TEAM PROJECT REQUIREMENT
You will be assigned to teams with three or four members.
The project requires you to conduct a complete analysis and valuation of Lowe’s Home Improvement, Inc. A key feature of the project is that it requires ¬you to identify and obtain the relevant information. Thus, in addition to being evaluated on your ability to apply the tools of analysis described in the course, you will also be evaluated on your ability to identify and obtain the relevant information. Your analysis should provide solid support for the assumptions and forecasts that drive your valuation. Your valuation should use only publicly available information. Do not use inside information obtained from personal company contacts, etc.
Your valuation analysis should follow the steps described in the course.
1. Business Strategy (half page): Briefly describe the Lowe’s industry and specific lines of business, Discuss its strategy for success and, most importantly, the sustainability of profits generated by the strategy. Why do you think the firms return on equity will or will not revert to its cost of capital? Please do not simply repeat the company overview from the 10-K. (15 points)
2. Accounting (1 page): Assess the degree to which the Lowe’s accounting reflects the underlying business reality. Identifying accounting distortions and their impact on the sustainability of profits. Describe only the accounting problems that need to be taken into consideration in your forecast, and how you resolved these problems in your forecasts (20 points)
3. Financial Analysis (2 pages): Use ratio analysis and/or cash flow analysis to evaluate the current and past performance of Lowe’s and assess its sustainability. You should definitely compare the company to some peers in the industry. (25 points)
4. Forecasting (2 pages): Forecast the Lowe’s future income statements and balance sheets for the next three years. This is the heart of the project so provide specific justification for each major component of your forecasts. Is the forecast based on past trends, comparisons with other firms in the industry, an industry report, etc.? How does your forecast for the next three years compare with analyst forecasts? Finding relevant data from outside the Lowe’s own financial statements to guide your forecasts is particularly valuable here. Be sure to justify your selection of a time horizon. Justify your forecast of the Lowe’s ROE in the terminal year. Compare your EPS forecast for the first year (or two if available) to the market consensus forecast and explain any significant differences. (30 points)
5. Valuation (half page) on a recent date: Justify your estimate of the cost of equity capital. Compare your valuation of the company to the current market value of the company and describe what you believe are the differences between your forecasts and the market consensus. You should conduct a sensitivity analysis by varying your discount rate and other crucial assumptions. (10 points)
6. In addition you must attach the company’s most recent 10-K filing: Item 1 – Business and Item 8 – Financial Statements.
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