Muscat University

In this project, you will select a publicly traded US-based corporation and analyze it along several dimensions related to corporate finance. More specifically, you will estimate its cost of capital (WACC) and per-share value, as well as offer comparisons among multiple financial

ratios between the firm and its peer group.

Overview of Grading Scheme:

• Introduction 5 Points

• Summary of External References 5 Points

• Cost of Capital Estimation 15 Points

• Financial Ratios and Interpretation 40 Points

• Valuation Estimation 15 Points

• Pro Forma Statements 10 Points

• Conclusion 10 Points

1. INTRODUCTION

In this section you will introduce your firm, list all external resources or references

consulted, and then explain your selection of its peer group. Ideally, the peer group can

consist of your firm plus 3, 4, or 5 other firms (per your preference).

There is no need in the introduction to summarize your results.

2. SUMMARY OF EXTERNAL REFERENCES

It is frequently the case that we can quickly come to an appreciation of a firm’s

competitive position and strategy by reading an external reference. As mentioned

previously, obvious potential references are the ‘MD&A’, report from a credit rating

agency, equity valuation analysis, or business profile.

Your summary here should include anything relevant to understanding the financial

ratios, the competitive position, market strategy, etc etc. In other words, look for details

that are interesting and / or illuminating that might otherwise not be obvious.

3. COST OF CAPITAL (WACC) ESTIMATION

Here the goal is to calculate the weighted-average cost of capital (WACC). Relevant

inputs are the cost of equity, the cost of debt, the respective weights (based on market

values), and the tax rate faced by the company.

You may consult the slides from Week 7 as a guide for the steps.

4. FINANCIAL RATIOS

Here you will conduct analyses on two types of common-size financial statements. First, you will

do ‘vertical analysis’ your own firm’s balance sheet and income statement in which you look at

growth trends in recent years (this is very fast). Next, you will look at common-size ‘horizontal’

financial ratios of your firm and its peers.

5. VALUATION

Here you will conduct three distinct rough estimations for the value of the firm’s stock on

a per-share basis. All three estimations will involve the firm’s Free Cash Flow to the Firm

(FCFF) and its WACC (which you calculate in an earlier section). For each of the three

calculations, you will first calculate firm value, then adjust to get equity value (we will

cover the details later), and then divide by shares outstanding to get price per share.

We will discuss later the specifics for the valuations. However, the first two will be quite

easy, whereas the third one will require you to incorporate your estimated ROIC, one of

the financial ratios.

6. PRO FORMA STATEMENTS

Here you will calculate a one-year-ahead pro forma balance sheet and income statement

based on sales projections. You will also calculate the sustainable growth rate and EFN

(external financing needed).

This portion of the project is dependent on class progress. The instructor may waive it

per his discretion (subject to class notification, of course).

7. CONCLUSIONS

Here you should not only summarize your major findings from each section, but also

identify any connections between the results from the individual sections.

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