You can pick whichever company you want as long as it is headquartered in the US, is listed on the
exchange, and has bonds and options. Also I recommend that it is not a financial (bank, etc.) … please try
to avoid financials as they are hard to develop FCF models.
Please answer the following items in your deliverable for your assigned company (I will randomly assign
companies). This project’s main deliverable should not exceed 8 pages (front & back), 12-font, doublespaced (although you may include an appendix of any length) and is due the last day of scheduled
classes. To simplify this assignment, you may want to follow this template, including the numbering of your
answers. Please, do not wait until the last days of that week due to begin this deliverable as I believe you
will find it too much to complete in a single setting.
1) Provide a short paragraph suggesting “the story” that is being told by the historical fundamentals – for
example, by profitability, growth, free cash flow, etc.
2) Provide and highlight the abbreviated forecast of the next five-year DCF or FCFF or FCFE forecasts (i.e.,
year by year) and the normalized, constant growth calculation for forecast years 6 to infinity.
3) Provide a DCF or FCFF or FCFE model-based valuation range, explaining in brief, your inputs. This
range will serve as an “absolute valuation” metric and will be calculated by discounting your individual fiveyear FCFF forecasts by a realistic WACC, discounting the constant growth by the WACC, subtracting out
debt and dividing by shares outstanding. You can use FCFE as well, making the necessary adjustments.
Highlight this absolute valuation range.
4) Provide historical 10-year price/earnings, price/book, and price/sales charts, commenting on today’s
relative valuation AND providing the forecasted P/E, etc. metrics that you selected to use in your forecasts.
For example, substantiate your P/E ratio and earnings per share forecast inputs that will provide your P/E
valuation. This “relative valuation” will serve as range value inputs for your final valuation range. Highlight
this relative valuation range.
Note: The “DCF absolute value” range will be combined with the P/metric “relative value ranges” to form a
“final range of value”. For example, if the DCF suggests $38/share and the P/metrics suggest $34–37, your
valuation range – combining the absolute and relative values – would likely be $34–38/share.
5) Provide and discuss the important “systematic factors” (value, growth, capitalization, quality,
momentum, inflation, international, interest rates, industrial production, etc.) that you believe will drive this
security’s return, explaining why you chose to include the ones that you did. You may wish to supply a
simple regression to prove your point (hint, hint).
6) Provide and discuss the important “fundamentals” (profitability, growth, cash flows, etc.) that you
believe will drive this security’s future return, explaining why you chose the ones that you did. Comment on
the “embedded expectations” that you believe the market is focusing on (recall that any good analysis is
about understanding the embedded expectations in the market price and how those expectations will
change so as to drive a higher or lower market price in the future).
7) Given your analysis, would you recommend a buy or a sell on this equity security? Explain your
recommendation in a “summary paragraph” (think “story”) that you would provide as an Executive
Summary with your investment team. Provide and highlight this in a single paragraph, seeking to assure it
is an accurate and complete storyline of your analysis.
8) Provide the duration, convexity, and yield to maturity of any fixed income instrument of this company
that matures after 2025. Use any excel, Bloomberg, etc. template that you wish, highlighting the inputs
that you used.
9) Provide the Black-Scholes valuation of any option of this company that expires within the next 12
months (please be sure to provide your inputs as well as a brief discussion of your “volatility”
assumptions). Briefly compare your Black-Scholes valuation (V) to that last price (P) traded in the market
and your recommendation (buy or sell).