The companies chosen must be listed on the US stock exchanges and have readily available financial statements. You should choose two companies: one for your main analysis, and the other one as the competitor for the purpose of comparison. You may send me your choices of companies for comments and suggestions.

You should obtain a copy of the latest annual reports or 10-Ks for your company and its closest competitor. 10-K filings can be usually found from the companys website or the EDGAR database at the Securities & Exchange Commission (SEC) website, as discussed in Module 1. In particular, you may use the following steps to obtain 10-K reports from the SEC website.

• Go to www.sec.gov
• Click Company Filing Search from the dropdown menu under FILINGS
• In the Company and Person Lookup textbox, type the name or ticker of your company,
• Type in 10-K in Filing Type and click Search

I suggest that you choose US companies with business models and financial information relatively easy for you to understand, because non-US companies may not follow US GAAP, and complex business operations make financial statement analysis and firm valuation more difficult. For example, GE has many business segments, such as GE aviation, GE power, GE capital and etc. As a result, GE is a manufacturing company, and an energy company as well as a financial institution, which significantly complicates its financial statement analysis.

Computation of Key Ratios

For both the main company and its chosen competitor, compute relevant ratios for the most recent three years. Use tables or graphs to compare these ratios in your report. Please also show your calculations in Excel spreadsheets.

The following ratios should be included, but feel free to add other ratios you feel important for your analysis. You may find the formulae for the relevant ratios in Modules 3 and 4. Please use Excel spreadsheets to show your calculations.

the analysis by computing the following ratios for the current and prior years for the company(ies). (Assume

a marginal tax rate of 37%.)

Return on equity (ROE)

Return on assets (ROA)

Return on net operating assets (RNOA)

Times interest earned

Operating cash flow to debt

Free cash flow to debt

Current ratio

Quick ratio

Liabilities-to-equity ratio

Total debt-to-equity rati

Return on equity (ROE)

Return on assets (ROA)

Return on net operating assets (RNOA)

Account receivable turnover

Inventory turnover

Accounts payable turnover

PPE turnover

Times interest earned

Operating cash flow to debt

Free cash flow to debt

Current ratio

Quick ratio

Liabilities-to-equity ratio

Total debt-to-equity ratio

Profitability Ratio Analysis

1. Perform a traditional Dupont Disaggregation by decomposing ROE into profit margin, asset turnover and financial leverage. What inferences can you draw from the disaggregation?
2. Perform a RNOA disaggregation by decomposing RNOA into NOPM and NOAT. What inferences can you draw from the disaggregation?
3. What is your assessment of the profitability of your firm in recent years? How does your firms profitability compare with that of the competitor?
4. What factors (e.g., business environment, business strategies, and product mix) may distinguish your companys operating performance from that of its closest competitor?

Productivity Ratio Analysis

1. What is your assessment of the operating efficiency of your firm in recent years? Comment on any observed trends.
2. Compare your firms operating efficiency with that of the competitor. What factors distinguish your companys productivity from that of its closest competitor?

Coverage Ratio Analysis

1. What is your assessment of the coverage ratios of your company in recent years? Comment on any observed trends.
2. Compare your firms coverage ratios with those of the competitor. What factors contribute to the differences of coverage ratios between your company and its closest competitor?

Liquidity and Solvency Ratio Analysis

1. What is your assessment of the liquidity and solvency of your company in recent years? Comment on any observed trends.
2. Compare your firms liquidity and solvency with those of the competitor. What factors contribute to the differences in liquidity and solvency between your company and its competitor?

Firm Valuation

This part requires you to estimate firm value of your main company, and to provide stock recommendations.

You are required to use one of the valuation methods discussed in the class (e.g., DDM, DCF, or ROPI models).

You should state and justify the major assumptions used for your calculation. Discuss how the changes in the assumptions may affect firm value. A sensitivity analysis may be performed to provide further insights into firm valuation and stock recommendation.

When you make stock recommendations, one important factor to be considered is the difference between the estimated equity values and the observed stock prices. If the estimated equity value is higher (lower) than the current stock price, this suggests that the market undervalues (overvalues) your firm and analysts should provide a buy (sell) recommendation. To enhance the credibility of your recommendation, you may summarize the main points from the previous analyses (i.e. company overview; ratio analysis).

Please use Excel spreadsheets to show your estimations.