Purpose:

Using spreadsheets to solve complex problems is a key competence - in fact a requirement - for many middle management positions in the workplace. Corporate finance provides many opportunities to use MS Excel to solve problems that cannot easily be solved manually.

In this assignment, you will use MS Excel to prepare pro forma financial statements and also calculate free cash flow for a multi-year business opportunity. While you will not need to use any special functions for this assignment, you will need to consider how you can structure your spreadsheet to be flexible enough to handle sensitivity analysis.

Instructions:

1.Use the scenario below to answer the questions. (Note: the websites are just recommendation, and you can freely to use other reliable resources, as long as you are able to find the accurate information required. For example, you can directly go to Caterpillar and Microsoft corporate website and find the information under "Investor" section...)

2.Use Excel for all calculations.

3.Submit your report in Word format. Attach any supporting Excel documents.

4.See the rubric below for the marking criteria.

Scenario:

This is your second interview with a prestigious brokerage firm for a job as an equity analyst.

You survived the morning interviews with the department manager and the vice president of equity. Everything has gone so well that they want to test your ability as an analyst. You are seated in a room with a computer and a list with the names of two companies

Caterpillar (CAT) and Microsoft (MSFT). You need to complete the following tasks:

1.Download the annual income statements, balance sheets, and cash flow statements for the last four fiscal years from MarketWatch (www.marketwatch.com). Enter each company's stock symbol and then go to "financials." Copy and paste the financial statements into Excel.

2.Find historical stock prices for each firm from Yahoo! Finance (finance.yahoo.com). Enter the stock symbol, click on "Historical Prices" in the left column, and enter the proper date range to cover the last day of the month corresponding to the date of each financial statement. Use the closing stock prices (not the adjusted close). To calculate the firm's market capitalization at each date, multiply the number of shares outstanding (see "Basic Weighted Shares Outstanding" on the income statement) by the firm's historic stock price.

3. For each of the four years of statements, compute the following ratios for each firm:

Valuation Ratios

Price-earnings ratio (for EPS use diluted EPS total)

Market-to-book ratio

Enterprise value-to-EBITDA

(For debt, include long-term and short-term debt; for cash, include marketable

securities.)

Profitability Ratios

Operating margin (use operating income after depreciation)

Net profit margin

Return on equity

Financial Strength Ratios

Current ratio

Book debt-equity ratio

Market debt-equity ratio

Interest coverage ratio (EBIT / interest expense)

4. Obtain industry averages for each firm from Reuters.com (www.reuters.com/

finance/stocks). Enter the stock symbol at the top of the page in the "Symbol

lookup" and then click on the "Financials" button, and then click on "Search".

a. Scroll down to "Valuation Ratios," and compare each firm's ratios to the

available industry ratios for the most recent year. (Ignore the "Company"

column as your calculations will be different.)

b. Analyze the performance of each firm versus the industry and comment on any

trends in each individual firm's performance. Identify any strengths or

weaknesses you find in each firm.

5. Examine the market-to-book ratios you calculated for each firm. Which, if either,

of the two firms can be considered "growth firms" and which, if either, can be

considered "value firms"?

6. Compare the valuation ratios across the two firms. How do you interpret the

difference between them?

7. Consider the enterprise value of both firms for each of the four years. How have

the values of both firms changed over the time period?