Reference no: EM132234430 , Length: 12
Term Paper Assignment -
OVERVIEW - You are the head of financial analysis for Truly Voracious Holdings, a company with no assets other than lots of money, and an unlimited appetite. You have been told to analyze a potential acquisition.
Please analyze and discuss the company and its industry, from the perspective of a potential shareholder.
Your final product will be a report that shows your various analyses, discusses the pros and cons, and ultimately recommends either going ahead with the takeover, or not. (Please see discussion of Content, below.)
You will be rewarded by your senior manager based on the logic of your conclusion, and how well supported it is.
The following items are required to be incorporated into your report, each in a section of its own.
1. Present a high-level overview of your target company and its industry. Focus on the key drivers of success (i.e., shareholder value maximization), including products, markets, and competition. (5% of Term Paper grade)
The purpose of this section is only to provide context for your financial analysis. It may not exceed 1 2 pages.
2. Perform a detailed ratio analysis of your target company, specifically from the perspective of a shareholder. (30% of Term Paper grade)
- Perform both trend (company historical) and benchmarking (industry) analyses. Present 2 or more ratios for each of the five types of ratio, showing the three most recent years for your target company, and the industry average for at least the most recent of those years. You do NOT need to calculate the ratios, if you can find them elsewhere.
- Explain the implications of these ratios on the company, and comment critically on the direction of the trends, and why the company's ratios may differ from the industry average. This is the most important element of the ratio analysis. Cite specific examples from the analysis above to support your comments. For instance, "The Company's liquidity seems adequate, as both the Current Ratio and Quick Ratio have been relatively steady over the last three years, and are currently slightly above industry averages of 2.4 and 1.3, respectively."
3. Develop projected Income Statements for each of the next three years. (25% of Term Paper grade)
- Project annual revenues based on any reasonable sales forecast, but explain your thinking. For example, "I expect sales to grow 1.4% per year, compared to the average growth over the last three years of 1.2% per annum, due to the recent expansion into Sweden and Norway."
- Project the major Expense lines, based on what should be driving the expenses. For example: "Cost of Goods Sold is expected to rise at the same rate as the increase in Sales." "Administrative Expense is expected to grow at the overall rate of inflation, which I project to be 1% per year." "Income Tax is expected to remain at the same rate as the previous year of 36.2% of Pre-Tax Income."
Your explanations of the revenue and expense drivers are the most important element of the income statement projection.
4. Use the Dividend Growth model to calculate a valuation for the company's stock. (15% of Term Paper grade)
- Assume the dividend will grow at the average rate of change in your projected Net Income over the next three years.
- Assume the required return is 3% higher than the dividend growth rate. Thus, if the calculated growth rate of Net Income over the next three years is 6.2%, then assume a required return of 9.2%
- Compare your calculated valuation to the Company's current stock price, and comment on any significant variation.
5. Finally, make a specific investment recommendation regarding the acquisition of the target's bonds, stock, neither, or both? You should primarily base this on the financial analyses you've done. Please give your reasons, with specific references to all the above analyses. For example, "The Company's profitability ratios handily exceed the industry average, and the company's liquidity seems adequate, based on its Current Ratio of ...Therefore, I recommend acquisition of the company's bonds. However, the projected Income Statements show declining profitability, and the current stock price is 12% higher than the valuation of the Dividend Growth model...Therefore, I do not recommend acquiring the Company's stock at the current price".
List of Target Companies
- American Airlines
- Best Buy
- Campbell Soup
- Cisco Systems
- CVS Caremark
- Lockheed Martin
- Southwest Airlines
- The Gap
- The Jones Group
- Time Warner Cable
- Whole Foods