BF3201 Corporate Finance and Strategy

Assignment: Corporate Finance Analysis of Procter & Gamble Co.

_____________________________________________________________________
This assignment constitutes 20% of the assessment in the subject. The full
mark of this assignment is 100.
Submissions are to be made using 12 point Word font. Word limit for the final
group report is 3,000 words.
You should work in syndicates of six members.
All group members will get exactly the same basic marks on the report.
However, this basic mark will be adjusted according to a peer evaluation
scheme.
Late submission will not be accepted and shall attract no credits.
Project Outline
This project provides an opportunity to get some hands-on experience applying
corporate finance theory and models to real firms. All groups pick the same company
(P&G) to perform the analysis. In the process, you will get a chance to assess
corporate governance issues, evaluate the risk profile of the firm, and examine the
sources of risk. The written report is due at 5pm on Friday, 23 September, 2016.
You are required to submit a hard copy of your written report and a soft copy of
your report and excel spreadsheets.

Try your best to answer the following questions.

Part I. Corporate Governance Analysis
I.A. The relationship between managers and stockholders
1. The Chief Executive Officer
Who is the CEO of the company? How long has he or she been CEO?
If it is a family run company, is the CEO part of the family? If not, what career
path did the CEO take to get to the top? (Did he or she come from within the
organization or from outside?)
How much did the CEO make last year? What form did the compensation take?
(Break down by salary, bonus and option components)
How much stock and options in the company does the CEO currently own?
2. The Board of Directors
Who is on the board of directors of the company? How long have they served as
directors?
How many of the directors are inside directors? (i.e. employees or managers of the
company)
How many of the directors have other connections to the firm (as suppliers, clients,
customers..)?
How many of the directors are CEOs of other companies?
Do any of the directors have large stockholdings or represent those who do?
3. Share Voting Structure
Are there differences in voting rights across shares?
If so, do incumbent managers own a disproportionate share of the voting shares?
I.B. The relationship between the firm and financial markets
1. How many analysts follow the firm? What are analysts recommendations? Buy,
sell, or hold?
2. How much trading volume is there on this stock? Is the stock liquid?
I.C. The relationship between the firm and society
Does the firm have a particularly good or bad reputation as a corporate citizen?
I.D. Marginal investors
1. What percent of the stock is held by institutional investors?
2. Who are the marginal investors of this company?
I.E. Summary
Summarize the major concerns of corporate governance and potential conflicts of
interest in the company.

Part II. Risk, Hurdle Rates, and Investment Returns

II.A. The risk profile of the company, risk parameters, and the hurdle rates for
the firm
1. Estimating Historical Risk Parameters (Top Down Betas)
Run a regression of returns on the firm's stock against returns on a market index,
preferably using monthly data with 5 years of observations (or weekly data with 2
years of observations). Alternatively, if you have access to Bloomberg, go into the
beta calculation page and print off the page (after setting return intervals to monthly
and using 5 years of data)
What is the intercept of the regression? What does it tell you about the
performance of this company's stock during the period of the regression?
What is the slope of the regression? What does it tell you about the risk of the
stock? How precise is this estimate of risk? (Provide a range for the estimate.)
What portion of this firm's risk can be attributed to market factors? What
portion to firm-specific factors?
2. Comparing to Sector Betas (Bottom up Betas)
Break down your firm by business components, and estimate an unlevered
beta for each component, which is adjusted for cash.
Attach reasonable weights to each component and estimate an unlevered beta
for the entire business.
Using the current leverage of the company, estimate a levered beta for each
component.
3. Choosing Between Betas - Which of the betas that you have estimated for the
firm (top down or bottom up) would you view as more reliable? Why?
4. Estimating Default Risk and Cost of Debt
o What is the most recent rating for the firm? What is the default spread
and interest rate associated with this rating? If the company has bonds
outstanding, estimate the yield to maturity on a long term bond. What
is the company's marginal tax rate? Estimate a synthetic rating and the
interest rate that corresponds to the synthetic rating.
5. Estimating Cost of Capital
o Weights for Debt and Equity
What is the market value of equity? Estimate a market value for
debt. (To do this you might have to collect information on the
average maturity of the debt, the interest expenses in the most
recent period and the book value of the debt). What is the debt
value of operating leases? What are the weights of debt and
equity?
o Cost of Capital
What is the cost of capital for the firm?

Data Sources
Please check the following webpage for a complete list of data sources at
Business Library.
http://blogs.ntu.edu.sg/library-resources/banking/resources/databases
There are four main data sources that you may find very useful.
1. Bloomberg: Much of the data comes from Bloomberg, which is available
in Business Library. I have uploaded onto our website a data manual on
using Bloomberg data.
2. Capital IQ: It provides deep information companies and financial markets.
You
can
apply
for
the
accounts
individually
at
https://venus.wis.ntu.edu.sg/lib/CIQ/gs/login.aspx. Alternatively, you
can contact librarians (Akbar Hakim or Balbindar Dhaliwal) for account
applications.
3. Lexis/Nexis: It contains company information, news publications and
reports. It is available online through our library\Databases.
4. Financial Filings: You will be able to get annual reports for almost any non
US company. I usually try the company's own web site first
(companyname.com usually gets you there) and print off the annual
report. You can also try the following web site that lets you print off
annual reports once you have registered with them (It is a bit pain but
free)
http://www.carol.co.uk.
Alternatively,
you
can
try
http://www.annualreports.com/. The UK does have its own version of
the SEC and you can get information on UK companies by going to
http://www.companies-house.gov.uk/.
I. Corporate Governance
If you have a US company, visit the SEC website http://www.sec.gov and print off
the latest 14-DEF for your firm.
If you are wondering what an HDS page and how to get it, you need to get to a
Bloomberg terminal, click the equity button and find your company. Once you
have found the company, type in HDS and you will get a listing of the top holders
of equity in your company.... print off just the first page.
Bloomberg: When you type in your company's name into Bloomberg, the first
thing that will strike you is the number of listings that Bloomberg will pull up on
your company. (Nokia has more than a 100 listings under equity). To get the
listing that will contain all the information for your company, you need the
primary listing in the local market. (The ADRs (which are the listings traded in
the US) will not provide you with adequate information.) Look for the country
code for the local market (In Western Europe, for example, FP: France, IM: Italy,

GR: Germany, GA: Greece; LN: UK; SW: Switzerland; Pl: Portugal: FH: Finland
etc...You can get a more complete list on Bloomberg). Once you have found the
listings on the local market (and there will often be more than one), it is a
process of trial and error. Check a listing and type in DES. If you get only 2 or 3
pages, you have the wrong listing... Keep trying and you will hit the jackpot...)
Once you have found the listing, print off everything you would for a US company
(HDS, Beta, DES (first 10 pages), FA (item 25))
To find out who the top managers in the firm are, as well as who sits on the
board of directors, check out the companys annual report. You can get the
annual reports of some companies on line at http://www.annualreports.com/. If
that does not work, you can always try the home page for the company. Many
companies have their annual reports online. To find out a little more about the
people who serve on the board of directors, check out the web site called
www.theyrule.net. You can also get more information on recent filings with the
SEC on insider trading and holdings from www.freeedgar.com as well as from
the official SEC site which is www.sec.gov/edgarhp.htm. The statement that
you will find most useful for information on who the directors are, how much
stock they hold and compensation, is 14-DEF. (You can get a description of the
forms and their contents on the edgar site)
To get some external perspective on how the board of directors of your company
measures up in terms of keeping an eye on management, you might want to look
at what one our largest (and one of the earliest active investors) CALPERS has to
say about the issue of corporate governance at www.calpers-governance.org.
They highlight 10 companies that they choose to focus on for severely
underperforming their peer groups. You should also check Business Week's
annual issue ranking the boards of directors of large U.S. companies. The most
recent issue can be obtained on line at www.businessweek.com (enter best
boards of directors in the search box). Finally, check out your company on Yahoo!
Finance (www.finance.yahoo.com). Under the profile for your company, you will
see a corporate governance rating for your firm where you will be told how your
firm falls relative to the market and the sector in terms of corporate governance.
There are a number of interesting sites that keep track of directors and their
workings. I have listed a few below:
http://corpgov.net/: This is a general site listing corporate governance issues
and
links
http://www.ecgi.org/ : Covers corporate governance in Europe
To get a sense of how much and how your CEO is paid, you should check Forbes,
which carry annual rankings on this matter. Forbes has an online site that ranks
CEO compensation and provides the company's rankings in terms of
performance - see Forbes. If you dig a little deeper, this same site breaks down
the CEOs compensation into its different components.

To get data on analyst coverage and views of this stock, try the site maintained
by Zacks Investment Research. You can enter the symbol of a stock and get pretty
detailed information on it at www.zacks.com in the Free Research Box. You can
get the same information on the Morningstar site, under earnings estimates for
your firm. (www.morningstar.com -enter symbol)
Finally, to get a sense of socially responsible investing, check out the web site for
social investing at www.socialinvest.org. One of the larger socially responsible
funds, Calvert, has its site at www.calvertgroup.com. For environmental issues,
you will get a listing of "green" companies by going to the site for Sustainable
Business. To get a labor perspective on firms, you can check the AFL-CIO labor
site, with its distinct perspective on CEO pay and union labels (www.aflcio.org;
look under corporate watch). For more general news about corporate social
responsibility, try the CSR news wire.
Ultimately, there are two important questions that you should answer:
i. How much power do you as an individual stockholder have over the management
of this company? To make this assessment, you want to start by looking at the
board of directors and examining it for independence and competence. I know
that there are lots of unknowns here, but work with at least what you know - the
size of the board, the appearance of independence, the (perceived) quality of
these directors. With US companies, you can get more information about the
directors from the DEF14 (a filing with the SEC that you can get from the SEC
website). With non-US companies, you may sometimes find yourself lacking
information about potential conflicts of interests, but what you cannot find is
often more revealing than what you can find out; it points to how little power
stockholders have in these companies. Also look at subtle ways in which power is
shifted to managers at the expense of stockholders including anti-takeover
amendments (poison pills, golden parachutes), if you can find reference to them.
ii. Are there other potential conflicts of interests between inside stockholders and
outside stockholders?
In some companies, you will find that there are large stockholders in the
company who also play a role in running the company. While this may make you
feel a little more at ease about managers being held in check (by these large
stockholders), consider who these large stockholders are and whether their
interests may diverge from yours. In particular, the largest stockholder in your
company can be a founder/CEO, a family holding, the government or even
employees in the company. What they might want managers to do may be very
different from what you would want managers to do... Look for ways in which
these inside stockholders may leverage their holdings to get even more power
(voting and non-voting shares for inside stockholders, veto powers for the
government...)
Stockholder Analysis

To get information on the percent of stock held by insiders and institutions check
out the Value Line page on this company; there is a box that lists out percent held
by each. You can get more updated and detailed information at the SEC site
(www.sec.gov/edgarhp.htm). The institutional ownership can also be obtained
from the daily stocks web site, under www.dailystocks.com - profile or from the
Yahoo! Finance site. You can also get an update on companies where there has
been significant insider activity at the Yahoo! finance site. You can also get a
sense of how this firm is classified (value versus growth, small versus large cap)
by going into the Morningstar web site and entering the symbol for your firm
(www.morningstar.com - quicktake reports). When you get the company's snap
shot, click on Investment Style.
To find out if the company is listed in multiple markets, find a Bloomberg
terminal, and enter your company's symbol. All of the listings that this company
has around the world will be enumerated.
II. Risk and Return
Getting regression betas for your company is easy, though no two services will
give you the same beta for the same company. You can get a beta from the Yahoo!
Finance web site for your company and compare it to the beta on the
Morningstar site.
You can get unlevered betas by industry though Yahoo! finance which does
report a sector beta on their competitors page. To get the breakdown of
operating income and revenue by business sector, you might want to check the
annual report (http://www.annualreports.com/) and the 10-K report
(www.sec.gov/edgarhp.htm). The market value of equity and the inputs
needed for estimating the market value of debt should be available in the same
sources. (The maturity of the debt should be listed as a footnote to the balance
sheet in the 10-K report.)
http://en.wikipedia.org/wiki/List_of_countries_by_credit_rating lists the most
recent sovereign rating for all countries.
To find the rating for your company, you can check the handbook on ratings
(available in most libraries) issued by Standard and Poors. You can also e-mail a
ratings request to Standard and Poors at www.standardandpoors.com.
Moody's is more with the times and lets you look up the ratings for companies
online (enter the name of your company and search); you will have to register
but it is free. To get the spreads that go with the ratings, you can use the data set
on in our data folder that lists the default spreads (over the long term treasury
bond rate) for each ratings class. You can also get updated default spreads
(under corporate bond spreads) and your company's bond rating (by going to
corporate bonds and typing in your company name under issue) from
www.bondsonline.com; this site used to be free but has unfortunately become a
paid site. You can get slightly dated but usable spreads from our spreadsheet. If
you want to estimate a synthetic rating, you should examine the table in our data
folder that lists ratings as a function of interest coverage ratios.