Fin 449 - Valuation

Mid-term valuation project assignment

Prof. Rogers

Fall 2020

Assigned: Wednesday, October 14, 2020

Due: Wednesday, November 4, 2020 (submission must be received no later than 5 PM of due date)

• Students must submit an electronic copy of their report in Word or PDF format. Please e-mail the Word or PDF file t..s@pdx.edu.
• I also require that students submit (by the due date and time) an accompanying Microsoft Excel file (including all numeric documentation of the work completed for the report) via e-mail (..s@pdx.edu). I do not "grade" student spreadsheets, but I do examine the spreadsheet file to assess consistency between spreadsheet files and reports. Additionally, I do some checks on the technical abilities employed in the analysis specifically to assess any flaws in understanding. I also examine spreadsheets to check for degree of originality in work (including assessing possible instances of academic dishonesty).
• PLEASE NOTE: To receive a passing grade, the student's document must be written such that the reader does not HAVE to refer to the student's spreadsheet to understand the student's valuation of the company. In other words, necessary numeric data and analysis must be presented clearly within the text, tables, and/or charts of the student's document.

PLEASE SIGN AND DATE BELOW.

Academic Honesty Statement: I understand that I am not to seek assistance or consultation on any portion of this exam from any other individual. I understand that I can ask in-class questions of the instructor during the exam preparation period, and that I may post questions on the class D2L discussion forum. Students may discuss "general issues" about their shared company assignments, but should avoid discussing specific numbers they are using within the scope of preparing this assignment. The instructor reserves the right not to answer any question that he deems inappropriate. Any evidence of collaboration or outside consultation will result in a failing mark for any component of the exam paper for which such evidence is found.

This sheet must be attached, and submitted with the student's exam document. The return of this document verifies student's agree with the terms of the statement.

Student's name (please print):_________________________________________________

Date:_________________________

Basic Instructions: In writing the requested report for this midterm valuation project, it is important that you clearly incorporate relevant numbers (which may include tables and/or charts as exhibits) and explain numeric aspects of the requested valuation within the scope of your report. The most likely way to "fail" this exam is to provide insufficient numeric detail within your report. Continue to read below for the specific assignment!

What are the key assumptions necessary for "price = value" for your assigned company?

Each student has been assigned one of seven companies for this midterm assessment. The companies are as follows:

• PepsiCo Inc. (ticker = PEP), a global snack foods and beverage manufacturer and marketer
• The TJX Companies Inc. (ticker = TJX), a US retailer focused on discount retail
• The Home Depot Inc. (ticker = HD), a global retailer of home and building supplies
• Best Buy Inc. (ticker = BBY), a US retailer of electronic equipment
• Costco Wholesale Corp. (ticker = COST), a global retailer in the warehouse space
• The Clorox Company (ticker = CLX), a manufacturer and marketer of household products
• Darden Restaurants Inc. (ticker = DRI), a US restaurant chain company

Because of your performance on earlier valuation-related work, your boss, D.A. Webb, at the equity research firm, FCF Value Partners, has entrusted you to justify the market's current traded price of your assigned company's equity by constructing a free cash flow forecast model and valuation of its stock. She would like you to provide a concise written discussion as to what assumptions may be necessary about the company's business and valuation fundamentals that would cause the markets to price the company at its current levels.For purposes of this assignment, Ms. Webb has asked you to use October 16, 2020, closing price as the value estimate target.

From your valuation course at PSU, you learned that value is a function of assumptions about expected free cash flow, cost of capital, and a terminal value estimate. Certain "big-picture" assumptions affect company value through their effects on corporate free cash flow. These assumptions revolve around the company's 1) revenue potential, 2) expected profitability, 3) necessary investment, and 4) possibly financing choices. Assumptions about cost of capital and terminal value also create significant effects on company value estimates, therefore, these assumptions include big-picture metrics as well. As such, you plan to create a report such that the big-picture assumptions necessary to justify your assigned company's current price are apparent to Ms. Webb. One of the senior analysts has mentioned that Ms. Webb especially appreciates informative data exhibits (such as tables and charts) included with analyst reports. However, Ms. Webb gets annoyed when analysts do not clearly explain how the data exhibits relate to the text of the report.

THE ASSIGNMENT:

• Ms. Webb has asked you to complete a short bullet-point oriented written report (MAXIMUM of 2 pages of single-spaced text) by the due date listed earlier.
• Data exhibits, such as tables and charts, should be included as an appendix to your report. These do not count against the page limit.
• You will receive feedback one week after submission. Your report (along with the feedback) will go into your personnel file and may be used in any subsequent permanent hiring decision.

DATA SOURCES:

• Compustat (WRDS interface): For your convenience, Ms. Webb has provided 15-year financial statement histories from the Compustat database (see the content link "Midterm Files") of the companies. Make sure to locate your company assignment in the "Midterm Company Assignments" file.
• Other Available Resources:
• Compustat: Comparable company information
• Bloomberg Terminal: Wide variety of information on the company, industry, comparable companies, etc.
• Mergent Online (available through PSU Library access): Wide variety of information on the company, industry, comparable companies, etc.
• Damodaran files and website (see the course syllabus)
• PSU library resource Course Guide for Fin 449 (look below the Calendar link on the right-hand-side of the course D2L page)
• SEC filings from the company
• Investor Relations information from the company

GENERAL ASSESSMENT CRITERIA: I will evaluate submitted reports on the following points:

Content/communication issues:

• How well does the intern's valuation estimate(s) approximate theOctober 16, 2020 per share closing price(and associated market capitalization)? A good report should produce a value estimate within 0.5% of the price. (Maximum = 10 points)
• How well does the report show bullet points focused on the following? (Maximum = 60 points)
• Value estimate and price (Max = 5 points)
• Free cash flow (Max = 25 points)
• Revenue
• Profitability
• Investment
• Financing
• Cost of capital (Max = 20 points)
• Cost of equity
• Risk-free rate
• Beta
• Market risk premium
• Cost of debt
• Risk-free rate
• Credit rating
• Default risk premium
• Terminal value (Max = 10 points)
• Amount
• Useful multiples
• How well does the analyst provide basic support for key bullet point assumptions? (Max = 10 points)
• Revenue
• Cost of equity
• Terminal value
• How well are key bullet points expanded upon and supported with data from exhibits? (Max = 5 points)
• How effectively are data exhibits used to support text of report? (Max = 5 points)
• How well does analyst communicate data sources used in the report? (Max = 5 points)
• What level of analyst rigor is evidenced by the spreadsheet composition? (Max = 5 points)

Technical issues:

• What technical and/or methodological issues found in spreadsheet detract from the quality of the results reported in the text?
• Revenues
• Profitability
• Investment
• Financing
• Cost of capital issues
• Terminal value estimation/interpretation

Minor issues = 1 - 2 point deduction per incidence

Moderate issues = 5 point deduction per incidence

Major issues = 10 - 20 point deduction per incidence

GRADING PHILOSOPHY:

• Scores will be calculated from applying a rubric to the bullet points listed above.
• Scores will be scaled to fit into my grading scale (see the course syllabus).
• Average/median grade for this project will depend upon the typical quality I observe across all student submissions.
• Average/median grade range expectation is between B-minus and B-plus.

IMPORTANT NOTE:Students are not being asked to do a lot of general business and/or industry research on their assigned companies for the purpose of this project. This assignment is primarily a numerically-focused spreadsheet exercise to assess your abilities at working with the class spreadsheet template and your abilities at communicating the important aspects of the numbers you have used in the spreadsheet. Nevertheless, it is advisable to explore enough information to have a basic knowledge of your assigned company as this knowledge will come in handy later in the term.

HAVE FUN!!!!!

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