Draft 3 Requirements

Introductory Section:

Discuss the purpose of this section, the methods you will be employing, and the overall product (accomplishments) of this section

  1. Financial Statement Presentation Section (Re-Statements)
  • Provide a discussion of the restatement process (type to KAPS such as Goodwill, Operating Leases and Research & Development). Document that you hit restatement thresholds and the process by which you will be restating (adjusting) the past 5 years financial statements.
  • Discuss the assumptions made (do not adjust for income taxes)
  • Discuss how the restatements affect your view of the firm (profitability and leverage issues).
  • Prepare and present “As-Stated” and “Re-Stated” Income Statements and Balance Sheets in the body of your written report
  • Create an appendix with all of your supporting computations and schedules. This must include the trial balance worksheets that take you from an “as-state” basis to a “re-stated” basis.0
  1. Financial Ratio Analysis Section:
  • Discuss what you will be doing in this section and why it is important. Then do the following
  • Trend (Time Series) and Cross-Sectional (Industry) Analysis
  • Perform Ratio Analysis over past 5 years (actual and restated basis)
  • You must compute ratios for and analyze performance implications of:
  • The Basic Liquidity, Leverage, Capital Structure, Debt service Profitability, Credit Quality plus IGR & SGR ratio measures
  • Draw meaningful conclusions that can be related to your draft 1 of this project.
  • Prepare a Table and Graph (by year and by ratio grouping) that clearly present this material
  • Discuss and analyze your findings in terms of performance and how they will be used for your forecasts
  • Use (where possible) the ratio graphs as a basis for discussing industry trends, consistency and fragmentation.
  • Discuss and analyze your findings in terms of performance and how they will be used in your forecasting of future financial statements.
  • Be sure to provide overall conclusions regarding Liquidity, profitability, leverage and credit risk. Also, be sure to discuss how the restatements affect YOUR VIEW of the firm’s financial performance.
  1. Financial Statement Forecasting Methodology Section:
  1. Discuss the methodology and criteria used for selecting a forecasting model through March (or October) of this year (Quarterly and Monthly)
  2. Based upon the previous section's ratio (trend and benchmarks) what assumptions will you be using for the 10 years to be forecast ahead (justify and discuss what you will be using/doing)
  3. Discuss the limitations, strengths and weaknesses of your forecasts, methods and assumption

Prepare and present the following forecast financial statements

Required Financial Statements (Forecast and Actual) and Format:

  • Income Statement(In dollar amounts)
  • Balance Sheet(In dollar amounts)
  • Statement of Cash Flows(In dollar amounts)
  • Common Size Income Statement(Line Items Stated as Percentage of Sales)
  • Common Size Balance Sheet(Line items stated as Percent of assets, percent of current and/or LT Assets, Liabilities)
  • Common Size Cash Flow Statement(Line Items stated as CFFO section as percent of sales, operating income and net income)

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Acceptable format of Forecast Financial Statements (Both As-Stated and Restated Statements are Required)

  • Statement of cash flows must have CFFO, CAPEX and Dividends specifically shown
  • Bad things happen if balance sheets don’t balance and if earnings and/or dividends don’t flow through equity

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Cost of Capital Estimation Section:

1Estimate the Cost of Equity Using the Capital Asset Pricing Model

  1. This involves data collection
  2. Get historical monthly price and dividend data from Yahoo finance in order to compute Monthly Returns
  3. Get Risk-free rate data from the St. Louis Federal Reserve Web site:

b.Using regression analysis and the CAPM, estimate Ke

  • 1 point on the yield curve (20 year Treasury)
  • 5 return (holding period) horizons (72, 60, 48, 36 and 24 month Beta Estimates for each point on the yield curve
  • Total regressions = 5

Present Regression results, assess explanatory power of CAPM, significance of Beta

Analyze which return horizon provides the highest explanatory power (Beta stability or structural shock story)

Overall best estimate of Beta and resulting cost of equity.

  • Check the reasonableness of your directly estimated Cost of Equity by computing the implied cost of equity

2.Estimate the Weighted Average Cost of Debt Using Stated interest rates and St. Louis risky debt where appropriate

3Estimate both the Before Tax and After Tax Weighted Average Cost of Capital (WACC)

Using your Cost of Equity and Cost of Debt Estimates

  1. This entire section involves much more than merely presenting pages of numbers. Discuss your data and sources.

Discuss the methods that you used and assumptions that were required. Draw conclusions regarding the stability of Beta and the implied investment horizon. Assess the usefulness of Beta in estimating the cost of equity.

Be sure to provide an overall summary and conclusion as to what you have done

Don't forget to number your pages and to include any references used

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