Mini Project 4 In this project, you are supposed to be the financial analyst that is covering the same firm studied in MP1 and MP2. You have to apply the k

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Mini Project 4

In this project, you are supposed to be the financial analyst that is covering the same firm studied in MP1 and MP2. You have to apply the knowledge obtained in this class to develop possible future scenarios in order to forecast financial statements 4 years into the future, calculate the free cash flows and then calculate the fundamental value of the firm. Once you compare the expected price from the scenarios against current stock price, you will develop a recommendation whether to BUY, HOLD or SELL the share of that company.

University of Houston-Victoria
FINC 6352- Financial Management
Dr. Xavier Garza Gomez
Mini Project 4

Financial statement forecast and Corporate Valuation

1. Purpose of the project:
In this project, you are supposed to be the financial analyst that is covering the same firm studied
in MP1 and MP2. You have to apply the knowledge obtained in this class to develop possible
future scenarios in order to forecast financial statements 4 years into the future, calculate the free
cash flows and then calculate the fundamental value of the firm. Once you compare the expected
price from the scenarios against current stock price, you will develop a recommendation whether
to BUY, HOLD or SELL the share of that company.

2. Outline for the project:
(1) Estimate Operating ratios

Using the financial statements obtained in MP1, students will calculate operating ratios:
(cost/sales, Dep/PPE, cash/sales, AR/sales, Inv/sales, PPE/sales, AP/sales, accruals/sales,
tax rate) for the past 15 years

(2) Estimate short term and long-term sales growth rates
Students will use the growth profile reported in MP1 to develop scenarios of possible
sales growth for the next 2 years. For years 3 and 4, students will analyze long-term
growth prospects for the company based on the growth of the economy. (real GDP
forecasts, inflation) or other macroeconomic variables (wages growth, population growth,
etc.) while considering the countries/regions where the company operates.

(3) Develop scenarios
Based on the forecast for sales growth and the ranges for operating variables, students
will develop two initial scenarios.

1) “Stay the same” scenario. This scenario just uses the most recent values of the
operating ratios and the most recent sales growth rate for years 1 and 2.

2) “Average value” scenario. Using 15 years of data, this scenario uses the mean of
all operating ratios and the average of sales growth to forecast values for years 1
and 2.

Alexis Giusti

FINC 6352 – Financial Management MP4 Dr. Xavier Garza Gómez

At this stage of the process, students will decide which of the two initial scenarios
(current or average) will be used as base for the other scenarios.
3) Minor improvement scenario. Operating ratios and growth rates improve for the

company. Improvement for operating variables doesn’t exceed 25% of the
variable’s 15-yr range or 1% for sales growth rates. Improvement is applied to the
“base” scenario.

4) Mild recession. Operating ratios and growth rates deteriorate. Change for
operating variables doesn’t exceed 25% of the variable’s 15-yr range or 1% for
growth rates.

5) Major improvement scenario. Operating ratios and growth rates improve for the
company. Improvement for operating variables may exceed 25% of the variable’s
15-yr range or 1% in growth rates.

6) Continued deterioration. Operating ratios and growth rates deteriorate. Change for
operating variables may exceed 25% of the variable’s 15-yr range or 1% in
growth rates.

For simplicity, the scenarios will only modify Year 1 operating ratios and assume they
stay constant forever. That is, no improvement/deterioration in operations occur after
year 1.
Once the scenarios are defined, probability must be assigned to each of them.

(4) Calculate FCF
Calculate 4 years of FCF for the firm using the template. Make sure the Year 4 growth rate
for FCF matches the long-term growth rate in sales.

(5) Valuation
Using the WACC and tax rate calculated in MP2, students will calculate the value of
operations and the stock price of the company for each of the scenarios

(6) Sensitivity analysis and recommendation
Students will analyze the sensitivity of the price estimate to the growth scenarios and in
relation to the main input variables. Students will develop a BUY/HOLD/SELL
recommendation based on the expected price and the price range (standard deviation)
obtained from the scenarios.

FINC 6352 – Financial Management MP4 Dr. Xavier Garza Gómez

3. Other information regarding the project:
(1) Information obtained in previous MPs is needed for the successful completion of this mini

project. Comments/feedback received about WACC calculation must be incorporated into
the Excel file before final submission.

(2) The reports will be submitted individually.

This mini project is worth 60 points (out of 1000).

  • 1. Purpose of the project:
  • 2. Outline for the project:

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