Financial Management Project Solution
1. Purpose of the project:
Financial management 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 Financial Management 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 financial management 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.
At this stage of the financial management project development 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.
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y, the scenarios will only modify Year 1 opeFor simplicitrating 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. APA
3. Other information regarding the financial management 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
