FINANCIAL ANALYSIS PROJECT

BFIN 322

The financial analysis project that you and your team conduct represents a learning
experience. Each company is different and therefore each analysis will be somewhat
unique. It is difficult to generalize on what might be required beyond some basic,
minimum procedures and outputs. You and your team must decide what is important
and/or relevant to the specific situation of your company and industry. Do not ask your
instructor to make these decisions for you. In addition, do not ask to look at examples
from previous classes.

The goal of financial analysis is in part assessing the companys performance, strengths,
weaknesses, opportunities and threats (SWOT), but more so assessing the cause(s) of
changes in the financial position of the company over time. This will require qualitative
analysis and research. Put another way, the data collection and numerical analysis is but
one part of the total analysis. Ratio analysis tells very little without supporting material
on whether the changes are significant and also what the causes might have been. You
and your team need to determine the cause/effect relationships. This information is not
blatantly and conspicuously printed. It is up to you to research news clippings, magazine
articles, publications, etc. to find this information.

Part I

You and your team need to prepare a summary of the firms performance/condition and
competitors performance/condition in each of the five key performance areas: liquidity,
asset utilization (activity), debt utilization (leverage), profitability, and market valuation.
I expect you to have five (5) years of historical financial data as your basis for the
summaries. Do not ignore the current fiscal yearyou may have to rely on quarterly
data or partial data, but be up to date! Make sure to include in the appendix the five
years of historic financial data for both companies!

You decide which financial data or ratios might be useful/relevant. You have been
shown many ratios in the class, and it is up to you to determine which ones to use. For
example, dont waste time calculating accounts receivable turnover for McDonalds
Corp. or times interest earned for a company that has no debt.

For most companies, you would want to include (but not limit yourself to) the following:
Current Ratio
Quick Ratio
Debt Ratio
Times Interest Earned
Return on Equity
Return on Assets
LT Debt/Total Assets
Profit Margin (Gross, Operating, Net)
Receivables and Inventory Turnover
It is up to you to determine which other ratios are important. Let the competitor you are
analyzing provide a partial guide.

PLEASE NOTE: I do not grade by the pound. The length of Part I should be no longer
than five pages, double spaced, #12 font or larger. Do not include tables, graphs, etc. in
the body of the report. Make sure they are included in the appendices if you refer to them
in the body. If you choose to use spreadsheet output, thats fine. Do not include
materials that are not discussed in the body of the report.

I also expect to see the financial statements of both companies included in the
report. This is standard procedure when doing a financial analysis. Each summary
should identify positive and negative trends/changes and what you have determined to be
their cause. Focus on the interrelationships of the ratios studied.

Part II

This section is to prepare a forecast of the companys future. Specifically, what do you
think the companys earning power will be in the next five to 10 years? What social,
legal, technical, industrial, economic, environmental and international factors do you
consider to be the most important? I am not looking for black and white answersI
want to see your conclusions, logic, and supporting evidence, not other peoples research
or opinions, especially those opinions of brokerage firms! Periodical articles on your
company and the competition will be most useful.

PLEASE NOTE: Part II should be no longer than two pages, double spaced, #12 font or
larger.

Part III

The third section of the body of the report requires you to value the common stock of the
firm. The dividend growth model and P/E valuation models will be most useful. What is
the stock worth and how does it compare to historical and recent stock prices? Is the
stock value of the company you are analyzing comparative to the competitors stock
price, given you research? Assuming a well-diversified portfolio, would you purchase
this stock and at what price? Why? Why not?

PLEASE NOTE: Part III should be no longer than one page, double spaced, #12 font or
larger.

Part IV

The last section of the body of the report requires you to prepare a supplemental or
pro-forma financial analysis, addressing the following questions:

1. What single ratio, factor, or indicated problem is the most important to the
company? Why?
2. What possible change in the company would most affect the factor identified in
question 1?
3. Trace an improvement of 20% (prepare a pro-forma income statement) in the
factor identified in question 2 through to profitability. This question is designed
to make you think outside of the box. For instance, maybe you have determined
the company has too much accounts receivable. Think of everything that could
occur to the company should Accounts Receivable decrease by 20%. Will there
be more cash? Will sales be lost due to tighter credit approval? How will
profitability ultimately be affected?

I am looking for indepth thinking, rather than a black and white answerthere is no
black and white answer! Make sure an actual pro-forma income statement is
included, as well as your justification for the numbers you have included on the pro
forma statement.

PLEASE NOTE: Part IV should be no longer than two pages, double spaced, #12 font or
larger (not including the pro-forma statement.)

Additional Format Information

1. The report must have a cover sheet with the companys name on the top, followed
by your name and the names of your team members, and the date. A table of
contents is also desirable. Do not use plastic coversjust staple the report. I
will not be returning the report so make copies! How you arrange the financial
data, ratios, etc. in the appendix is your decision; however, I require a two page
maximum introduction to the company and its competitor to be the first item in
the appendix. Include a description of the basic products, services, markets, etc.

2. Do not submit a sloppy, poorly prepared report. Your grade will be affected.
Most students devise a divide and conquer strategy for the report. Although not
the best method, it can be successful if all parts are brought together beforehand
and edited. For example, I have seen Yellow Stone Park and Yellowstone Park
used in separate sections of the same report. Needless to say this one error
completely invalidated the rest of the report.


3. You must have a list of all references. Properly footnote/endnote all sources
of work which is not your own. A bibliography is also required.

4. Your report will primarily be graded on the basis of original thought, analysis,
logic, and support for your conclusions. Be as neutral and objective as possible.