CORPORATE FINANCE BUS3042

GUIDELINES FOR PREPARING THE REPORT FOR THE MODULE

CORPORATE FINANCE

Winter Semester 2024/2025

Contents

Introduction 3

Sources of the Information for the Assignment................................................................................ 4

Formatting........................................................................................................................................... 4

Content of the Report......................................................................................................................... 5

Brief Overview of the Company..................................................................................................... 5

Corporate Governance Analysis..................................................................................................... 5

Taxation........................................................................................................................................... 6

Communication with Stakeholders................................................................................................ 6

Basic Financial Analysis................................................................................................................... 7

Risk Profile of the Company............................................................................................................ 7

Cost of Capital................................................................................................................................. 8

Cost of Equity................................................................................................................................ 8

Cost of Debt.................................................................................................................................. 9

Financing........................................................................................................................................... 10

Grading Scheme................................................................................................................................ 11

Introduction

Each student will have to hand in a report on a self-chosen company. You will apply what you learn in class to this company. The work requirements are explained in the following chapters of this guidance. This report is due on January 6^th, 2025 (17:55) (please submit it via Moodle in the section Company Report Work Assignment). There is only one date for the report submission, regardless of which examination period you register for the exam. Please remember that the report is an examination module that is not transferable to the next semester. If you registered for the course and did not submit the report, it will be counted as a failed attempt even if you are not registered for the written exam (16(2) of the Exam Regulation). If you have not completed the report but do not want to fail the module, please submit the completed piece and it will be graded.

Please work in small groups (between 3 and 6 students who chose the companies in the same industry). It will help you save time on collecting information, for example, regarding comparable companies or discussing common problems and possible solutions. The list of the companies is available on Moodle, you must choose one company. This list does not contain loss-making, high levered and financial companies.

All companies on the list are publicly traded, which means that a lot of important information is available online. Of course, we perform analysis for all companies in practice, but for this course, you shall not make your life unnecessarily complicated. Therefore, please do not approach me the request like I want to write a report about DB or similar.

Meet regularly to discuss and compare your findings. Each student must deliver an individual report on her or his company (PDF file plus calculations in Excel). You must decide about the company before October 15^th. I advise you to follow the company in the news or Yahoo Finance. You can create a news alert about the chosen company in Yahoo Finance or Google. This will help you not to miss any important information about the company.

Some reports from previous years are available on Moodle. It does not mean that they are the best. The reports are posted there to give you an idea of what students from past semesters have delivered. The reports are not meant to be "master solutions. They are all good reports, but they do contain inaccuracies and sometimes mistakes. They are not meant to serve as templates. In each section of this guide, you will find boxes with exclamation marks that contain information about the most common mistakes. Please read that information carefully; it will help you avoid those mistakes.

Sources of the Information for the Assignment

The primary source of information is the companys annual report, including financial statements and non-financial reports. Some companies include financial reports in their annual reports. Please use only those financial reports that are confirmed by auditors for the financial analysis. If you take financial data from another source, you will lose points.

You should use Bloomberg, Yahoo Finance, and the companys website for corporate governance and capital costs.

For CSR analysis, you should use Bloomberg, Yahoo Finance, a companys website, and non-financial reports published by a company.

Formatting

Please follow the academic style. The easiest way to do this is to follow the requirements that you learn in the Academic Writing and Research Methods class. Please remember that I will not accept reports that contain plagiarism or patchwork. Your report must have references and a list of references. Each table or figure must be mentioned in the text, and it must have a number, name, and source of information. Each table and figure shall be explained.

You must submit two files for the grading: a PDF report and an Excel file with calculations. The report must summarise your findings and not be a collection of screenshots or tables from Excel. The Excel file must be a summary of all your calculations. If you perform calculations in several files, you must merge them before submission into one file. All numbers must be traceable, and all formulas must be visible. If I do not see a formula or do not see the source of the number, you will not get a credit. Please check the final version of your Excel file. There must be no links to the files on your laptop because I will not be able to see the content. Please ensure that your files (Excel and PDF) do not contain any broken links.

The most common question from the students is: how many pages in a PDF file do I expect to see? The answer is I do not have any expectations. To get a high grade, you must answer all the questions. The size of the answer depends on the company.

Content of the Report

Brief Overview of the Company

In this section, you shall give a brief overview of the companys business. There is no need to copy- paste the company's history from the website or annual report. You shall summarise in your own words the following information:

1. What kind of business/businesses do the company do?

1. What was the contribution of businesses during the last two reporting years? It could be presented as a percentage of revenue or operating profit.

1. At what markets does the company operate? What was the share of each market during the last two years? It could be presented as a percentage of revenue or operating profit that comes from each region.

Some companies provide very nice tables and figures, some companies do not, your task is to create nice visualization and analyse it.

Corporate Governance Analysis

To understand the relationship between managers and stockholders, try answering the questions below and write a short summary. You can find information to answer these questions in the annual reports, management reports, corporate governance reports, companies websites, Yahoo Finance, and Bloomberg terminal. If you do not understand the essence of the question, please read the relevant part of the lecture notes and/or book.

Questions:

1. Is this a company with a separation between management and ownership? If so, how responsive is management to stockholders?

1. If it is a family-run company, is the CEO part of the family? If not, what career path did the CEO take to get to the top? Did he or she come from within the organization or from outside?

1. Who is the CEO of the company? How long has he or she been CEO?

1. How much did the CEO make last year? What form did the compensation take? (Break down by salary, bonus, and option components).

1. How much stock and options in the company does the CEO own?

1. Who is on the board of directors of the company? How long have they served as directors? How many of the directors are insiders? (i.e., employees or managers of the company)

1. What committees are involved in the management of the company? Who are the members? How many of the directors are CEOs of other companies?

1. Are there differences in voting rights across shares? If so, do incumbent managers own a disproportionate share of the voting shares?

1. What are the other potential conflicts of interest that you see in this firm? Please check the lecture notes to answer this question.

1. What is the breakdown of stockholders in your firm - insiders, individuals, and institutional? Please do not use all these questions as headings for the subsections in the You should organize the subsections according to your findings.

Based on your findings, you must right the conclusions regarding the quality of the board and management overall and summarize the sources of the conflict of interests (please refer to the agency theory and information provided in the presentation, especially page 22 of the Corporate Governance presentation).

Taxation

In this section, write what type of corporate taxes the parent company pays. What is the tax rate, is it proportional or progressive? What is the marginal tax rate for the company? Has the company been involved in tax avoidance and/or aggressive tax planning scandals (please check the last ten years)? What were the consequences of the scandal?

Communication with Stakeholders

To understand the relationship between a company and stakeholders, try answering the questions below and write a short summary. You can find information to answer these questions in the annual reports, management reports, corporate governance reports, corporate social responsibilities reports, companies websites, Yahoo Finance, Bloomberg terminal, daily news, and social media. If you do not understand the essence of the question, please read the relevant part of the lecture notes and/or book.

Questions:

1. How does the firm interact with financial markets?

1. How do markets receive information about the firm?

1. How does a company communicate with the stakeholders in social media?

1. What kind of non-financial reports does a company prepare? Are they mandatory? What does the company communicate through those reports?

1. How does a company view its social obligations?

1. Does a company have a good or bad reputation as a corporate citizen? How did the company earn its reputation?

1. If the company has been a recent target of social criticism, how has it responded? Please analyse ESG indicators for the last five years.

In this section, you shall apply knowledge gained from the other courses. You shall show your understanding of the news about the company. You can do a word analysis of posts and comments on social media. Please consider in this section how many analysts follow the firm.

Basic Financial Analysis

In this section, you are expected to prepare a common-size balance sheet and an income statement for the last two business years. You shall use financial statements verified by auditors (Not Yahoo, Bloomberg, Statista etc data). In the report, you shall summarise your findings about significant changes in the items of the financial reports and possible reasons for the changes. Significant means more than 5% for the assets and liabilities and more than 1,5% for the expenses and revenues.

The next step is calculating all financial ratios mentioned in the lecture notes and analysing the findings. In the analysis, you shall compare your findings with peers (here, the groupwork comes in handy) and explain the significant changes in ratios. If you do not work in a small group, please use information about peers from Bloomberg.

For this section, you shall use information from audited financial statements (for calculations) and disclosure notes (for writing comments). I advise you to make a summary table for each group of ratios and write comments on each of the summary tables

Risk Profile of the Company

You are expected to answer the following questions:

1. What is your company's risk profile?

1. How much overall risk is there in this firm?

1. Where is this risk coming from (market, firm, industry, or currency)? Please check disclosure notes to the financial statements.

1. How is the risk profile changing?

Please analyse how ? changes throughout the research period (use Bloomberg). Please use information from the disclosure notes, there is a special section about risk.

How to perform analysis of ?:

Run a regression of returns on your firm's stock against returns on a market index, preferably using monthly data and five years of observations

or

If you have access to Bloomberg, go into the beta calculation page and print off the page (after setting return intervals to monthly and using five years of data)

• What is the intercept of regression? What does it tell you about the performance of this company's stock during the period of the regression?

• What is the slope of regression?

• What does it tell you about the risk of the stock?

• How precise is this estimate of risk? (Provide a range for the)
  
  
  • What portion of this firm's risk can be attributed to market factors? What part of firm-specific factors? Why is this important?

Cost of Capital

Please calculate the cost of equity, debt, and the weighted average cost of capital for two years. The calculations must be based on the market values of debt and equity. Please comment on the results.

Your calculations must be based on a companys financial reports, additional information from Bloomberg, Damodarans website, or any other reliable source.

Cost of Equity

The cost of equity must be calculated using CAPM. You must explain each component of the CAPM and your assumptions. You are required to perform extra calculations for beta:

Regression Beta:

You can use the beta results from the previous section if a company has not undergone significant changes in the last two years. If a company has undergone significant changes in the last two years, you need to make appropriate calculations for beta.

Comparing to Segment Betas (Bottom-up Betas)

• Break down your firm by business components and estimate a business beta for each component using a sample from five to ten companies (check the example provided in the lecture).

• Attach reasonable weights to each component and estimate an unlevered beta for the business (based on revenue, operation profit or any other reasonable weights).

• Using the companys current leverage, estimate a levered beta for each

Comparing to Industry Betas (Bottom-up Betas)

• Break down your firm by business components and find industrial beta in the Damodarans spreadsheet for each component (you must use unlevered beta corrected for cash).

• Attach reasonable weights to each component and estimate an unlevered beta for the business (based on revenue, operation profit or any other reasonable weights).

• Using the companys current leverage, estimate a levered beta for each

Choosing Between Betas

Which of the betas you have estimated for the firm (top-down or bottom-up) would you view as more reliable? Why?

Cost of Debt

Estimating Default Risk and Cost of Debt

If your company is rated:

• What is the most recent rating for the firm?

• What is the default spread and interest rate associated with this rating?

• If your company has bonds outstanding, estimate the yield to maturity on a long-term Why might this be different from the rate estimated in the last step?

• What is the company's marginal tax rate? If your company is not rated:

• Does it have any recent borrowings? If yes, what interest rate did the company pay on these borrowings?

• Can you estimate a synthetic rating? If yes, what interest rate would correspond to this rating? Even if your company is rated, you must calculate cost of debt using official and synthetic rating. Please do not forget to write all your assumptions in the report, and please do not forget to write interpretation of the results.

Financing

You are expected to answer the following questions in this section:

1. What are the different kinds of financing your company has used to raise funds? What are the dynamics of financial leverage?

1. In qualitative terms, how large are the advantages and disadvantages to this company from using debt?

1. Based on the cost of capital approach, what is the optimal debt ratio for yourfirm?

1. What type of financing should this firm use? Should it be short-term or long-term?What currency should it be in?

1. What special features should the financing have?

Your answer shall be based on the information from the annual report and previous analysis. Calculations of the optimal debt-equity mix shall be performed using the provided template. The file with optimal financing calculation must be merged with the main Excel file.

General rule 1: if I cannot verify a number, it is automatically wrong (take care of references)

General Rule 2: If calculations are based on numbers other than financial reports (if required), they will not be graded.

Grading Scheme

The grading scheme is presented in Table 1.

Distribution of points for the sections of the report

Table 1