Corporate Finance and Crowdfunding 

Firm Selection

Select a company listed on an internationally recognised and well-established Stock Exchange (such as London, New York, Tokyo, Mumbai). It is important that historical share and stock index price data and financial statements for the selected firm and its competitors is available for a minimum of 5 years. It is preferable to select a firm operating in a single industry but not the financial industry since their accounts are more complicated and are regulated through central bank oversight.

Introduction to the selected organisation (what it is, who its key competitors are, how it operates, its industry sector) must be included 

Part 1 – historical performance (over past 5 years)

Based on the systematic comparative appraisal of the selected firm’shistorical performance:

•      Discuss how successful the selected firm has been at delivering value to its shareholders  

•      Analyse the historical total shareholder return (TSR) and economic value added (EVA) for the selected firm and its principal competitors (or appropriate benchmarks). You can also pursue or discount SVA / MVA and define you own value drivers based on the organisation’s annual statement.

To estimate EVA: estimate cost of capital x how much capital it has compared to what they actually earn, this explains whether they are creating more or less value then the cost of capital indicates;  TSR – note down any significant events, changes in price up or down, price return plus dividends; choose an appropriate benchmark  

•      Although a full ratio analysis for the company is not required and will not be assessed, you may find a ratio analysis supplemented by analysts’ and journalists’ reports on the company helpful in analysing its past performance and as a guide to future performance. you can consider net asset value (total asset minus total liabilities) how has it changed; comparable ratios (price to earnings, enterprise value etc…). when looking at evaluations it is good to look at relative evaluation. This should be compared with competitors and previous history data.  

As part of this discussion, you can refer to model such as the Growth model.  Market efficiency you can assume. As an illustration you can calculate the cost of equity from CAPM, and compare the result with the Gordon dividend model or use the cost of capital to estimate the implied growth rate.

For comparisons, you should look at other firms within the same industry as your selected firm to comment on the firm’s performance using certain financial values and ratios. 

Part 2 -prospective performance  

Evaluate the current shareholder value of the selected firm.

•      Apply discounted flow techniques (DCF) to the selected firm’s projected free cash flow (FCF) performance to determine its current shareholder value. This is derived from the selected firm’s projected financial statements (Profit & Loss account, Balance Sheet, and Cash Flow statement).

•      Your projections, including the firm’s terminal value, must be based on realistic and plausible assumptions that can be fully justified. The projection horizon should be a minimum of 5 years.

•      The current shareholder value is obtained by discounting the future FCFs at the weighted average cost of capital (WACC), which should be estimated  from the raw data.

•      A full sensitivity analysis on the more significant assumptions should be conducted. As part of the discussion you should comment on what influenced the share price the most.

•      Additional information from various sources such as company annual reports of the selected firm and its competitors, analysts’ reports, news stories, industry trade publications, government and quasi-government reports on the industry should be accessed to guide your analysis and evaluation.

•      Alternative methods for estimating the current shareholder value based on key financial ratios (P/E, P/B, EV/EBITDA) and Net Asset Value should also be considered.

•      Significant differences between the estimates of shareholder value obtained from the above methods should be reconciled with the market shareholder value. A clear recommendation on the “correct” shareholder value for the selected firm with a clear justification should be made.

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APA

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