Assignment Requirements
Master’s Level Term Paper
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 a publicly traded, U.S.-based company (of your choosing) 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.
I must approve your target company ahead of time. Please submit your proposed company to the Term Paper Target Company assignment drop box, by the posted due date and time.
Your grade for the Term Paper will be penalized if you do not submit your target company on time.
GUIDELINES
• This is an individual assignment.
• Please do not use your current place of employment.
• Your target company must have long-term debt on which they pay interest. (Check the Balance Sheet for the long-term debt, and the Income Statement for interest expense.)
• Your target company must be paying a cash dividend. (Check the Statement of Stockholders’ Equity of the Statement of Cash Flows for dividends paid.)
• You may want to avoid conglomerates involved in disparate, multiple lines of business, as it will complicate your industry analysis.
• You must use the most recent, publicly available information and financial statements. This information should be readily available online, as well as or from industry reference books, such as Dun & Bradstreet, Moody’s or Value Line.
CONTENT
The following items are required to be incorporated into your report. However, feel free to add additional material to support or illuminate your analysis.
1. Present an 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. Discuss the impact of any significant recent domestic and/or global events relating to your company.
The purpose of this section is only to provide context for your financial analysis. Please do not exceed 1 2 pages.
2. Perform a detailed ratio analysis of your target company, specifically from the perspective of a shareholder.
• Perform both trend (company historical) and benchmarking (industry) analyses. Present 2-4 ratios covering 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 the next three years.
• Project annual revenues based on any reasonable sales forecast, but explain your thinking. For example, “I expect sales to grow 10% faster than 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 Income Statement 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.
• 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.
• Compare your calculated valuation to the Company’s current stock price.
5. Give your own opinion about the future growth potential and prospects, not only of the target company, but also its industry overall, over the next 12 months. You should make reference to all the financial analyses you’ve done, as well as any qualitative factors you find relevant (e.g., future changes in legislative environment, competition, etc.).
6. Finally, make a specific investment recommendation regarding the acquisition of the target’s bonds, stock, neither, or both? 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 … However, the projected Income Statements show declining profitability, and the current stock price is 12% higher than the valuation of the Dividend Growth model…”
Each of the above items should be in a section of its own.
ADMINISTRATIVE ITEMS
• Please keep the paper finance oriented.
• The paper can be a maximum of 20 pages long, including tables, charts, graphs, and appendices.
• Please double-space, using Arial 12 pt. font, to make the paper more manageable.
• You may include an Executive Summary of your report on the first page (optional).
• Please include any tables, charts and graphs you wish. You must include a bibliography stating your sources.
• Please upload your completed term project to the Term Paper assignment by the posted due date and time. Please name your file “Lastname, Firstname Term Paper”.
• Your paper must be in either PDF or Word format.
• Failure to follow these guidelines will result in a lower grade.
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