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Security Analysis and Valuation

Assignment on Valuation of Company’s Stock
Instructor: Syed Babar Ali
e-mail: babar.ali@nu.edu.pk

The hallmark of this course is valuation of financial instruments. Much of the curriculum addresses it. This project is based on the
application of the working knowledge of valuation models and the financial environment in which common stocks exist. A
research analyst needs to know how to analyze the economy, industry and the company a financial instrument relates to and should
be able to select the right model to value it. The project has been divided into five parts with individual deadlines such as the
following:

Part Name of The Part Deadline

One Introduction January 28, 2010

Two Economic Analysis February 16, 2010
Three Industry Analysis March 5, 2010
Four Company Analysis March 22, 2010
Five Final Report April 10, 2010

Students need to understand these submission deadlines have nothing to do with how they schedule the activitivites at their own
end. They can always start preparing themselves for the third or fourth submission even though the second deadline has not yet
come. They need to keep in focus the broader picture of the report rather than only the deadline dates.

You are also instructed to append with the final report at least 20 news clippings, interviews or articles about the company from
authentic sources. Students need to interview management cadre employees of the company and the abstract of those interviews
are to be appended as well. The following table is to be followed as a benchmark to the quantity, and the level of employees to be
interviewed. :

Functional Areas No of Interviews

Departmental Managers Top Level Managers
Marketing 3 1
Finance 2 1
Operations 3 1
Human Resources 2 1
Information Technology 1
Board 2

General Instructions
The project will be graded out of 12 marks. Submission of the report in accordance with the schedule is a strict requirement so late
submissions under all circumstances will be penalized as half a mark per day. A detailed presentation of the final report is also a
requirement of this project whereby you need to be prepared to answer questions specific to any part of your report. All
submissions would be laser printed on A-4 size paper. Do not file the report. Simply staple the left hand corner of the report with a
heavy duty machine, and punch it so that I can file your reports in one folder. If you desire to improve on one or more of the
already submitted part you can do it when you submit the final report. To obtain appointments with the senior employees might not
be without hassles so do not delay this activity at all and start working on it from today. A serious penalty could be enforced if
someone else’s work is copied or false information is incorporated in the report. Send a soft copy of your final submission but
please do not send soft copies of the individual parts. Submissions are to take place in the class and if you miss the class it is your
responsibility to submit the part or the final report in person to me. If the class on which submission is due does not meet for any
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reasons the submission would take place in the next class. It is your responsibility to meet as many requirements as possible as
are suggested in this write-up the instructor would both subjectively and objectively evaluate the quality of your work.

The description of the individual parts of the report is as follows:

Part One Introduction

• A brief history of the company.
• A brief operating history of the business.
• Description of the location of the facilities of the business.
• Description of the product mix.
• Description of the group and the board.
• Brief operating performance of the company during the last five years.
• A brief description of the major competitors of the company.
• A brief description of the markets the company serves.

Part Two Economic Analysis

• Describe the economy in terms of the key indicators such as GDP, Employment Rate, Inflation Rate, Fiscal policy
components, Money Supply, Foreign Direct Investment and Portfolio Management.
• Suggest the direction of the economy over a period of five years by predict the value of those indicators. Predict the values
and suggest the direction in the light of opinions of the State Bank, Federal Finance Ministry, International Intelligence
Bureaus, Local and International credit rating agencies and any other authentic source.

Part Three Industry Analysis

Use the Porter’s five factors model to define the structure of your industry. Use the industry Analysis Model provided and describe
the industry in terms of products, equipments, raw materials, operating environment, human resources, competition and regulatory
environment specific to it.

Products
Demand and supply of the products
Pricing of the product
Life cycle of the product
Substitutes

Equipment
Nature of the type of equipment used.
Sources of the equipment.
Availability of Technology.

Raw Material
Type of Raw Materials.
Cost of Raw materials
Demand and Supply of Raw Materials
Sources of raw materials.
Taxes and other Regulations
Substitutes

Human Resources
The type of Skilled labor required.
Supply of skilled workers.
Union Agreement
Cost of labor including overtime and benefits.
Regulations specific to workers.
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Regulatory Environment
Especial type of regulations related to the industry such as pollution, negative advertisement, tax holidays, quotas and others.
Industry Analysis Model

Industry Classification
Life Cycle Position
Business Cycle

External Factors
Technology
Government
Social
Demographic
Foreign

Demand Analysis
End Users
Real and Nominal Growth
Trends and Cyclical Variation around Trends

Supply Analysis
Degree of Concentration
Ease of Entry
Industry Capacity

Profitability
Supply/Demand Analysis
Cost Factors
Pricing

International Competition and Markets

Part Four Company Analysis

• Based on the clippings and interviews of the management perform a SWOT analysis of the company.
• Use other tools to enable analysis of the company operations and strategic direction.
• Translate the SWOT and the result of other tools to project the cash flows of the company over a period of five years.
• Show all calculations in support of the components of projected cash flow statement.
• Indicate the basis of estimation of different components of the projected cash flow statement.
• Give reasons for adopting such basis.

Part Five Final Report

• Determine the beta and required rate of return of the company’s stock.
• Use free cash flow model (Firm or the Equity)or residual income model to find the fair value of the company’s stock.
• Recommend whether to hold or buy the company’s stock.
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• Submit the last part as a complete package of all the preceding parts and the final part.

End of Instructions