The focus is on
ex
–
post
or backward validation of alternative
valuation approaches.
Formal Requirements
for Part 1
1)
You are required to provide
a valuation of the
common stock
(equity) in ANY ONE of
the firms
listed below,
at the end of 20
10
, using the actual
–
real
–
financial results
reported by the firm in 20
1
1
and 201
2
.
Ticker
Firm Name
CAG
ConAgra Foods, Inc.
MRK
Merck & Co. Inc.
UTX
United Technologies Corp.
WMT
Wal
–
Mart Stores Inc.
2)
Your valuation should utilise TWO valuation technologies one of which MUST be
either Residual Earnings Analysis or Earnings Growth Analysis.
3)
You should supply a commentary on the usefulness of the two techniques that you
use, substantiating your conclusi
ons with the results from the valuation.
4)
You must prepare a concise written
account
for this part of the assignment
and
you
are
also
required t
o include in your written report for Coursework Assignment 2
, as
!”#$%
!
%
&’%
”
%
%
an appendix, the
entire
set of all the annual
financial statements for the chosen firm
for the period 20
10
–
201
2
. Please note that NO other appendices are allowed.
5)
Your written
account
must contain clear references to the relevant portions of the
financial statements for the firm being analysed, and
the relevant portions should be
highlighted.
Ex
–
post
validation means that you must explore the usefulness of the two valuation
technologies that you employ by comparing their respective
ex
–
post
estimates of the
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the end of 20
10
. That is, you need to look back and convert the financial statement numbers
from 20
1
1
and 201
2
into an
ex
–
post
valuation of t
KHILUP¶VHTXLWDWWKHHQGRI
10
and
provide your conclusion on which of the two valuation techniques that you utilise is more
powerful at predicting
ex
–
post
the value of the firm at the end of 20
10
.
Please note that in this particular project there i
s no need for you to attempt forecasting pro
forma numbers, since you can treat the 20
1
1
and 201
2
DFWXDOQXPEHUVLQWKHILUP¶VILQDQFLDO
statements as impeccable one
–
and two
–
year projections that can be used for valuing the
ILUP¶VFRPPRQVWRFNDWWKHHQG
of 20
10
.
Attention should be given to the valuation technologies that attempt to calculate the
fundamental (intrinsic) value.
The structure of the
written account
for Part 1 of the assignment
will provide an executive
summary, a brief retrospective
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environment, and then will concisely outline an appropriate specification of payoffs based on
an analysis of the available 20
11
and 201
2
financial statements, an
ex
–
post
valuation and
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at the end of 20
10
, concluding with a discussion of the degree of usefulness of the two
valuation methods that you utilise from the perspective of a
n academic researcher.
Avoid applying equity valuation techniques mechanically, as the examiner will need to see
that you have the necessary understanding of the costs and benefits of alternative
technologies and are using the appropriate tools.
You mu
VWEULHIOVWDWHWKHYDOXDWLRQDVVXPSWLRQVWKDWRXXVHLQYDOXLQJWKHILUP¶VHTXLWDQG
critically interpret the valuation results, using evidence in the argument.
You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform y
our
conclusions.
You may round all computations to the nearest integer (or nearest percentage).
P
ART
2:
U
SING
F
INANCIAL
S
TATEMENTS FOR
C
REDIT
R
ISK
A
NALYSIS
(50
MARKS
)
Part 2 of the assignment is intended to help you develop practical skills of credi
t analysis.
The assignment provides you with
an
opportunity to evaluate the financial status of a
potential corporate borrower, using ratio analysis of the financial statements.
Formal Requirements
for Part 2
1)
You are required to carry out an analysis of financial statement ratios that indicate the
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