Coursework
1) Prepare a fundamental analysis report and a firm and equity valuation of British petroleum plc using the free cash flow approach of Daves et al spreadsheet.
On the basis of the share price you estimate for the company, what recommendation would you make to investors who currently own shares in the company or are thinking of buying shares in the company?
b) Critically analyze and evaluate the various models of firm and equity valuation (Empirical analyze and evaluate)
Guideline to Coursework
1.a Appendix 12 of Daves et al. provides the framework for the fundamental analysis and valuation of your chosen FTSE100 Company. Some of the sources of information have been provided in the module handbook.
The framework requires
‘Developing an understanding of the national and global economic environment relevant to the company being valued’ Industry overview, Business Strategy.
Researching the industry and any potential developments and its implications for the competitive position of the firm within the industry (SWOT, PESTLE, POSTER’S FIVE FORCES)
Analyzing the company covering strategy, core competences, governance
Evaluating the financial performance of the company including the calculation of key ratios that could be used for valuation (Daves et al chapters 9 and 10)
Using historical information for the generation of condensed statements.
Forecasting of income statement, balance sheet and statement of retained earnings.
Form the forecasted income statement and balance sheet , forecast NOPLAT, invested capital and tax, free cash flow, economic profit (See tables 14.6 to 14.13 in Copeland Weston and Shastri for examples of relevant tables required in your submission).
In projecting various statements see chapter 12 of Daves et al including its summary on PPT slides on K or U drive.
Estimate the cost of capital (See chapter 11 of Daves et al)
Value the cash flows (See table 14.15 in Copeland Weston and Shastri and Chapter 13 of Daves et al).
Note that you do not have to project for 20 years as done by Daves et al. Five years projection would be adequate in most cases. You should include a terminal value calculation in your valuation.
Please attach a disc containing your spreadsheet outputs to the assignment you submit.
1b The economic and accounting models of corporate valuation should be analyzed and evaluated. Identify and evaluate all theoretical and practical models. The evaluation should include the use of empirical evidence
See folder entitled Academic Papers in the main folder Daves et al &
Valuation on the K drive.
Some of the key papers and journals to used for 1b question
Abarbanell J & B Bushee, 1997, Fundamental analysis, future earnings and stock prices, Journal of Accounting Research 35, 1-25
Bauman M 1996, A review of fundamental analysis research in accounting, Journal of Accounting Literature, 15, 1-33
Bernard V L 1995, The Feltham- Ohlson framework: implications for empiricists, Contemporary Accounting Rersearch 11, 733-747
Dechow P, A Hutton, R Sloan,1999, An empirical assessment of the residual income valuation model, Journal of Accounting and Economics 26, 1-34
Feltham G A and Ohlson J A, 1995, Valuation and clean surplus accounting for operating and financing activities. Contemporary Accounting Research. 11, 689-731
Miller M. H., and Modigliani F., (1961) Dividend policy and the valuation of shares. Journal of
Business34,411-433
Myers J, 1999, Implementing residual income valuation with linear information dynamics, The Accounting Review, 74, 1-28
Ohlson J A ,1995, Earnings, book values and dividends in equity valuation, contemporary Accounting Research, 11 no 2.
Peasnell K, (1982) Some formal connections between economic values and yields in accounting numbers. Journal of Business Finance and Accounting. 9, 361-381
Penman S H and T Sougiannis, 1988, A comparison of dividend, cash flow and earnings approaches to equity valuation, Contemporary Accounting Research, 15, 343-383
Richardson G Tinaiker S 2004, Accounting based valuation models: what have we learned? Accounting and Finance, 44, 223-255.
Stober T L, 1999, Empirical implications of the Ohlson (1995) and Feltham and Ohlson (1995, 1996) valuation models, managerial Finance vol 25
Credit:ivythesis.typepad.com
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