Answer the following questions about a business of your choosing

If corporate finance is best learned through application and in real time, there is no better way to learn the subject than to try out everything we do in class on a real company in real time. You should consider this project a live lab experiment. Please try to apply the principles of corporate finance to a company that you have learned in this class so far.

You will pick a company. The company should be publicly traded and have at least one year of trading history and one set of annual financial statements. The company can be listed in any stock market. Avoid the following firms:

  • Financial service firms (banks, insurance companies & investment banks)
  • Money losing companies
  • Companies with large capital arms (GE and the auto companies)
  • Real estate investment trusts

Your project report will cover the following points:

  • I.Corporate Governance Analysis:
  • II. Stockholder Analysis:
  • Is this a company where there is a separation between management and ownership?
  • If so, how responsive is management to stockholders?
  • What are the other potential conflicts of interest that you see in this firm?
  • How does this firm interact with financial markets?
  • How do markets get information on the firm?
  • How does this firm view its social obligations and manage its image in society?
  • What is the breakdown of stockholders in your firm – insiders, individuals and institutional?
  • Who is the marginal investor in this company?

III. Risk and Return:

  • What is the risk profile of your company?
  • How much overall risk is there in this firm?
  • Where is this risk coming from (market, firm, industry or currency)?
  • How is the risk profile changing?
  • What return would you have earned investing in this company’s stock?
  • Would you have under or out performed the market?
  • How much of the performance can be attributed to management?
  • How risky is this company’s equity? What is its cost of equity?
  • How risky is this company’s debt? What is its cost of debt?
  • What is this company’s current cost of capital?

(Look at Betas by Industry, Cost of Debt/Capital by Industry to gain the above information)

IV. Measuring Investment Returns:

  • Is there a typical project for this firm?
  • If yes, what does it look like in terms of life (long term or short term), investment needs and cash flow patterns?
  • How good are the projects that the company has on its books currently? ¨ Are the projects in the future likely to look like the projects in the past? Why or why not?
  • How has this company returned cash to its owners?
  • Has it paid dividends or bought back stock?
  • How much cash has the firm accumulated over time?
  • Given this firm’s characteristics today, how would you recommend that they return cash to stockholders (assuming that they have excess cash)?

(Look at ROE and ROC by Sector)

V. Dividend Policy:

VI. A Framework for Analyzing Dividends:

  • How much cash could this firm have returned to its stockholders over the last few years?
  • How much did it actually return? ¨
  • Given this dividend policy and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?
  • How does this firm’s dividend policy compare to those of its peer group and to the rest of the market?

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