For this assignment, you will attempt to justify the market value of a publicly-traded organization by investigating the asset value of the company. Use the models above (theoretical market value and the current market value model) to obtain an estimated value of the organizations’ assets. You have been requested by the public company you choose to prepare a comprehensive report that fairly evaluates the company’s current market valuation for its stakeholders (i.e., the value the company would realize if sold to a new set of investors). (Note that in a public company, the shares are sold on a Securities Exchange, such as the New York Stock Exchange. However, when a company is sold, the transaction is an agreement that the value of the assets is fair for both parties and is not the capitalized value of the shares on the exchange.) Be sure to carefully follow all of the instructions in each part:
Choose a publicly-traded company that you want to analyze (different from the choice for assignments 3 and 4). It is recommended that you choose a company from an industry about which you have an interest. One way to find an annual report for a company is to search on www.annualreports.com. Reports are grouped by industries, public market exchanges on which listed and other filters. Read the company’s most recent annual report. Write about three paragraphs describing the company. Discuss the company’s line of business, products and/or services offered, time the company has been in operation, and main location. Discuss any other aspects of the company that you believe are particularly interesting about the company.
Assess the company from a microeconomic point of view. Discuss the demand characteristics for the company’s product or service (e.g., the company’s customers, competition, etc.), the company’s cost structure (e.g., degree of variable cost versus fixed costs), and the nature of the industry (highly competitive, somewhat competitive, oligopoly, or monopoly). Discuss any other microeconomic factors that you believe are relevant to the company.
Consider the strategy for new products or services that are described in the company’s annual report. Are there any aspects of the current strategy that you perceive will positively or negatively affect the company’s growth (assume the strategy presented is likely achievable). Determine if the proposed strategy will alter the past growth rate of earnings as trending in past years reported.
Create a pro forma income statement for the company in order to estimate net income for the next annual accounting period (you only have to create a proforma income statement, not a proforma balance sheet). Using the net income calculated for next year, calculate the cash flow for next year (cash flow = net income + depreciation).
Use the CAPM (capital asset pricing model) and/or the Dividend-Growth Model (dividend per share/ stock price per share *100) + estimated growth per year of earnings (from annual report and/or from a five year estimate from an Independent Investment Research House, which is located in University Library), calculate the perceived cost of equity for the company. Evaluate the reasonableness for the growth rate of equity you develop based on the calculations and the evaluations accomplished in Parts 2 and 3 above.
Estimate the value of the assets using both the theoretical market value model and the current market value model described above. Evaluate the differences between the two. As the chief financial officer, evaluate which of the values you have calculated more fairly estimates the true market value of the organization proposed for sale to a new set of investors.
Based on your comprehensive evaluation of your chosen company, would you want to be the CFO of this company or not? Provide reasons for why you would or why you would not. (Note: Although you must include Part VII in what you submit for this assignment, this item will not be included in the final comprehensive report that will be given to the company.
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