INTRODUCTION TO CORPORATE FINANCE
Group Assignment 2017-18
Corporate Valuation Exercise
- Valuation Report
- Guide to Writing the Report
- Guide to Working in Groups
- The Team Charter
- Assignment Rubric
Working as teams, each group is required to research and write up a valuation of The Restaurant Group plc (as described later). There are two dimensions to this exercise: (1) the valuation report and (2) developing your understanding and experience of working in a team/group engaged in a financial task.
- The valuation involves using the course content and other learning on your degree programme and applying this in a practical exercise that involves forecasting the group’s future cash flows and using these to determine a valuation for the business as a whole and for the firm’s equity. This is what you will need to provide in your group report.
- For this assignment, we are also getting you to work in groups to develop your skill as a team member. When you enter the world of paid work, you will be required to work as part of a team (group)—either on a permanent basis or for a limited period as part of a project.
Hence, you should use the opportunity of being part of a group to work on this assignment as an occasion to develop your understanding of your own attitudes and behaviours in a team setting by reflecting and taking feedback on your performance as a group member, and developing those all-important team member skills. These can include being a good initiator, informer, clarifier, summariser and reality tester. For instance, the Belbin Team Inventory analysis casts team members into one of three categories: thinking (with roles for specialist, monitor/evaluator and plant), action (with roles being a shaper, implementer, completer/finisher) and people (resource investigator, co-ordinator, and team worker). In practice, individuals occupy space in more than one category—but the roles reflect individuals’ own preferences and behaviours. How well a group performs is a function of its cohesiveness and sense of purpose and this can be nurtured both through positive actions and reflection.
2. Timeline for This Assignment
This assignment is worth 40% of the course marks. It is a group assignment and students in the group are collectively responsible for delivering the required output from their collaborative efforts, except as indicated later. A timeline for the work is given below, but the absolute deadline for final electronic submission of the report is Monday 13 November at 14.00 hours. This will need to be submitted according to the guidelines given in the course booklet (that is, into Turnitin with the group’s signed originality statement into the course’s Learn VLE.)
However, one other element that has to be submitted by the group for students to obtain a pass on this component of assessment, namely:
A group charter, which is due to be written by the group and must be submitted electronically in Learn by Monday 23 October by 14.00 hours. Failure to submit by this date will mean the group cannot obtain a pass mark on the written element of the assignment—however well it is presented.
You will also be asked to complete an end of project WebPA peer evaluation of your fellow group members that is used to modify the initial grading for the written report.
By Monday 23 October by 14.00 hours Group charter due
(This is a group responsibility)
By Monday 13 November 14.00hours Assignment report due
(This is a group responsibility)
By Monday 20 November at 14.00 hours End project WebPA peer-evaluation due
3. The Valuation Report
This is what you will need to submit!
You are being asked to produce what is known in the investment banking industry as a valuation report (or analyst’s report). This is a valuation and business case report on a particular firm. The company you are required to consider is The Restaurant Group plc (TRC) a publicly-listed company that manages pub and restaurant chains. You will need to download the latest annual report of the company (and any previous ones you consider helpful), which is available in pdf format at:
Note: to save you having to copy accounting information for the assignment, an Excel file containing key financial data is available on Learn in the assignment folder.
What you will need to produce for this assignment:
- A one page summary of your conclusions of the valuation you reach based on the analysis you have undertaken. (If it is helpful, consider this is being done with a view to either investing in the business or as part of an evaluation with a view to your client/firm making a bid to acquire the company). Equally, think of this as an “executive summary”. It should allow the decision maker/report commissioner to get all the facts and understand your argument without having to read all the supporting documents.
- To provide the analysis and justification for the value you use in requirement 1 above, undertake a financial valuation using the tools of finance that are being covered in the course and elsewhere on your programme. There are two ways to value a business: (i) via discounted cash flow (DCF) valuation (also known as a fundamental valuation) and (ii) using suitable comparators. It is the first method, using DCF valuation, that you are asked to undertake. But you may decide to do the second as a way of triangulating your valuation.
The report should be in the form of a one-page executive summary and this is the absolute length limit. As discussed below, you will need to add supporting documents as required (for instance, assumptions, spreadsheet analysis, calculations, etc.). This is not being directly assessed but is there to support and evidence the analysis used to create the one-page summary and will be consulted as required to allow the assessor to understand whether the analysis presented in the executive summary is factually and methodologically correct. There total word count for all your submission is 1500 words, which should be more than adequate in allowing you to detail your assumptions and other information that supports your executive summary. But do not pad out your report for the sake of being close to the word count as excessive length and the inclusion of irrelevant material may lead to a reduction in marks.
For your group one page summary, you may wish to adopt a clear report format that covers all the salient elements (see the Guide to Writing the Report below). To help you, there are many examples of what are called analysts’ reports available on the web that are similar to the exercise you are being asked to undertake and you should research these with a view to getting inspiration and insight as to how to present your report. Aim to make it as professionally looking as possible.
The one page stipulation limits your word count significantly so you should consider how best to present your findings so as to provide the key information any decision maker would want to have and to make it as clear as possible. This may involve significant writing and re-writing of your summary to achieve the desired succinctness, clarity while providing the key information required for the decision maker. From a skill development perspective, being able to summarise complex material into a short, convincing document is a key skill (if in doubt that this is so, research the idea of the business elevator pitch or one page memo).
Note that the presentational quality and integrity of the report (i.e. how the different components relate to each other in a coherent way) count towards the overall mark. (See the evaluation rubric that is given later). Also marks will be deducted if explanations and justifications for the results presented in your summary are not provided in the appendices. A key element in any valuation are the assumptions used to arrive at the conclusion.
(Note: we are specifically not looking to see how close your valuation is or isn’t to current TRG’s current valuation by the market.)
You may wish to consult parts of the course text to help you:
- Chapter 2 on financial statement analysis is useful in looking at the historical development of The Restaurant Group and as a way of helping you determine key ratios going forward.
- Chapter 19 is specifically on financial valuation and modelling and is an ideal primer on many of the things you need to consider when doing your assignment, but does not go hugely into the way you can use the historical accounting and other data to build your forecast for future cash flows.
- Chapters 7, 8 and 12 provide the key material for treating the valuation as a capital budgeting exercise as well as the material covered in class on how to go about undertaking a capital budgeting exercise. (Not all aspects will apply, though.)
4. Guide to Writing the Report
There are a number of elements that you should include in your supporting documents for your report (and which may be also be provided in summarised form in your 1 page executive summary as discussed above):
- Company overview: a short description of the company that helps the reader understand its business, the industry and its strategy
- Valuation: this has to be a discounted cash flow valuation (also sometimes called a fundamental analysis), but valuation is an imprecise process, so you may consider also doing a comparative valuation against the industry and the firm’s peers. Note that any valuation has a specific purpose, some of which are given below:
- Fair market valuation: the value of a business to a typical investor
- Investment valuation: the value of a business to a specific investor (e.g. a firm that might consider acquiring the valued business in order to gain from synergies and economies of scale and scope)
- The value of a business as a specific point in time (it is likely to be different at a different time)
- Conceptually simple as indicated in Exhibit 1, the discounted cash flow model/approach/method in a real world application is usually quite difficult because of the need to estimate uncertain future cash flows and discount rates (by the way, this is the ‘real world’ challenge!). It has the following four key elements that you will need to consider (and make judgements about and write up as part of your assumptions):
- The life of the project being undertaken or the value of the project/business at your horizon point. For the purposes of this exercise, you will need to consider a minimum of 5 years for The Restaurant Group valuation; but you can make it longer if you consider this appropriate. Ideally, the detailed cash flow modelling should end at the point where the cash flows beyond the horizon point are in a stable growth phase (that is, beyond any excessive growth point). But a minimum five years is the requirement. As part of this, you will need to apply one or more of the appropriate techniques for calculating the terminal (horizon) value (it is called the continuation value in the textbook). See chapter 19 for more details on this. You may also find the following webpage useful: http://www.corality.com/tutorials/estimating-terminal-value
- Compute the appropriate discount rate with which to present value the cash flows. This requires you to work out the firm’s cost of equity and its cost of debt (if any). Do not ignore taxes as we want an after-tax cost of capital.
- To correctly calibrate the future free cash flows that the firm can generate, you will need to consider the future growth path of the firm (which could be negative) and this will require you to understand the firm’s competitive position within the industry and the economy as a whole.
- The forecast net cash flows per period from today to the horizon point or end of the project; this will require you to work out the cash inflows to the project/business (that is its revenues) and the cash outgoings (these will be fixed and variable costs, including corporate income taxes). To do this, you will need to make assumptions as to how these inflows and outflows will evolve in the future as explained below. A good method of doing this is to use the percentage of sales method where the income/revenue generated is the key variable while business costs and investments are derived as a fraction of revenues.
You should forecast “normal” cash flows. For instance, when you look at TRG’s financials you will see some extraordinary costs for the financial year 2016. Possible one offs, such as these, are not part of the modelling process. You should be thinking about the “expected” cash flows that the business is likely to generate.