Project
High-Level Process Flow.
To successfully complete your preliminary analysis of the target acquisitions, your team should follow this high-level process flow:
STEP 1 – Select Comparable Companies
Describe the methodology used to select the target acquisitions.
STEP 2- Conduct Qualitative Research on the Companies
Provide relevant background information on each company, current forces affecting its operations, and its expectations for future years.
Analyze the content within the companies’ most recent independent audit of its financials and records. In performing this analysis, the teams should focus on the audit findings and opinions.
STEP 3- Conduct Quantitative Analyses of the Companies (financial)
Present a comprehensive financial statement analysis of the target acquisitions.
Prepare the common size statements and all the ratios and amounts for the measures given below for the most recent year for both of your companies and present in a clear tabular form. Then discuss each category given below.
- Prepare common-size financial statements for both target acquisitions
- Complete both a horizontal and vertical analysis for each target acquisition
- Compare the common-size financial statements between the two companies using cross-sectional analysis
- Calculate and interpret relevant profitability, solvency, liquidity, leverage, market value ratios for each company that will be useful in comparing the target acquisition
- For each company, graphically trend the net income and cash flow from operations over the last five years. Based on a comparison of the income statement to the statement of cash flows, what accounts explain the greatest differences between net income (loss) and cash flow from operations. Comment on the quality of the earnings numbers.
- Calculate and interpret the net present value (NPV) of the companies’ annual free cash flow (FCF) for a 5 year period (NPER) taking into account a constant growth rate (which will need to be calculated), and a discount rate that is equal to your companies weighted average cost of capital (WACC), which is 7%.
Links:
https://www.investopedia.com/articles/fundamental-analysis/11/present-value-free-cash-flow.asp
STEP 4- Prepare Report of Findings with Recommendation
Address any notable similarities and differences in financial reporting practices of the two acquisition targets that could potentially impact your analysis.