Question
What are the key assumptions necessary for price = value for your assigned company? Each student has been assigned one of seven companies for this
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:
oCompustat: Comparable company information
oBloomberg Terminal: Wide variety of information on the company, industry, comparable companies, etc.
oMergent Online (available through PSU Library access): Wide variety of information on the company, industry, comparable companies, etc.
oDamodaran files and website (see the course syllabus)
oPSU library resource Course Guide for Fin 449 (look below the Calendar link on the right-hand-side of the course D2L page)
oSEC filings from the company
oInvestor Relations information from the company
GENERAL ASSESSMENT CRITERIA: I will evaluate submitted reports on the following points:
Content/communication issues:
oHow well does the intern's valuation estimate(s) approximate the October 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)
oHow 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
oRisk-free rate
oBeta
oMarket risk premium
Cost of debt
oRisk-free rate
oCredit rating
oDefault risk premium
Terminal value (Max = 10 points)
Amount
Useful multiples
oHow well does the analyst provide basic support for key bullet point assumptions? (Max = 10 points)
Revenue
Cost of equity
Terminal value
oHow well are key bullet points expanded upon and supported with data from exhibits? (Max = 5 points)
oHow effectively are data exhibits used to support text of report? (Max = 5 points)
oHow well does analyst communicate data sources used in the report? (Max = 5 points)
oWhat level of analyst rigor is evidenced by the spreadsheet composition? (Max = 5 points)
Technical issues:
oWhat 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.
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