Advanced Corporate Finance
Prof. Mathias Kronlund
Market Information Lab Exercise
Due Date: March 18, 2015
Pick a publicly traded company where the first letter of the company’s name is the same as the first letter of your last name (see, e.g. www.russell.com/documents/indexes/membership/membership-russell-1000.pdf for a list of large companies that belong to the Russell 1000 index). However, make sure the company you pick does not belong to the financial sector (valuation techniques for financial firms are quite different).
For this exercise, you will use Capital IQ to obtain financial information about that company (plus information for a few comparable companies) and do a valuation analysis. During the lab session, we will first learn how to find and download the necessary data from CapitalIQ to do this analysis for one “example company”. You will then get to do the same analysis for your company. There may not sufficient time during the lab session for you to fully finish all calculations, so think carefully about what data you will need for each question and at least download that data before the class session is over. If you find you need more data after the lab session, you can also visit the MIL on your own or look up data from other sources (e.g., Yahoo
Finance, SEC Edgar, etc.) to complete your analysis.
Part 1 - DCF
Value the company using DCF:
a)
Project sales of the company over next seven years. You can do so using either analyst estimates of future sales (analysts don’t always make sales forecasts, or at least not this far in the future), by projecting based on past sales and your own view on the industry growth, or ideally, based on a combination of these methods.
b)
Project an EBITDA/Sales margin for each year of the forecast period based on past margins, analyst estimates of future profits, your own view of the industry, or some combination of these methods.
Apply this margin to predict EBITDA for the forecast period.
c)
Estimate Free Cash Flows for the forecast period. To do this, you will need to predict future depreciation, capital expenditures, and net working capital. 1 You can assume that future tax rates will be 35%.
d)
What long run growth rate of Free Cash Flows would you use to calculate the terminal value of the company? Also describe your reasoning behind this growth rate.
e)
What is WACC of the company? You can estimate WACC using the following method: First look up or calculate the equity beta for the company and apply CAPM to get the cost of equity capital. To estimate the cost of debt capital, first see if your company has any bond ratings. If it does have a rating, you can estimate a debt beta based on Table 1 below (if the firm has several bonds with different ratings, you can use the average rating). If the firm has no ratings for its debt, you will need to guess a rating based on your assessment of how risky the firm’s debt is (e.g., based on the firm’s
