in the Quantitative portion
The goal of this project is to estimate the value loss or creation resulting from COVID-19 for a firm of
your choice.
you can dismiss the DDM and PE valuation methods in the Quantitative portion.
I strongly suggest that you start working on this project as early as possible.
Qualitative Research (Before COVID-19 crisis):
You should include a qualitative analysis where you describe:
o The overall situation of the firm and trajectory
o The financial situation of the firm
o The prospects for growth and future plans
Please include a brief SWOT Analysis
Detail the reasons supporting your chosen “super-normal growth rate”. You should also justify
your chosen time-horizon of this “super-normal growth” stage of the business cycle of the
firm (how long the firm will grow at this super normal rate before using the long term growth
rate)
The qualitative analysis must be at least 2 pages (single-spaced and typed). In addition to the
2 pages, you should explain the rationale behind your choice for all needed assumptions in
your valuations.
Quantitative Research (Before vs. After COVID-19 crisis):
A: Estimate the value of your firm using three valuation methods (DDM, PE and DCF) before
the COVID-19 shock (As of January 2020).
B: Estimate the value of your firm using three valuation methods (DDM, PE and DCF) after the
COVID-19 shock (As of April 2020). (Hint for DDM: Has the firm announced any changes to the
forthcoming dividends?)
***Before choosing a firm, please make sure that the company is profitable (is having positive
earnings) and that it has paid dividends for at least three years.
***If you are working on the project by yourself, you can dismiss the DDM and PE valuation
models.
The value loss or creation is simply the difference between A and B for each model. Please
answer the question: In your opinion, which valuation method captured the value loss/gain
more precisely and why do you think this is the case?
You should submit your quantitative research in an Excel Workbook. All calculations should
be made by formulas. Any number plugged-in manually will be ignored for grading purposes.
Your assumptions, of course, are the result of your qualitative research. Although these values
may be plugged directly (there is no formula), you should describe how you chose the “x” or
“y” value as your assumption in the qualitative portion.
For calculation of Beta, your historical observation period will be 2017 – 2019 (3-Year Period).
Use monthly returns.
Remember that the discount rate used in the DDM method is the Expected Return estimated
from the Capital Asset Pricing Model.
It is understood that an accurate estimation of a firm’s value loss or gain due to COVID-19 is
a laborious and complex process which requires data that is not in your reach or possibly not
yet available. Attempting to do so is out of the reach of this project. Notwithstanding, you
should be ok implementing the basic form of DDM, PE and DCF models as learned in this class.
If you face any challenges or limitations, please reach out to your instructor.
You will not be graded by the accuracy of your valuation, data, inputs or output, but rather by
correctly implementing the models learned in class.
Remarks:
* You must show your calculations for Beta. Remember to use 36 months. You can vary this timeframe
providing the reasons to do so.
* In this project, you should consider the 10-year Treasury rate as the “risk-free” rate. You can find
this rate at: https://fred.stlouisfed.org/series/DGS10. The risk-free rate will be quite different before
and after COVID-19 ….. Just as food for thought: Pay attention to the effect of this rate in your cost of
equity and cost of capital.
* Assume S&P500 returns as the “market returns”. You can get the index prices from Yahoo Finance
(https://finance.yahoo.com/quote/%5EGSPC/history/). Remember to use the Adjusted Close column.
Please keep in mind these are the prices. For your valuation, you will need the returns (Pt+1 / Pt – 1).
* When calculating your firm’s WACC (In the Discounted Cash Flow Model), you do not need to
calculate the cost of debt. You can find it online and cite your source.
* Please indicate your sources for all data used in your valuation.
* You may find data for Quarterly Dividends. However, please remember to use the total yearly Dividends when estimating the stock value using DDM (Dividend Discount Model).
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