Research Project

OBJECTIVE

The specific objective of this graded written research exercise is to prepare an "executive level financial report" to the Chief Financial Officer (CFO) of a mythical company in which you are employed as a financial analyst. This report will pertain to the financial evaluation of a real, publicly-traded, company. It will require independent research (web-based or library), careful financial analysis, and the proper application of key financial theories and formulas.

SITUATION

You are a financial analyst with the mythical RenDi corporation. RenDi is a manufacturer of renewable synthetic diesel fuel. One of the emerging markets for this product is in ground support equipment (GSE) for the airline industry.A competitive technical and economic product evaluation has determined that Southwest Airlines (LUV), (a real publicly-traded company) is the best potential partner. The partnership entailsan agreement that will allow Southwest to purchase renewable synthetic diesel at fixed rates for 5 years while RenDi studies the environmental costs/benefits of converting GSE to renewable fuel. RenDi would absorb all conversion costs for the GSE fleet of Southwest Airlines.

Based upon someseriousconcerns about the stability of companies in the airline industry,the CEO has asked your CFO to conduct a financial analysis of Southwest Airlines to determine if it is prudent to commit to a 5 year contract with this company. The cost of converting over to renewable synthetic diesel fuel is significant and any interruption in the agreement duringthe next few years would adversly affect RenDi's performance and profit. Specifically, the question is: will Southwest Airlines be financiallyviable over hte next two to three years?

YOUR SPECIFIC ASSIGNMENT

Your specific assignment is to research, analyze, and prepare a report for the CFO on the actual financial performance ofSouthwest Airlines for the years 2009, 2010, and 2011. In addition to reviewing the traditional financial performance indicators, you are also to reviewSouthwest's past and current stock performance for the same respective periods. Your report is to consist of three parts:

(1) An evaluation ofSouthwest Airline'sfinancial performance for the period 2009, 2010, & 2011.

(2) An evaluation ofSouthwest Airline'sstock performance for the period 2009, 2010, & 2011

(3) Finally, a specific recommendation, with supporting rationale, as to whether or not Southwest's recent trend in financial and stock performance is of sufficient financial strength to warrant entering into a long-term commitment.

To assist you in your task, the CFO has provided the following general guidance. Since it is recognized that theairline industry is undergoing a major contraction, it is very important to comparatively evaluateSouthwest's financial and stock performance trends against its Industry.

You are to consider all necessary and relevant financial performance and stock information, trends, and projections in supporting your recommendation. These factors include, but are not necessarily limited to financial statement analysis, financial ratio trends and industry comparatives, capital spending, stock growth, Beta values, credit rating service valuations, bond rating valuations, and management and investment reports - when these documents are available.

REPORT REQUIREMENTS

Your final report is to be an executive-level financial report, directed to the CFO. This report must beno longer thansix (6) or seven (7) single-spaced typewritten pages. Include suitable comparative, quantitative and qualitative analyses and conclude with a specific and supported recommendation on the projected financial viability ofSouthwest Airlinesfor the next several years.

Essential research data, financial calculations and other documentation as necessary to support your recommendation should be referred to in summary form in your report and attached in detail as enclosures. All major sources should be referenced. There is no set limit to the size of the enclosures, but it is recommended that only essential enclosures be attached. You should use references and bibliography to identify any remaining supporting documents you wish to include.

Your report is to be submitted electronically and limited to a maximum of two files, one for the executive report and one for attachments. One file is acceptable with attachments included as separate pages at the end of your report. Only Word, Plain Text, Rich Text, and Excel file formats are acceptable.

This report is an individual effort and must be researched, developed and prepared by you. However, to maximize the learning benefit, you are encouraged to share freely or exchange sources of information (web sites), general approaches, alternatives, and discussion on general financial theory and applicability as related to the report.

All questions related to this assignment, should be referred to the mythical CFO (i.e., your instructor).

Other Information

For the paper,I wanted to give you some insight as to what I am looking for and how it is graded.

The requirements are for you to submit and executive level financial paper to your boss, analyzing Southwest Airlines as a potential partner. Your report has 3 parts- analysis of financial performance, analysis of the stock performance, and a recommendation to your boss based upon your findings.

Basic grading is as follows: Each part is worth 30 points, and the overall presentation is worth 10 points, for a total of 100 points.

To earn full points in the first two parts, the analysis sections, you need to go beyond just reciting the ratio or statistics. Remember, I said good analysis is like being a detective. Dig in and find out why the ratio appears to be too high or too low, as compared to the industry. Is this good, is it bad, and what does it mean for the future? We are considering making them a partner so we want to know if they will be financial solid over the next several years.

The recommendation needs to be your opinion backed by your research. There is no right or wrong answer. Tell your boss what you think and why. I have seen papers submitted with a recommendation saying more research will need to be done. Well, that is what your boss is asking for you to do. This is also not a book report on SWA. Take the information you find, analyze it, and tell me what you think.

The overall presentation should follow the technical guidance found in the syllabus and be professional looking and well organized. It is up to you if you want to include charts or graphs within the paper or merely reference them and provide an attachment with the charts, etc. Major sources should be referenced as well.

I found some more websites that may be useful in your research. You can find them in the SWA Conference.

Allison’s notes – some of these ratios could be part of the report

Current ratio
Quick ratio
Inventory turnover
Average collection period
Debt ratio
Times interest earned ratio
Gross profit margin
Net profit margin
Return on total assets
Return on common equity
Market/book ratio
Book Value
End of year stock price