As an investment advisor, you have been approached by a group of professional investors (probably who already have a well-diversified portfolio). They are considering investing in a New Zealand Company listed on the New Zealand Stock Exchange. They perceive it to be an icon of the New Zealand business world. But, they also have their doubts. They are also concerned about the company's overseas operations and/or plans. In additional to your value analysis, they require your commentary on foreign currency and any other related potential risks. You will need to describe how you have allowed for these risks in your analysis. They have approached you with the task of analyzing the performance and prospects of the company and for your advice on whether the company's share price represents good value. To do this, you must first carry some detailed forecasting.
1. The individual component.
You will use the company that has been allocated to your group.( www.methven.com)
Individually. You are to prepare pro forma forecast financial statements for the next five years. It is suggested that your refer to the handout notes for forecasting steps and process given to you during this course. To complete the forecasting process you will need to make a variety of assumptions including anticipated growth rates for income, any changes or otherwise in ratios etc. The Report should contain a discussion of the assumptions you have made and general commentary on the future prospects for the business. It is anticipated that you will need approximately four or five pages, excluding appendices.
Graphs or tables to illustrate the ratios or trends plus the actual financial statements are to be included in an Appendix and are in addition this page limit.
Your hand in report therefore should contain:
- Commentary and discussion of the company's stage in its life cycle, future prospects, new strategies etc and how these have been factored into your assumptions
- All the assumptions and reasoning you made in developing the pro forma statements.
- The final forecast summary income, balance sheet and cash flow statements
- Appendix with workings etc
2. Group Component.
In your groups, prepare and complete a Group Report on the Financial Performance of your company and a current valuation of the shares. This analysis should be done using both Microsoft word and Excel. You may use some of the individual assignment material from one of your team members.
There are two parts to the group assignment.
PART 1. Ratio Analysis.
Using ratio analysis you will provide commentary on:
- the company's sales performance, overall and by business segment if appropriate
- the company's profitability, overall and by business segment
- the company's liquidity
- the company's financial structure
- the company's earnings and dividend returns to shareholders.
The ratios, trends and relevant benchmarks that your analysis is based on must be identified.
PART 2. Company Valuation
This exercise is to determine the present value of the company's future cash flows and compare to the current share price. To do this you will need to: (see also guidelines below)
- Decide on a discount rate to be used (given some of your assessment of future risks)
- Decide on a future growth rate of cash flows after the five years of forecast.
- Calculate the current value of the company per share.
- Compare this value with the price quoted in the share market at around the time of the release of the latest annual report.
- Choose one of your group member's forecast financial statements and use this as a basis for determining the future annual cash flows.
- Determine both the free cash flow to the firm and the likely dividend stream.
- Determine the WACC for the company.