Download - Mark E. Moore

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
A. 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
B. 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:
1. The Basic Liquidity, Leverage, Capital Structure, Debt service
Profitability, Credit Quality plus IGR & SGR ratio measures
2. Draw meaningful conclusions that can be related to your draft 1 of this
project.
3. Prepare a Table and Graph (by year and by ratio grouping) that clearly
present this material
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4. Discuss and analyze your findings in terms of performance and how
they will be used for your forecasts
5. Use (where possible) the ratio graphs as a basis for discussing industry
trends, consistency and fragmentation.
6. Discuss and analyze your findings in terms of performance and how
they will be used in your forecasting of future financial statements.
7. 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.
C. 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)
Actual Financial Statements
2011 2012 2013 2014 2015
Forecast Financial Statements
2016 2017 2018 2019 2020
2021
2022
2023
2024
2025
Items
 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:
1
Estimate the Cost of Equity Using the Capital Asset Pricing Model
b.
a.
This involves data collection
b.
Get historical monthly price and dividend data from Yahoo finance in order to
compute Monthly Returns
c.
Get Risk-free rate data from the St. Louis Federal Reserve Web site:
http://research.stlouisfed.org/fred2/categories/22
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
3
Estimate both the Before Tax and After Tax Weighted Average Cost of Capital (WACC)
Using your Cost of Equity and Cost of Debt Estimates
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4. 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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