1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, as of the end of 201

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1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, as of the end of 2013, using the actual - real - financial results reported by the firm in 2014 and 2015:

BA7031: Corporate Finance and Financial Statement Analysis

PART 1: USING FINANCIAL STATEMENTS FOR EQUITY VALUATION (50 MARKS)

Part 1 of the assignment is intended to help you develop practical skills of Fundamental Analysis. The assignment provides you with 

an opportunity to apply valuation technologies that are commonly used in practice and that incorporate financial statement 

information into equity valuation models. The focus is on ex-post or backward validation of alternative valuation approaches.

1) You are required to provide a valuation of the common stock (equity) in ANY ONE of the firms listed below, as of the end of 2013, 

using the actual - real - financial results reported by the firm in 2014 and 2015:
Ticker
Firm Name

CLX

The Clorox Company
FL
Foot Locker, Inc.
HOG
Harley-Davidson, Inc.
JWN
Nordstrom, Inc.

2) Your valuation should utilise TWO valuation technologies one of which MUST be either Residual Earnings Analysis or Earnings 

Growth Analysis.

3) You should supply an analytical commentary on the usefulness of the two techniques that you use, substantiating your 

conclusions with the results from the valuation.

4) You must prepare a concise written report for this part of the assignment and are required to include in your written report, as 

an appendix, entire sets of all the annual financial statements for the chosen firm for the period 2013-2015. 

5) Your written report must contain clear references to the relevant portions of the included in the report financial statements for 

the firm being analysed, and those relevant portions should be highlighted.

Ex-post validation means that you must explore the usefulness of the two valuation technologies, which you employ, by comparing 

their respective ex-post estimates of the fundamental (intrinsic) value of the firm’s equity with the actual market price of the equity 

at the end of 2013. That is, you need to look back and convert the financial statement numbers from 2014 and 2015 into an ex-post

valuation of the firm’s equity at the end of 2013 and provide your conclusion on which of the two valuation techniques that you utilise 

is more powerful at predicting ex-post the value of the firm as of the end of 2013.

Please note that in this particular project there is no need for you to attempt forecasting pro forma numbers, since you can treat the 

2014 and 2015 actual numbers in the firm’s financial statements as impeccable one- and two-year projections that can be used for 

valuing the firm’s common stock at the end of 2013.

Attention should be given to the valuation technologies that attempt to calculate the fundamental (intrinsic) value.

The structure of a report for Part 1 of the assignment will include an executive summary with a brief retrospective background on

the firm’s business model, industry, and economic environment. The report for Part 1 will concisely outline an appropriate specification

of payoffs, based on an analysis of the available 2014 and 2015 financial statements, as well as describe an ex-post valuation and a 

comparison of the obtained estimates of the equity’s fundamental value with the market price at the end of 2013, concluding with a 

discussion of the degree of usefulness of the two valuation methods, which you utilise, from the perspective of an academic researcher.

Avoid applying equity valuation techniques mechanically, as the examiner will need to see that you have the necessary understanding 

of the costs and benefits of alternative technologies and are using the appropriate tools.
You must briefly state the valuation assumptions that you use in valuing the firm’s equity and critically interpret the valuation 

results, using evidence in the argument.

You can bring in sensitivity analysis or reverse engineering, if appropriate, to inform your conclusions.
You may round all computations to the nearest integer (or nearest percentage).
PART 2: USING FINANCIAL STATEMENTS FOR CREDIT RISK ANALYSIS (50 MARKS)
Part 2 of the assignment is intended to help you develop practical skills of credit analysis. The assignment provides you with an 

opportunity to evaluate the financial status of a potential corporate borrower, using ratio analysis of the financial statements.

Formal Requirements for Part 2

1) You are required to carry out an analysis of financial statement ratios that indicate the creditworthiness of a corporate borrower, 

that is, the corporate borrower’s ability to pay its debts on scheduled times, for ANY ONE of the firms listed below, over the period 

2013-2015:

Ticker
Firm Name
CLX
The Clorox Company
FL
Foot Locker, Inc.
HOG
Harley-Davidson, Inc.
JWN
Nordstrom, Inc.

2) You should calculate the FOUR financial statement ratios that you identify as the most pertinent for credit risk assessment of your 

particular firm, making sure to address short-term liquidity, long-term solvency, and operating profitability. You must justify your 

choice of each of these four ratios.
3) You must supply a brief commentary on the dynamics of credit quality for the firm being analysed over the period 2013-2015. 

Your commentary must briefly outline entailing implications for pricing of the firm’s debt of the risk of debt default. You should 

discuss whether the credit risk of the firm - as implied by the four ratios – appeared to be improving, deteriorating, or remaining 

stable. You must substantiate your conclusions with evidence and offer plausible causes of any significant changes in credit risk 

detected through your ratio analysis.
4) You must prepare a concisely written report and are required to include in your written report, as an appendix, entire sets of 

all the annual financial statements for the chosen firm for the period 2013-2015. Please note that NO other appendices are allowed.

5) Your written report must contain clear references to the relevant portions of the included in the report financial statements for 

the firm being analysed, and those relevant portions should be highlighted.

In respect of Part 2 of the assignment, no particular structure is required, but you must take the perspective of an academic 

researcher.

You may round all computations to the nearest integer (or nearest percentage).
Some Pointers to Data Sources and Spreadsheet Programs
The reports of firms listed for public trading in the United States are available at www.sec.gov/edgar.shtmlvia the SEC’s EDGAR 

database. You are also encouraged to make use of various financial information resources such as Bloomberg, Datastream, 

Thomson ONE Banker, Yahoo!Finance, and Google Finance.
The links page on the Penman website www.mhhe.com/penman5e has links to useful financial resources.
The Penman website www.mhhe.com/penman5e offers useful advice on spreadsheet modelling, too.

Learning Outcomes for Coursework Assignment 2
The assignment will assess your ability to:
 in the context of equity analysis, discuss and analyse financial statement information and asset prices
 understand advantages and disadvantages of valuation technologies commonly used in practice
 set up valuation models of equities, using relevant valuation technologies
 understand the effects of financial statement information on valuation and risk of financial assets
 analyse the business environment of a company

 critically evaluate financial statements and reports to assess a company’s valuation
 understand the usefulness of accounting disclosures in the decision-making process, in the context of credit risk assessment
 in the context of credit risk analysis, critically discuss and analyse financial statement information
 understand advantages and disadvantages of credit assessment technologies commonly used in practice.