semiconductor integrated circuit industry

ASSIGNMENT:  FIN.365, Group Project

PART 2

“Firm Analysis and Stock Valuation”
Complete PART 2 by December 4th, 5 P.M. Post materials as due on Blackboard.  Post only your final EXCEL file to Blackboard.  Only one group member need post, the assignment will be automatically included for all group members.  No late submissions accepted.
The first part of your project must have provided you with some useful information about basic characteristics of the industry of the company that you chose. The goal of the second part is to use this information and apply it in the context of the capital budgeting tools we have learned in class.

For this part of the project, assume that you have identified a good business opportunity and you want to find out if you invest in it or not. To make this decision, you need to make several assumptions and projections down the road and evaluate the viability of your investment. To this end, we provide you with a basic capital budgeting tool in MS Excel that requires specific inputs and calculations on your part.

Key information

You have to make assumptions (or predictions) for some key inputs below. You can use financial information from the company or its industry average you chose in Part A, or you can make up your own assumptions. You can also mix methods. Make sure you indicate in your response what assumptions you make and why (i.e. you should try to base your analysis on well-grounded assumptions).

What are your initial sales (year 1)?
What is the annual sales growth (from year 2-5)?
What are the operating expenses (as a % of sales) and what are fixed costs?
What is the upfront investment in net fixed assets (NFA) you need to make today (year 0)? Depreciate the value of these assets on a straight-line basis to zero over the five-year horizon.
What is the salvage value of these assets at the end? (has to be a positive number)
What is your upfront investment in net working capital (year 0)?
Starting in year 1, net working capital (the liquidity you need) will be based on how much are your sales. How much (as a % of sales) do you need to retain in NWC every year? (for example, you can assume that you need NWC equal to 10% of sales each year after year 0 and then figure out the change in NWC each year). The last year you assume that you recover all the dollar amount invested during this period in NWC.

Cost of Capital (WACC)

To find your weighted average cost of capital (WACC) you’ll need to find certain key inputs for your company.

How much of your total assets will be financed with debt and how much by equity (like your own capital)? Use this information to determine the equity weight (i.e., E/A) and debt weight (i.e., D/A). In other words, you should choose your “target” debt-equity mix. If you are not sure what this mix should be, find the (Total) Debt/Equity ratio or the “debt ratio” (Total) Debt/ Assets for the industry (both numbers should be based on market values). Otherwise let us know what you chose and why.
What is the cost of debt for your company? To find this you’ll need to do the following:Identify what’s the average cost of capital for your industry (see data provided in separate excel file titled “Cost of Debt for Firms (based on industry)”).
If your company is small and private, add an additional 5% to the average cost of that industry.

What is the cost of equity for your company? To find this you’ll need to do the following:Find the equity beta of the most similar company. The company you chose in part A is the best candidate as long as it is in the same industry as your startup. To find the beta, use online resources to get this information, but remember to cite your source.
Use the 3-month Treasury bill rate as your risk-free rate. Go to Saint Louis FRED for this information: https://fred.stlouisfed.org/

To find market return (Rm) use the average yearly return of the S&P 500 in the last 5 years. The information is available at Yahoo finance, so type S&P 500 in the search tab to find the index value on the S&P 500 click on the tab historical data and set your parameters (go choose the monthly frequency). You’ll need to use calculate monthly returns ((P1-P0)/P0 where P0 is the value of the index today and P1 is the value of the index next period), find the average return and then convert it to yearly (you found the monthly returns so you need to multiply the average by?).
Use the CAPM with the information in steps (a)-(c) to find the cost of equity for the company.

Use the WACC formula with the inputs above to calculate the discount rate.

Find Free Cash Flow (CFFA)

Use the inputs above in the excel spreadsheet format we provide to find CFFA for years 0-5 of your project.

Find NPV and IRR:

Calculate NPV and IRR for your project.

Scenario analysis:

Repeat the analysis above by changing the key inputs above. Report how the NPV and the IRR of your project change as you change these inputs. Create at least 5 different scenarios by altering most of your initial assumptions and report your NPV and IRR from the most optimistic to the least optimistic projections (e.g., alter values for sales, sales growth, operating expenses, etc.)  Provide your answers and the outcomes of your analysis in professional-looking format, suitable for presentation to potential investors.

*** IMPORTANT NOTE ***

Record all your answers in the Template excel file provided on Blackboard and no other file. A *single* Excel file should be your final deliverable.

Exemplary(90+ points)
Good(80-89 points)
Acceptable(70-79 points)
Unacceptable(below 70 points)

Organization (10%)
Students present information in logical, interesting sequence which is easy to follow.
Students present information in logical sequence which is generally easy to follow.
The reader has difficulty following the information provided.
The reader cannot understand the information provided because there is no sequence of information.

Analysis/ Interpretation of the results (25%)
Students demonstrate full knowledge, with explanations and elaborations of their answer.
Students are at ease with content but fail to fully elaborate their answers.
Students do not demonstrate full knowledge of some of the content and do not elaborate their answers.
Students do not demonstrate full knowledge of most of the content and do not elaborate their answers.

Accuracy of the results (50%)
Answers are generally accurate with few mistakes.
Most of the answers are accurate.

Graphs and tables (15%)
Graphs and tables are neat and clearly labeled. The data presented is accurate and can easily be read.
Graphs and tables are labeled. The data presented is accurate with few exceptions and can easily be read.
Some of the graphs and tables labeled. Most of the data presented is accurate.
Some graphs and tables are missing. The graphs and tables are not labeled. The data is inaccurate.

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