GUIDELINES FOR PREPARING THE REPORT

“INTERNATIONAL FINANCIAL MANAGEMENT”

Summer Semester 2023

 GENERAL INFORMATION
Each student will have to hand in a report on a self-chosen company. Please remember that you will
work with the company’s data for two semesters (there is the other course in the winter semester).
Therefore, it is better to choose a company which is really interesting for you.

You will apply what you learn in class to this company. The work requirements are all pages marked
with “Company Analysis Work Requirements” in the lecture notes and this guidance. I expect you
to summarize your findings in a report. This report is due on 12 July 2023 (23:59) (please e-mail
[email protected]). There is the only 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.

Please work in small groups (between 3 and 6 students). It will help you save time on collecting
information, for example, regarding comparable companies, or discuss common problems and
possible solutions. Choose an industry (social media, beverages, apparel, luxury goods, construction,
software, whatever you like and are interested in, you are free). Within this industry, each student
chooses a company. It should be a multinational, i.e. globally active company, and it should be
quoted on a stock exchange. Avoid loss-making companies, companies from the financial services
sector, and companies with large capital arms (GE, car manufacturers). The company must be
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.

Meet regularly and discuss and compare your findings. Each student must deliver an individual
report on her or his company. Please send me an email with your working groups and companies
until 24 April.

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 about what students of past semesters have
delivered. And, of course, to have me answer fewer questions on how the format of a report should
be, etc. 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.
 CONTAIN OF THE REPORT

1. Who is on board?
• Look at the board of directors for your firm.
− How many directors are inside directors (Firm employees, ex-managers)?
− Is there any information on how independent the directors in the firm are from the managers?

• Are there any external measures of the quality of corporate governance of your firm?
Yahoo! Finance now reports on a corporate governance score for firms, ranking them against the
rest of the market and their sectors.
• Is there tangible evidence that your board acts independently of management?
Check news stories to see if there are actions that the CEO has wanted to take that the board has
stopped him or her from taking or at least slowed him or her down.
2. Who Owns/Runs Your Firm?
• Look at Bloomberg printout HDS for your firm

• Who are the top stockholders in your firm?

• What are the potential conflicts of interest that you see emerging from this stockholding
structure?

3. Who Is the Marginal Investor in Your Firm?

• You can get information on insider and institutional holdings in your firm from:
− http://finance.yahoo.com/
− Enter your company’s symbol and choose the profile and holders.

• Looking at the breakdown of stockholders in your firm, consider whether the marginal
investor is

− An institutional investor
− An individual investor
− An insider
4. Estimating a Market Risk Premium

Get the geographical breakdown of revenues in the most recent year for your company. Based upon
this revenue breakdown and the most recent country risk premiums, estimate the equity risk
premium that you would use for your company.

This computation is based entirely on revenues. What concerns would you have with your company
about whether your estimate is too high or too low?

5. Analyzing the Risk Regression

• Using your Bloomberg risk and return printout, answer the following questions:
− How well or badly did your stock do, relative to the market, during the period of the
regression?
− Intercept - (Risk-free Rate/n) (1- Beta) = Jensen’s Alpha
where n is the number of return periods in a year (12 if monthly; 52 if weekly)
− What proportion of the risk in your stock is attributable to the market? What proportion is firm-
specific?

− What is the historical estimate of beta for your stock? What is the range on this estimate with
67% probability? With 95% probability?

− Based upon this beta, what is your estimate of the required return on this stock?
− Riskless Rate + Beta × Risk Premium
6. Estimating a Bottom-up Beta
Based on the business or businesses that your firm is in right now and its current financial leverage,
estimate the bottom-up unlevered beta for your firm.
Data Source: You can get a listing of unlevered betas by industry on Damodaran’s website by going
to updated data.
7. Estimating a Cost of Debt
Based upon your firm’s current earnings before interest and taxes, its interest expenses, estimate
− An interest coverage ratio for your firm
− A synthetic rating for your firm (use the tables from prior pages)
− A pre-tax cost of debt for your firm
− An after-tax cost of debt for your firm
8. Estimating Market Value
Estimate the
− Market value of equity at your firm and Book Value of equity
− Market value of debt and the book value of debt (If you cannot find the average maturity of
your debt, use three years). Remember to capitalize the value of operating leases (if the company
did not do it) and add them to both the book value and the market value of debt.
Estimate the
− Weights for equity and debt based on market value

− Weights for equity and debt based on book value

9. Estimating Cost of Capital
Using the bottom-up unlevered beta, you computed for your firm and the values of debt and equity
you have estimated for your firm, estimate a bottom-up levered beta and cost of equity.
Based upon the costs of equity and debt that you have estimated and the weights for each, estimate
your firm’s capital cost.
How different would your cost of capital have been if you used book value weights?
10. Assessing Investment Quality
For the most recent period for which you have data, compute the after-tax return on capital earned
by your firm, where the after-tax return on capital is computed to be

After-tax ROC = EBIT (1-tax rate)/ (BV of debt + BV of Equity - Cash)

For the most recent period for which you have data, compute the return spread earned by your
firm:
Return Spread = After-tax ROC - Cost of Capital
For the most recent period, compute the EVA earned by your firm
EVA = Return Spread * (BV of debt + BV of Equity - Cash) previous year
11. Would You Expect Your Firm to Gain or Lose from Using a lot of Debt?

Considering, for your firm,

− The potential tax benefits of borrowing
− The benefits of using debt as a disciplinary mechanism
− The potential for expected bankruptcy costs
− The potential for agency costs

− The need for financial flexibility

Would you expect your firm to have a high or low debt ratio?
Does the firm’s current debt ratio meet your expectations?
12. Your Firm’s Optimal Financing Mix
Using the optimal capital structure spreadsheet provided:
1. Estimate the optimal debt ratio for your firm
2. Estimate the new cost of capital at the optimal

3. Estimate the effect of the change in the cost of capital on firm value
4. Estimate the effect on the stock price
In terms of the mechanics, what would you need to do to get to the optimal immediately?
13. Getting to the Optimal
Based on your analysis of the firm’s capital structure and investment record, what path would you
map out for the firm?
− Immediate change in leverage
− Gradual change in leverage
− No change in leverage
Would you recommend that the firm change its financing mix by
− Paying off debt/Buying back equity

− Take projects with equity/debt

14. Choosing your Financing Type
Based on the business that your firm is in and the typical investments that it makes, what kind of
financing would you expect your firm to use in terms of
a) Duration (long-term or short-term)
b) Currency
c) Fixed or Floating rate
d) Straight or Convertible
15. Estimating your Firm’s FCFE
In General, If cash flow statement used
Net Income Net Income
+ Depreciation & Amortization + Depreciation & Amortization

- Capital Expenditures - Capital Expenditures

- Change in Non-Cash Working Capital - Changes in Non-cash WC
- Preferred Dividend - Preferred Dividend
- Principal Repaid + Increase in LT Borrowing
+ New Debt Issued - Decrease in LT Borrowing

+/- Change in ST Borrowing

= FCFE = FCFE
Compare to

Dividends (Common) Common Dividend

+ Stock Buybacks Stock Buybacks
16. Assessing your Firm’s Dividend Policy
Compare your firm’s dividends to its FCFE, looking at the last five years of information.
Based on your earlier analysis of your firm’s project choices, would you encourage the firm to return
more or less cash to its owners?

If you would encourage it to return more cash, what form should it take (dividends versus stock
buybacks)?