Project I

56:054 Engineering Economy

Project I

Due Date: now due in class on March 1. Reports handed in after class will be considered late.

This project contributes 11.5% of your final grade.

Here are some possible background scenarios to the the project:

Scenario A

Thanks to your excellent education at The University of Iowa, you have been offered a high-level position, with stock options, with a company and you therefore need to examine the financial background and outlook for the company.

Scenario B

Thanks to your excellent education at The University of Iowa, you have become the Chief Financial Engineer for a major multi-national investment group and you need to examine the financial background and outlook for a company with a view to making a large investment in that company.

Scenario C

You have become wealthy though the application of your excellent education at The University of Iowa and you now need to examine the financial background and outlook for a company with a view to investment.

Objective

The objective is to gain experience evaluating a company's financial condition.

In this project your task, should you choose to accept it (your grade will self destruct if you don't), is to evaluate the financial performance and outlook of an example company (Microsoft (NASDAQ symbol: MSFT ) in this case).

Do remember that this project entails a great deal of approximation and estimation.

An excellent professional report is expected with evidence of considerable digging for information and use of initiative.

Deliverables

You will need to:

	Work in a team of 3 (a team of 2 is possible).
	Produce an analysis of the income statement and balance sheets of Microsoft. These are contained in the reports published by the company.
	Select, with reasons, and apply 5 ratios (including the P/E and PEG ratios).
	Compare the current financial condition to previous years and to others in its industry (this last part is somewhat difficult for Microsoft, since there are relatively few similar companies).
	Produce a present value analysis using the present net worth and future projections of retained income. Use a discount rate of i = 7%.
	Produce an analysis looking at forward estimates of the earnings and then using a suitable value of P/E to estimate the stock price in the future.
	Evaluate whether money should be invested in shares in the company, investing for perhaps 5 years before considering selling. Your analysis however should look out further to 15-20 years to see trends.
	Produce a report with max 12 pages single space, 12 point type, 1 in margins with figures. The title page, Table of Contents and any optional Excel spreadsheets and graphs are in addition to this. The contents of the report should be as shown below.

Resources

Given the tight time constraints, you will probably need to rely on the web plus using any information you can obtain from the library.

Information:

The Microsoft web site -- look for investor relations.

Also use:

CNNfn
quicken.com
finance.yahoo.com
eTrade.com
Value Line reports (in library)

Content of Report

The report should contain the following sections (remember the page limitations above):

	Sections that address each of the deliverables below with sub-sections as necessary.
	A professional quality: a table of contents, good writing and the appearance of your report are important (do include page numbering and a page header. Clearly identify your main points).
	A section on references used at the end (before appendices)
	Any detailed background information can be placed in an appendix at the end of the report.

The sections to include are (remember that this gives a minimum expectation - initiative is rewarded):

	Executive Summary (5%) - This should be a short (half page) summary of your main findings and recommendations.
	Overview of Company (5%)- half page. Briefly indicate the business Microsoft is in and key elements of its history
	Analysis of the Income Statement, Cash Flow and Balance Sheets (10%) . Identify key elements. Remember that MSFT disbursed a significant dividend in Fall 2004.
	Ratio Analysis (10%) (containing the application of 5 standard ratios -- give reasons why they were selected -- include the P/E and PEG ratios. Determining 5 standard ratios for a company such as Microsoft can be difficult. You can of course devise a new ratio for information-product high profit companies!)
	Current Financial Condition (10%) (containing a comparison of the current financial condition to previous years and to others in its industry). Actually, Microsoft occupies a relatively unique position in the market. You will need to identify some of the main factors that could alter future earnings, the development of new server and database products and the development of computing sales around the globe.
	Calculation of "Fair Value" of Share Price I -- Present Value Analysis (20%) (containing a present value analysis using the present equity per share -- from the Microsoft balance sheet -- and future projections of retained income, with a present value calculated for these.) Show, and justify, your assumptions. Use this PV analysis to identify a stock price. Describe the inaccuracies inherent in your analysis. Your analysis should look out 15-20 years to see trends. Hint: the total NPV per share = present equity per share + NPV per share of future retained earnings The value of present equity per share can be obtained from the balance sheets. The NPV of future retained earnings per share can be calculated as follows: estimate the growth in earnings per year (and the interest rate) and place these values in the Geometric gradient formulae or using Excel functions to give the NPV of future retained earnings per share -- an estimate of the "fair value" of the share price. Make sure that you work in data per share.
	Calculation of "Fair Value" of Share Price II -- Earnings Per Share Analysis (20%) (containing a estimate of the earnings per share 5 - 10 years out and hence the calculation of a future share price on the basis of a suitable P/E ratio) Hint: use the Earnings per Share figure from the last annual report. Project this into the future at your estimated growth rate. From this calculate the expected share price given your estimated P/E ratio. Calculate the NPV of this estimated future share price. This provides a second estimate of the "fair value" of the share price.

Potential of Investment (10%) (containing an evaluation of whether money should be invested in shares in the company.) You should also compare and contrast the two estimates of "fair value" of stock price. Once purchased, the shares can be sold when a new analysis indicates that the shares are no longer a good investment.

Appearance, presentation, references, table of contents etc. 10%

Do make sure that you explain and justify your assumptions and estimates.

Grading

The grade will be allocated on the quality of the report, justification of assumptions and the amount of research undertaken. Initiative is appreciated and rewarded. All team members will receive the same grade.

[ Professor O'Grady ]