Valuation

Task Description

You are asked to write a 2250 word long analysis of a listed company that I will provide.

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It is required from you to include in your paper a financial valuation analysis based on two (2) approaches, as follows:

The analysis must include either one the following three

1(a) the Dividend Discount Model (DDM), or

1(b) the Free Cash flow to Equity Model (FCFE), or,

1(c) the Free Cash flow to Firm (FCFF) Model,

and it must include all the following methods:

  1. Relative valuation, specifically:
  2. Price / Earnings Per Share (P/E) valuation,
  3. Enterprise Value / Earnings Before Interests, Taxes, Depreciation and Amortization (EV/EBITDA) valuation,

iii.      Price / Book Values (P/BV) valuation,

  1. Enterprise Value / Sales (EV/S) valuation, and
  2. Other industry-specific valuation metrics.

The goal of the paper is to check your understanding of the different methods presented in class and see whether you can apply them correctly.Your critical thinking skills will also be judged based on the choice of your methods and on the explanations that you give to the numerical results obtained.

Specifically, the purpose is to have a comprehensive picture about the company you have chosen including

  1. the model chosen,
  2. the inputs chosen,
  3. the valuation characteristics,
  4. the mechanics of the valuation
  5. the outcome of valuation
  6. sensitivity of the valuation
  7. triangulation with ratios
  8. limitations of the financial information

 

Notes on the content

The description of the company and the real financial management situation shall be no longer than 25 percent of the paper, 625 words. The writer has to introduce the chosen company (Ericsson) from a financial management perspective outlining the industry, the company and the main Financial Reports findings. Tools may include the Five Forces analysis for the industry, SWOT analysis for the company and vertical or horizontal analysis for the Financial Reports. The bottom line is the financial analysis preparing the financial measures and the Discounted Cash Flow analysis (DCF).

The complex set of financial measures shall be no longer than 25 percent of the paper, 625 words. Students should first of all comment on the risk profile of the company outlining its bond rating and debt financing costs, evaluating the overall riskiness of the industry and the specific company position within the industry. Following the cost of debt, the cost of equity has to be calculated within the CAPM framework. The resulting weighted average cost of equity (WACC) should be triangulated with other industry players also reflecting the company’s financial structure and risk level. Where applicable, project NPVs and IRRs need to be calculated additionally to evaluate project investment, capital budgeting and other separate investment decisions.

The introduction of the discounted cash flow analysis techniques shall be no longer than 50 percent of the paper, 1250 words. Students need to choose either the Free Cash Flow to Equity (FCFE) or the Free Cash Flow to Firm (FCFF) or the Dividend Discount Model (DDM) valuation models. The analysis of the Financial Statements is essential to be able to use the percentage-of-sales financial forecasting technique, as practiced during the seminars. The forecasting of the line items such as NOPAT, CAPEX and NWC resulting in the Free Cash Flow should be discounted to current state with the previously calculated WACC. Students are also required to calculate the Beta with regressing stock and market returns for at least one year. For the Terminal Value (TV) calculation it is essential to double check calculations with scenario and sensitivity analysis and relative valuation methods. The comparison to other industry players using Enterprise Value (EV), Earnings Before Interest and Taxes (EBIT), Earnings Before Interest and Taxes, Depreciation and Amortisation (EBITDA) and Price / Earnings (P/E) ratios is essential to outline the current valuation of the firm.

The document should be submitted in pdf format. All supporting calculations must be included in a separately uploaded Excel sheet. Failure to include detailed calculations will result in a zero grade.

The assignment will be assessed based on the following criteria (see the grid on Moodle):

  • Understanding of material (35%)
  • Analysis (35%)
  • Structure (20%)
  • Language and mechanics (10%)

Papers shorter than 2,250 and longer than 2,750 words lose 10 points. Papers shorter than 2,000 words fail automatically. Harvard-style referencing must be used throughout the document. Academic sources are academic journal articles, preferably, with DOI numbers; chapters in edited books; and monographs.

 

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