Company’s Valuation Major Assignment

Objectives

This project provides an opportunity to get hands-on experience applying corporate finance theory and models to real firms. You will get a chance to:

Evaluate the risk profile of a firm and examine the sources of risk.
Analyze its capital structure and decide whether the firm is under or over-leveraged.
Examine its dividend policy and decide whether more or less should be paid in dividends.

Suggested Steps for the Project

Step 1: Choosing a Company

When picking a company, keep the following in mind:

Pick a company with at least one year of financial reports. If the company has been listed for less than a year, ensure at least one year of data is available.
The company can be listed anywhere globally.
Ensure your group selects companies from the same sector or industry (e.g., trading/services, plantation, construction, etc.).
Avoid companies with consistent losses (PN17 companies) and financial service firms like banks or unit trust fund companies.
Choose a company with some differentiating features; avoid picking companies that are too similar in nature.

Step 2: Getting Data on the Company

Many of the required data, such as share prices and key ratios, can be found in Datastream (available in Sultanah Bahiyah library) or Thomson Eikon Reuters (available in the Trading room, COLGIS).

Annual reports can be downloaded from the Bursa Malaysia website.

Manager’s Objectives

Assessing a Board

After selecting a company, assess the board of directors, evaluating their independence and competence. Here are some useful resources:

Corporate Governance Network
Bursa Malaysia Corporate Governance
European Corporate Governance Institute

Conflicts of Interest

Look for potential conflicts of interest between inside and outside stockholders. Large stockholders, such as the founder/CEO, family holdings, or government entities, may have interests that differ from those of smaller stockholders.

Finding Your Firm’s Marginal Investor

To identify the marginal investor, examine the largest 30 investors in your firm. The marginal investor is one who holds a large stake and actively trades. In some cases, another company may hold a significant portion of the firm, which can be considered a marginal investor.

Capital Structure Choices

Analyze the firm’s financial mix and assess whether it is under or over-leveraged. Consider the following:

Benefits of Debt

What is the firm’s marginal tax rate and how does it compare to others in the industry?
Does the company have high free cash flows (e.g., EBITDA/Firm Value)?
Has the firm undertaken profitable investment projects? How responsive are managers to stockholder interests?

Costs of Debt

How stable are the firm’s cash flows? Is there variability in operating income?
What are the costs of monitoring stockholders and bond covenants?
How well can the firm forecast its future investment opportunities?

Optimal Capital Structure

Evaluate the firm’s cost of capital and determine the debt ratio that minimizes costs and maximizes firm value. Consider the following:

What is the firm’s current cost of capital?
At what debt ratio is the cost of capital minimized?
What will happen to firm value if the company moves to its optimal debt ratio?

Dividend Policy

Analyze the firm’s dividend policy to decide whether it should return more or less to stockholders. Consider the following questions:

Historical Dividend Policy

How much has the company paid in dividends in recent years?
How much stock has the company repurchased over the past few years?

Firm Characteristics

How easily can the firm convey information to financial markets?
What is the average stockholder’s preference—dividends or stock buybacks?
How well can the firm forecast future financing needs?

A Framework for Analyzing Dividends

Assess the firm’s cash flows and decide if it should adjust its dividend policy:

What were the free cash flows to equity over the past few years?
How much cash was returned to stockholders in the last few years?

Assessment Criteria

Learning Outcomes (LO)
Pass
Merit
Distinction

LO1: Record business transactions using double-entry book-keeping and extract a trial balance.
P1: Apply the double-entry system and record sales and purchases transactions in a general ledger.
M1: Analyse transactions and show progression from one trial balance to the next.
D1: Apply trial balance figures to show which financial statement they end up in.

LO2: Prepare final accounts for sole traders, partnerships, and limited companies.
P3: Prepare final accounts from given trial balances.
M2: Make adjustments like accruals and depreciation before preparing final accounts.
D2: Compare essential features of financial statements to analyse differences.

LO3: Perform bank reconciliations to ensure company and bank records are correct.
P5: Apply bank reconciliation process.
M3: Use deposit in transit and outstanding checks in reconciliation.
D3: Prepare accurate bank reconciliations using appropriate tools.

LO4: Reconcile control accounts and shift recorded transactions from suspense accounts.
P6: Explain the process to reconcile control accounts and clear suspense accounts.
M4: Demonstrate understanding of account types and their reconciliation.
D4: Produce reconciled accounts using appropriate methods.

Submission Guidelines

Submit your assignment through Moodle. Remember to include:

Completed assignment front sheet
Final version of your assignment
Appropriate Harvard-style referencing

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