Corporate Finance and Financial Statement Analysis 2: Using Financial Statement s for Equity Valuation and in Analysis of Credit Risk M odule weighting : 50% Submission deadline: 17 :00 ( PM ) Monday March 31 st , 2014 . Prepared by Dr Natalia Isachenkova (Room 311 in Kingston Business School ) This is an individual assessment contributing 50% of your marks for the module. You must submit an individual report . The deadline for submission is 17: 00 ( PM ) Monday March 31 st , 2014 . The assignment consists of two parts that carry equal marks. You MUST attempt both parts. P ART 1: U SING F INANCIAL S TATEMENTS F OR E QUITY V ALUATION (50 MARKS ) Part 1 of the assignment i s intended to help you develop practical skills of Fundamental Analysis. The assignment provides you with an opportunity to apply valuation technologies that are commonly used in practice and that incorporate financial statement information into equity val uation models. The focus is on ex – post or backward validation of alternative valuation approaches. Formal Requirements for Part 1 1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, at the end of 20 10 , using the actual – real – financial results reported by the firm in 20 1 1 and 201 2 . Ticker Firm Name CAG ConAgra Foods, Inc. MRK Merck & Co. Inc. UTX United Technologies Corp. WMT Wal – Mart Stores Inc. 2) Your valuation should utilise TWO valuation technologies one of which MUST be either Residual Earnings Analysis or Earnings Growth Analysis. 3) You should supply a commentary on the usefulness of the two techniques that you use, substantiating your conclusi ons with the results from the valuation. 4) You must prepare a concise written account for this part of the assignment and you are also required t o include in your written report for Coursework Assignment 2 , as !#$% ! % &’%  % % an appendix, the entire set of all the annual financial statements for the chosen firm for the period 20 10 – 201 2 . Please note that NO other appendices are allowed. 5) Your written account must contain clear references to the relevant portions of the financial statements for the firm being analysed, and the relevant portions should be highlighted. Ex – post validation means that you must explore the usefulness of the two valuation technologies that you employ by comparing their respective ex – post estimates of the IXQGDPHQWDOLQWULQVLFYDOXHRIWKHILUP¶VHTXLWZLWKWKHDFWXDOPDUNHWSULFHRIWKHHTXLWDW the end of 20 10 . That is, you need to look back and convert the financial statement numbers from 20 1 1 and 201 2 into an ex – post valuation of t KHILUP¶VHTXLWDWWKHHQGRI 10 and provide your conclusion on which of the two valuation techniques that you utilise is more powerful at predicting ex – post the value of the firm at the end of 20 10 . Please note that in this particular project there i s no need for you to attempt forecasting pro forma numbers, since you can treat the 20 1 1 and 201 2 DFWXDOQXPEHUVLQWKHILUP¶VILQDQFLDO statements as impeccable one – and two – year projections that can be used for valuing the ILUP¶VFRPPRQVWRFNDWWKHHQG of 20 10 . Attention should be given to the valuation technologies that attempt to calculate the fundamental (intrinsic) value. The structure of the written account for Part 1 of the assignment will provide an executive summary, a brief retrospective EDFNJURXQGRQWKHILUP¶VEXVLQHVVPRGHOLQGXVWUHFRQRPLF environment, and then will concisely outline an appropriate specification of payoffs based on an analysis of the available 20 11 and 201 2 financial statements, an ex – post valuation and FRPSDULVRQRIWKHREWDLQHGHVWLPDWHVRIWKHHTXLW¶VIXQGDPHQWDOYDOXHZLWKWKHPDUNHWSULFH at the end of 20 10 , concluding with a discussion of the degree of usefulness of the two valuation methods that you utilise from the perspective of a n academic researcher. Avoid applying equity valuation techniques mechanically, as the examiner will need to see that you have the necessary understanding of the costs and benefits of alternative technologies and are using the appropriate tools. You mu VWEULHIOVWDWHWKHYDOXDWLRQDVVXPSWLRQVWKDWRXXVHLQYDOXLQJWKHILUP¶VHTXLWDQG critically interpret the valuation results, using evidence in the argument. You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform y our conclusions. You may round all computations to the nearest integer (or nearest percentage). P ART 2: U SING F INANCIAL S TATEMENTS FOR C REDIT R ISK A NALYSIS (50 MARKS ) Part 2 of the assignment is intended to help you develop practical skills of credi t analysis. The assignment provides you with an opportunity to evaluate the financial status of a potential corporate borrower, using ratio analysis of the financial statements. Formal Requirements for Part 2 1) You are required to carry out an analysis of financial statement ratios that indicate the FUHGLWZRUWKLQHVVRIDFRUSRUDWHERUURZHUWKDWLVWKHFRUSRUDWHERUURZHU¶VDELOLWWRSD