Pts 2 – text (3500 words) and 10 pages supporting with the forecasting and valuation models as an appendix. ( Please follow the lecture notes and use only ratios in the lectures i.e. ROE, ATO etc, )
Due: Part 2 lecture 11
1. Prospective Analysis
Forecast future financial performance. Use the four valuation models outlined in class (Exclude Price Multiple) to produce an estimate of firm value, and compare to stock price. Perform sensitivity analysis and discuss the results.
1. Prepare your forecasts and write up the reasons for your forecast assumptions
2. Prepare your valuations and write up just the $ answers to your 4 models((Exclude Price Multiple), as well as include share price on the date of your valuation (the date of your last set of reformatted financial statements (table 1)
3. For all of your forecasting and cost of capital assumptions1, write up your reasons for your optimistic and pessimistic outcomes (best and worst they ever did in last
5 years perhaps?) and calculate your sensitivity analysis. Only use the AOI model and Table 2 reports your sensitivity results. Again compare to share price and discuss your results
Using your sensitivity analysis, and as a potential management consultant to your chosen firm, provide a discussion as to the possible opportunities for improvement, and potential challenges for your firm. Provide remedies for these concerns. You should be quite specific in any recommendations you make.
1. Your sensitivity testing will show you that your firm will be more sensitive to one of:
a. sales growth/cost of capital
2. Depending on which of the three above is most important to your firm, come up with some ideas for specific things that your firm can do. For example, if sales growth matters don’t just say “increase sales”. You need to come up with creative ideas for your firm to increase sales. You never know, yours may be the next assignment sent on to your firm!
AE: Abnormal Earnings
AOI: Abnormal Operating Income
ATO: Asset turnover
C: Cash from Operations
CAPM: Capital Asset Pricing Model
CSE: Common Share Equity
d: Dividends (the net cash flow to share-holders)
F: Cash flow to & from Debt-holders
FCF: Free Cash Flow
FLEV: Financial Leverage
I: Cash Investment
NBC: Net Borrowing cost
NFEat: Net Financial Expense after tax
NFO: Net Financial Obligations
NOA: Net Operating Assets
NOPAT: Net Operating Profit after Tax
PM: Profit Margin
RNOA: Return on Net Operating Assets
ROE: Return on Equity
Spread: Difference between lending & borrowing rates
WACC: Weighted average cost of capital
EIAT: Effective Interest After Tax
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