Reference no: EM13208648

Your project report should include an analysis of your company in the areas below. Where appropriate comment on the differences between your company and the companies the rest of the rest of your group.

I. Corporate Governance - There are several questions to address here.
a. How much power do you have as a shareholder over the management of this company? To answer this you want to look at the board of directors (are they going to look out for you?), the ownership structure (is there a potentially activist shareholder?), the presence of anti-take-over measures, and anything else you can think of.
b. Are there potential conflicts of interest between inside stockholders and outside stockholders? Can the insiders take advantage of you somehow?
c. Are there potential conflicts of interest between stockholders and bondholders? Information on this is usually hard to find, but if you do learn something interesting, by all means include it in your analysis.
d. Is the company a good corporate citizen? All companies claim to be. If you find anything interesting here, include it.

II. Who is your company's marginal investor? Remember that this will feed into your hurdle rate analysis.

III. Cost of Equity and Cost of Capital
a. Estimate the risk-free rate. If you are analyzing a company is US dollars, this is easy. Use the yield on the 10-year US T-bond.
b. Estimate the equity risk premium. We talked about several ways to estimate this. See me if you have any questions.
c. Evaluate the beta regression for your company. Include
i. Jensen's Alpha
ii. The beta estimate with confidence intervals
iii. The R-squared
d. Estimate a bottom-up beta for your company
e. Estimate the market value of your company's debt, including off-balance sheet debt.
f. Estimate the cost of debt
g. Estimate your company's levered bottom-up beta
h. Compute your cost of equity and cost of capital

IV. Measuring Investment Returns
a. Estimate you company's return on capital and EVA
b. Estimate your company's return on equity and equity-EVA.

V. Capital Structure
a. Do a qualitative analysis of your company's optimal capital structure, paying attention to the two main benefits and three main costs of debt we discussed.
b. Use the Cost of Capital Approach to estimate your company's optimal capital structure.
i. I will provide a spreadsheet which will take care of much of the computational part of this, but don't let the spreadsheet become a black box.
c. Check for downside risk in moving to your optimal capital structure
d. Explain why your optimal is what it is. This is one of the points where comparison to other companies in your group will be very helpful. Look at
i. Tax rates
ii. Cashflow generating capacity
iii. Volatility in Earnings
e. If you want to, try out the APV method, but this is not required.

VI. Getting to the Optimal
a. Evaluate whether the company has time to go slowly
b. Evaluate whether your company has good investment opportunities. (Look back to the Measuring Investment Opportunities part for clues about this.)
c. Make your recommendation

VII. Design your perfect debt
a. Keeping in mind the objective of matching debt to assets, think about the typical investments that your firm makes and try to design the right debt for the project. If your firm has multiple businesses, design the right kind of debt for each business. In making these judgments, you should try to think about
i. whether you would use short term or long term debt
ii. what currency your debt should be in
iii. whether the debt should be fixed or floating rate debt
iv. whether you should use straight or convertible debt
v. what special features you would add to your debt to insulate the company from default
Your objective is to get the tax advantages without exposing yourself to default risk.
b. Do a quantitative analysis of your debt.
i. Again, I will provide a spreadsheet to help with this.

VIII. Dividend Policy
a. What were the free cash flows to equity for the last few years and how much did they actually pay in dividends?
b. Do you trust the management to hold your cash for you?
c. Would you change this company's dividend policy?
d. Optional: Relative to other companies in your sector, does this company pay too much or too little in dividends? (Use a regression if necessary.)

IX. Valuation
a. Will you use cashflows to equity or cashflows to capital?
b. What growth pattern will you assume?
c. What are your estimates of the short- and long-term growth rates for this company? (Remember that your reinvestment rate is a part of this estimate.)
d. What is the value of your firm? Is it over or undervalued? How much of this value comes from expected growth? How sensitive is your estimate to changing assumptions?
e. Finally, what about value enhancement?
i. Where is this firm doing badly (investment, financing, or dividend policy)?
ii. If you fixed the problems, what would happen to the value of the firm?
iii. Based on your analysis, is this firm a take-over candidate (or just a buy or sell candidate)?