Simplified Valuation Exercise & Ratio Analysis

Transcription

1 Fin352 Introduction to Research Insight, in a Instructor: Simplified Valuation Exercise & Ratio Analysis I. Research Insight You might be wise to read section V of these instructions first. Then, proceed by going to Yahoo! Finance and identifying a fairly common company that (a) has generated positive net income for at least the past three years and (b) pays dividends on its stock. 1 You would begin by entering the ticker symbol of your favorite company into the Quotes field at the top of the Yahoo! Finance page. In turn, after you click on the Quotes button and a new webpage emerges for your company, you should be able to figure out whether a firm has paid dividends by looking at its Key Statistics (via a link on the right-hand side of the page). Near the bottom of the Key Statistics page, you will see a link that allows you to view your company s Income Statement. Click on the link to the Income Statement and examine the annual Income Statement numbers. Be sure that your company reports a healthy, positive annual income for the three years shown. Also, within the Key Statistics page, you should see a Dividends & Splits data section. If you see numerical values for the various cells, then your firm has paid dividends; if the firm you selected has not paid dividends, you will see N/A in all of the fields within the Dividends & Splits section. Now, after finding a firm that has three years of historical positive net incomes and also pays dividends, proceed to launch the Research Insight software, making a note of your company s ticker symbol. Once you are in Research Insight, click on the Report Assistant button. A window will open titled Report Assistant Step 1 and you ll want to perform an Historical Analysis of Time vs. Items for a Company. Click Next. In Step 2, you will see a field called Item Groups. You will likely have to use the Customize button/feature in order to activate the five Item Groups that we are interested in. Toggle the checked boxes so that you choose the following item groups: Bal Sheet Ann, Income Ann, Ratios, Supplemental Ratios, and Dividends. Now, in the Step 2 window, click on the Bal Sheet Ann button. From the Items window, add the following items to the Selected Items window over on the right-hand side of this window: Cash, Receivables, Inventory, Total Current Assets, Total Assets, Total Current Liabilities, Total Liabilities, Total Stockholders Equity, and Common Shares O/S. Click on the Inc Ann button. From the Items window, add the following items to the Selected Items window: Sales, Cost of Sales, EBIT, Pretax Income, and Net Income (Loss). Click on the Dividends button. From the Items window, add Cash Dividends-Preferred, Cash Dividends-Common, Cash Dividends, and Dividend Payout to your Selected Items. From Ratios and Supplementary Ratios, add the following items to your Selected Items (being sure to add them in the exact order that I have listed here): Op Income / Sales, Current Ratio, Receivables Turnover, Avg Collection Period, Inventory Turnover, Days to Sell Inv, Net Profit Margin, Fixed Asset Turnover, and Total Asset Turnover. Click Next. In Step 3, you will specify the range of dates over which you want to obtain your financial data. Select the format for period display to be Relative. You want your Beginning Period to be year 5Y; you want your Ending Period to be year 0Y. For Alignment, select Annual. Click Finish. In the Run Assistant window, enter the ticker symbol for the company you are evaluating. Also, select Industry Sector in the Find Similar Companies window. Then, click OK. [Please note: We will NOT be doing anything further with the similar companies data I just wanted to introduce you to this feature. When I performed a trial run of this project, I used Intel and I was amazed to have Research Insight find data for approximately 50 other firms besides Intel!] Once your report has been generated, if more than one company s data are pulled, you ll need to use the window down the right side of the screen to find the ticker symbol for YOUR company. Click on that ticker symbol and your company s data should display in the main window. Now, you ll want to SAVE your data into a txt file. You can either use File Save As or click on the floppy-disk icon at the top of the window. When saving, be sure to click on the Text Options button and specify that your text file will be 1 Intel (INTC), Internat l Business Machines (IBM), and Disney (DIS) are three firms that I found to have generated positive net incomes recently I looked at Income Statements (being sure to examine Annual Data, as opposed to Quarterly Data), links to which appear near the bottoms of the blue boxes down the left sides of the Yahoo webpages. You are welcome to use any of these three firms, though I encourage you to evaluate a firm that is of particular interest to you.

2 Fin352 Introduction to Research Insight: Valuation and Ratio Analysis, p.2 Instructor: (Research Insight, cont d) Space delimited. Also, be sure to click on the Current Company radio so that only your company s data is saved into the txt file. Save the file using a filename, and in a location, that you will be familiar with. [I will call this file RsrchIn for further discussion purposes in this write-up.] At this point, you are finished with Research Insight. Then, launch Microsoft Excel. Once Excel is open, you ll want to open RsrchIn. Be sure that you allow Excel to search for Files of Type All, since remember that the above file has been saved not as an Excel file, but as a txt file. When you try to open RsrchIn, Excel will recognize that this file is not in standard Excel format. You ll have to follow the Text Import Wizard instructions. In Step 1 of 3, tell Excel that your data is of the Delimited type. Click Next. In Step 2, indicate that your data is Space delimited. You can skip Step 3 and click Finish. Then, you will have some simple data clean-up to perform within Excel. You will notice that some of the variable names (e.g., Total Current Assets), themselves, contain spaces within them. Thus, your numerical data do not yet line up so neatly across years. Thus, you ll need to insert some cells and/or perform multiple copy-and-pastes in order to get your data all neat and orderly. Once your data is clean, please proceed to the next step. II. Ratio Calculations 1. Insert a line in your Excel spreadsheet between the Dividend Payout and Op Inc / Sales lines. (Note: The Research Insight reports Dividend Payout as a percentage.) In the blank line you just created, enter a calculation of Cash Dividends divided by Net Income for each of the five years. How do the answers to your own calculations compare to the values for Dividend Payout reported by Research Insight? 2. Insert a line in your Excel spreadsheet between the Current Ratio and Receivables Turnover lines. In the blank line you just created, enter a calculation for Current Ratio as you ve been taught to calculate it, for each of the five years. How do the answers to your own calculations compare to the values for Current Ratio reported by Research Insight? 3. If you have five years of balance sheets and income statements, you can calculate the most recent four years of Accounts Receivable Turnover. Insert a line in your Excel spreadsheet between the Receivables Turnover and Avg Collection Period lines. In the blank line you just created, calculate Receivables Turnover as you ve been taught to calculate it, for each of the four years. How do the answers to your own calculations compare to the values for Receivables Turnover reported by Research Insight? 4-9. Similarly, do your own calculations for Avg Collection Period (assuming a 360-day year), Inventory Turnover, Days to Sell Inv, Net Profit Margin, Fixed Asset Turnover, and Total Asset Turnover. How do the answers to your own calculations compare to the values reported by Research Insight? III. Valuation 10. [THE BIG PART OF YOUR ASSIGNMENT] A. Now, insert a new worksheet into your Excel workbook. If you don t know how to do this, try Alt I W (or Insert Worksheet). Label this new worksheet Forecast if you don t know how to rename a worksheet, try Alt O H R (or Format Sheet Rename). From the original worksheet, copy-and-paste all of (and only) the following lines of data into this new Forecast worksheet: Cash, Receivables, Inventory, Total Current Assets, Total Assets, Total Current Liabilities, Total Liabilities, Total Stockholders Equity, Sales, Cost of Sales, EBIT, Pretax Income, Net Income (Loss), and Cash Dividends. (Note: Hereafter, in this write-up, I will refer to Cash Dividends as Dividend Expense.) B. Now, you ll need to insert some additional items to make your balance sheet balance. Most likely, your Total Current Assets will not equal Cash + Receivables + Inventory. Thus, insert a line called Other Current Assets above Total Current Assets and assign it values such that Total Current Assets do equal Cash + Receivables + Inventory + Other Current Assets. Between Total Current Assets and Total Assets, insert a line called Net Long-term Assets and do the same thing: insert values for Net Long-term Assets such that Total Current Assets + Net Long-term Assets = Total Assets. On the lia-

3 Fin352 Introduction to Research Insight: Valuation and Ratio Analysis, p.3 Instructor: (Valuation, cont d) bilities side, do the same thing for Long-term Liabilities. Then, just to be safe, perform a check to be sure that for each year, Total Assets = Total Li s + Total Total OE. (If this identity ends up somehow not to be true, please see me.) C. [Before beginning this step C, you might want to visit the NOTE at the very end of these instructions.] Within this same worksheet, preferably in a mirror-image set of cells immediately below the grid that reports all of the numerical values, construct year-by-year calculations for every item as a percentage of sales... except for long-term liabilities, total liabilities, total owner s equity (hereafter often referred to as Total OE), and dividend expense. Next, in a column immediately to the right of the most recent year s percentages-of-sales numbers, calculate each item s average value for percentage of sales... again, except for long-term liabilities, total liabilities, total owner s equity, and dividend expense. D. Somewhere at the very top of this worksheet, enter a cell where you will store a user-changeable input value for Growth Rate in Sales and attach a label next to your input cell, accordingly. Format the cell so that it shows up as a percentage to two decimal points. Use 2.00% as your value for the sales growth rate. Now, you are going to forecast five years of future financial statement data. E. (i) Using the sales-growth-rate input cell constructed in D, and Sales from your most recent historical year, forecast sales for the next five years into the future. (ii) Next, using historical average percent-of-sales numbers and the forecasted Sales numbers for the next five years (just constructed in (i)), forecast future values for the following line items: Cash, Receivables, Inventory, Other Current Assets, Total Current Assets, Net Long-term Assets, Total Current Liabilities, Sales, Cost of Sales, EBIT, Pretax Income, and Net Income (Loss). [CHECK: At this point, the only variables that you have not yet forecasted into the future are: Long-term Liabilities, Total Liabilities, Total Owner s Equity, and Dividend Expense.] F. Let s focus next on Dividend Expense, Additions to Retained Earnings, and Total OE. (i) Begin by using the historical Net Inc and Dividend Exp data to calculate annoual Payout Ratios, in turn calculating one historical average Payout Ratio. [NOTE: If any of your years have a severe outlier value compared to all other years payout ratios, please devise your equation to ignore the severe outliers and then just add a note at the bottom of your spreadsheet, indicating which payout ratio, or ratios, are excluded.] (ii) In turn, use that average Payout Ratio and the future Net Incomes to calculate the forecasted future Dividend Exp s. (iii) Once you have your future Dividend Expenses, calculate the future Additions to Ret Earnings. (iv) Now, we will assume that your company will not issue any new common stock nor will it buy back any existing common stock thus, the only way that Total OE will change in the future will be due to changes in Ret Earnings, which are caused by Additions to Retained Earnings. Thus, forecast your Total OE for the five periods into the future. G. Lastly, let s utilize Total Long-term Liabilities as a Plug Figure. In your future financial statements, for any given year, the balance sheet identity must continue to hold. Certainly, with all of the independent forecasting that you ve done... at this point your balance sheet will not balance in any of the five years. Thus, you need to create a formula inside the Total Long-term Liabilities cells: Total Assets Total Current Liabilities Total Total OE. Then, you need to create a formula for Total Liabilities = Total Current Liabilities + Total Long-term Liabilities. Your balance sheet should now balance! (NOTE: Please do not worry if this plug variable ends up being negative in any years. If we wanted to, we could build a more sophisticated spreadsheet that would start reducing Owner s Equity as soon as Total Long-term Liabilities dropped to zero. But, we won t do that in this assignment.) H. Okay, now let s use some dividend data to value your company s stock. Insert a new worksheet and label it Dividend Valuation. Insert a generic time series 1 through 5. After inserting a 1 into a particular cell, you might want highlight a 1x5 range of cells and then try Alt E I S (or Edit Fill Series). If you set the Step Value = 1, Excel will fill the series in for you. Next, underneath the 1, enter an equation that references your Dividend Expense from the first year in your Forecast worksheet. Copy-and-paste this equation beneath the 2 through the 5. I. You have forecasted five years of future dividend expenses. Somewhere within this worksheet, create a new input cell for Discount Rate. Attach a label next to this input cell and format the cell so that it shows up as a percentage to two decimal points. Enter 8.00% as the discount rate to use in this problem. Now, to the right of Div 5, calculate Div 6 as being

4 Fin352 Introduction to Research Insight: Valuation and Ratio Analysis, p.4 Instructor: (Valuation, cont d) equal to Div 5 multiplied by 1 plus the value in the cell that contains the Sales Growth Rate in the other worksheet. Now, in the cell immediately beneath Div 5, enter an equation that captures Div 6 / ( r g )... which you may recall will capture a fair price for the way-future dividend stream (Div s 6 and beyond) at t=5. (Note, the g in this equation should be the same g that you used to calculate Div 6 moments before.) J. Now, in whatever way you feel is most efficient, calculate today s price (i.e., calculate the sum of present value of the six cash flows that the shareholders would receive if they held the stock for five years and then sold it). You may notice that the numbers for which you are calculating PVs are based on aggregate dividend snumbers. Thus, as a final step, go back to your original worksheet and find the Common Shares O/S from the most recent historical year. Divide your just-calculated overall present value of dividend expenses and time-5 selling price by this outstanding number of shares, and you have now calculated a fair price per share of your company s stock today assuming an 8.00% required return and a 2.00% growth rate in dividends at t=6 and beyond. Please understand that, alternately, you could have divided each of the aggregate dividend expenses by this same outstanding number of shares before you performed the present-value calculations, which would serve to transform each aggregate dividend expense into a dividend per share. You ve learned in this class (and in Bus351) that a share of stock s stream of expected future dividends per share is what contributes to the price of that share of stock today. K. Return to Yahoo! Finance and look up your company s current stock price. How does today s price compare to the price you calculated? Please do not be alarmed if the true reported price is substantially different from the price you calculated in your analysis. Perhaps, the 2.00% is an inaccurate value for g ; remember that we used g = 2.00% in constructing our analysis. Next, playing around (using a trial-and-error method or Excel s built-in Goal Seek feature (try Alt T G (or Tools Goal Seek)) with the numbers in YOUR spreadsheet, what would g have to be in order for your price to be equal to the true current price for your stock? Report your answer in this Dividends worksheet as a percentage, rounded to four decimal places. Label this answer as the Growth Rate implied by Today s Price, if r = 8%. L. Now, return the value for g back to the original 2.00%. Perhaps our g is accurate but our chosen r of 8.00% is not. Again, playing around (using a trial-and-error method or Excel s built-in Goal Seek feature (try Alt T G (or Tools Goal Seek)) with the numbers in YOUR spreadsheet, what would the discount rate have to be in order for your price to be equal to the true current price for your stock? Again, report your answer in this Dividends worksheet as a percentage, rounded to four decimal places. Label this answer as the Discount Rate implied by Today s Price, if g = 2%. IV. Ratio Analysis 11. Insert a new worksheet called Ratio Analysis. Within this worksheet, copy-and-paste the values for the following ratios: Current Ratio, Accounts Receivable Turnover, Inventory Turnover, Net Profit Margin, and Total Asset Turnover. 12. Using what you learned in class (and in your earlier Accounting courses), for each of the five ratios, provide interpretations for how well your selected company is doing in terms of what the ratio is designed to measure and explain whether the firm is improving, staying steady, or getting worse again in terms of what the ratio is intended to measure. You may type your answers within the Excel worksheet. V. Submission and Grading After you re-read the syllabus for my group-project submission requirements, please submit to me electronically, via is: A single Excel workbook named as described in the next paragraph and containing the following items: (1) The initial worksheet containing your work for steps 1-9; be sure to include your answers to each of the nine inquiries somewhere within this worksheet (2) A second worksheet, titled Forecast, containing your work for step 10, parts A-G

5 Fin352 Introduction to Research Insight: Valuation and Ratio Analysis, p.5 Instructor: (Submission and Grading, cont d) (3) A third worksheet, titled Dividends, containing your work for step 10, parts H-K; be sure to include your answers to the inquiries in part K. (4) A fourth worksheet, titled Ratio Analysis, containing your work for steps 11 and 12. Please give your Excel file the following name: Fin352-Proj1-XxxxYyyyZzzz-Sp10, where Xxxx, Yyyy, and Zzzz represent the first four letters of each group members last names. If you are working in a group of two people, the Zzzz obviously does not apply to your filename. If a person s last name has less than 4 letters, please just use that person s full last name. For example, a group with Spears, Lohan, and Winehouse would submit a file named Fin352-Proj1-SpeaLohaWine-Sp10. Each worksheet should be formatted so that your numerical results all fit onto one printed page. You should also give a meaningful header to each printed page. If you don t know how to create headers for an Excel worksheet, try Alt V H (or View Header). Once within the Page Setup: Header and Footer tab, you can construct an appropriate header that will give your reader (me!) a better idea. Within each sheet s header, please use the header s LEFT section to include your group members last names, separated by commas, in tenpoint font. Use the Center and/or Right sections to include appropriate titles for the sheets. This project will constitute 6.5% of your overall course grade; you may recall from the syllabus that group projects constitute 13% of your overall course grade. On this project, you will be graded on a scale of 20 points. A maximum of 12.0 points will be assigned based on the correctness of your work. A maximum of 3.0 points will be assigned based on neatness, clarity, organization, and thoroughness. A maximum of 5.0 points will be assigned based on flexibility/adaptability of your spreadsheets please use formulas as much as possible, please efficiently utilize absolute and relative cell references (see NOTE below) when setting up your percent-of-sales formulas, and please hard-coding at all costs!! Try to make your spreadsheets as adaptable as possible. [NOTE: You might want to revisit an important Excel topic by typing in About Cell Ranges and References into the Excel help box in the top right corner of the Excel workbook. Then, within the About Cell Ranges and References tutorial box, click on The difference between relative and absolute references.] ACKNOWLEDGEMENT: The author of this project thanks Sarah Saxby, outstanding Finance graduate from 2009, for her diligence in helping me write, test, and refine this project.