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Finance 323
Fin 323

Term Project Part I

By Tuesday, February 20, select your firm for the term project and obtain the closing stock price on this date. Remember the selection criterion and the data requirements. You can choose any public firm that you wish as long as its stock ticker symbol starts with the same letter as your first or last name. One other requirement is that you cannot reuse firms you have used or are using in your other classes. There are also a few firms that I use as examples that you may not use: Kellogg, Starbucks, Best Buy, or Johnson and Johnson. Do not choose, financial service firms such as, banks, insurance companies, brokerage firms etc. These firms do not fit with the discussion in the text since they are financial institutions. Any firm that meets the basic requirements will work. All you are really doing is getting data and then applying some analysis to it. The data itself does not matter. There are no good or bad firms for this project. It also not your job to find "good results," whatever that my mean. It does not matter whether the stock price goes up or down; whether the firm makes money or loses money; whether the dividend is zero or some positive number; or whether the ratios are good or bad. Your job is to find the data and do the required analysis and comment on the results.

As you collect this data think about what is going on. Each day investors evaluate the information set about the company and its environment and adjusts the price to reflect this information. So the stock price at any moment reflects all that is known and all that is anticipated about this particular company and its value, the investor forecast the expected cash flows from her investment and this results in a stock price.

Capital market pricing affect us all in some way, sometimes indirectly and frequently directly. As figure 1 shows the price depends on the present value of the future cash flows.


Figure 1

This pricing process sets discount rates, in the above formula: "R" (the ex post incarnation of these are called HPR's). This is the rate of return that we can expect to earn on this investment. The same process set rates of interest in other markets and that ultimately determines the rate of interest we pay on loans, and rates we earn on deposits. These rates also affect the prices we pay for many other products and services. For most of you it will also determine how much you must save in order to be able to retire. Thus I hope you will come away from this exercise with an appreciation for the pricing process in free markets.

By Wednesday, Feb 21 send an Email to (please do not use this address for any other messages use instead). Please format the subject line as follows (separate each item with a comma):


So for example, if your name is John Garcia and you chose JNJ (Johnson and Johnson), and  the stock price on Tuesday February 20 was $65.70 (I have no idea what the stock price will actually be on Tuesday February 20 or any future date so these are all fictitious prices.) Then your subject line would look like this:


Notice there are no $ signs and no blanks. Be sure to separate each item with a comma as shown above. You can leave the body of the email blank, no one will read it. If you do not format the subject field correctly your effort may not count.

Starting the next week you will also need to check if the stock received a dividend. The important date is the ex-dividend date, since that is the date the dividend no longer will trade with the stock. Starting the next week report dividend received (if any) during the week (i.e. the stock went ex dividend during the week), the stock price, and then compute your weekly holding period return (HPR) and add both of these to the subject line. For example if the following Tuesday the stock was $66.40 and the dividend during week was $0.375. (If no dividend was paid then the dividend is $0.00.) Then: 1+HPR = (66.40 + .375)/65.70 = 1.01636 (for this purpose use 5 decimal places). Also report the geometric average return to date, which for the first period is same as the HPR.

 The (1+HPR) is essentially the fundamental equation of finance solved this way:

  • P0 = (P1+ DIV)/(1+HPR)n
  • (1+HPR)n = (P1+ DIV)/P0
  • since in most of the case "n" will be one the equation is:
  • (1+HPR)1 = (P1+ DIV)/P0

Please format the subject line a


For this example it would be:


Figure 2

Suppose no dividend were paid the next week (as is likely) and stock price was 65.25. The HPR would be (65.25+0)/66.40 = 0.98268. And geometric average to date would be (1.01636*0.98268).5-1=-0.00062.Then the subject line would look like this:


Continue this exercise through the week of April 23. We will skip the week of March 26, but be sure to adjust the HPR for this during the week of April 2. You might want to develop a little spreadsheet such as Figure 2. (Example data, not actual.)

As part of you final report on the company include the Value of the Equity (VE) of this firm on 4/24/2007. For the number of shares use the last Balance Sheet's number of shares outstanding. Remember that this value would reflect the total present value all of the expected cash flows to the equity holder as of that date.

You will receive an email from me each week with my results for JNJ. (Remember the stock prices I used above are purely fictitious since I don't know what the actual will be.) I will send the first one the week before yours is due, with actual stock price for JNJ. So if you want to see if you are getting what you are supposed to be getting you might also want to look up the stock price for JNJ each Tuesday and compute the above values for JNJ and see how that compares with my Emailed results to you. If you are not getting the same answers than something is wrong. (It might be my mistake or it might be yours, so work it out carefully and find the error.)


Term Project Part II

I recommend that you start on this part of the project after the first exam. While it will probably not take long to complete the project there are things that may take some time to complete. Leaving some elapse time between your efforts increases the quality of the learning experience and avoids the problems associated with the "critical need detectors," always kick in when you fail to plan and try to accomplish the task at the last minute. The critical need is detected and something fails, and prevents you from accomplishing the task. You also need time to think.

 In addition to meeting the general requirements for the firm you will need 10 years of historical data so make sure that the firm you choose has the necessary data. Do not assume that it is bound to be available, if the firm was not a public firm it is unlikely to be available, this is particularly true for the stock price, but is also likely to be true for other financial data. Consider that some firms will already have data for fiscal 2007 and others for fiscal 2006. It is likely that by April firms with fiscal years ending in January through early March should have reported their fiscal year results for 2007 and remaining firms should have data for fiscal 2006 available.

 Collection of data/information is an important part of the process and you need to allow time for its completion. Last minutes searches are frequently fruitless. By now, after at least 15 years of formal education, all of you should have developed a sound research methodology. Hint, real research does not start with the word "Google" or any other internet search engine. Why? The problem with the internet is that there is no "editor" to hold responsible for the material. Any pea brained 12 year old chimp can put up a web page, which should tell you to be extremely cautious about material you find there. Your only protection in using material from this source is in knowing what the data/information should look like, if it is reliable. You have to have an appreciation for the field by having looked at reliable information sources before you venture out in the internet mine field. You should be able to use your existing research skills to obtain the data/information. I will not tell you where or how to find the data/information, this basic research methodology is prerequisite to the course. The information is available in a variety of places and sources. It may be necessary to chain two sources together to get data for the required time period. I will give you one more hint, when you are looking for information on a college campus you go to one of the largest (usually) buildings and start there (ours has a dome in front of it).

 As part of the analysis process you will need to enter the data into a spreadsheet. You can use the spreadsheet to put the data into a presentation format that looks professional. You will need to graph the data using the spreadsheet graphing tool (hand drawn graphs are not acceptable, nor are handwritten papers). Finally you will need to produce a well written report that meets the requirements listed below. You will of course need to integrate the output from the spreadsheet into the report. The term project requires that you apply some of the things you will learn to a firm. As such you will need to choose a firm that meets the requirements listed and then collect, at minimum, the following information:

The Data

    1. The last ten years (1997 through 2006 or later) of financial information including the Balance Sheet and Income Statement. While not required you might also want to obtain the Cash Flow Statements since in some cases it is the best place to find depreciation expenses.

    2. Collect the last nine years (1998 - 2006) of the end of the calendar year close common stock price, along with dividends (if any) paid during the year. This will give you eight holding period returns.

    3. A brief description of the firm's business and activities, in your words. Don't just copy the company's public statements.

    4. Attach the appropriate bibliographical information.

The Analysis and Graphs

Enter this data into a spreadsheet in a standard format. This format should not contain more than about 25 or so lines for the Balance Sheet and about 15 or so lines for the Income Statement. So you should create, simple readable, summary forms, of the financial statement, not just a dump of any data you find. You should have one sheet with 10 years of Balance Sheet information and one sheet with 10 years of Income Statements. Print (landscape) one page containing the Balance Sheets and one page containing the Income Statements. (See Figure 3)

    1. Then compute the ratios in Table 3.5 (page 60) for each year of data. (You will have 10 years of ratios. Print one page containing the ratios. For the first year of data please supply documentation of the calculation of the ratio by giving the data for the numerator and the denominator for each of the required ratios.

    2. Graph, over time, the ratios from each of the five (I, II, III, IV, V) categories in table 3.5 (total of 5 graphs). You may scale the data or use dual axis to achieve your results.

    3. Using the market data for common stock calculate the "Holding Period Return" (See pages 7 and 8 of this handout) for each of the last 8 years and the 8 year Internal Rate of Return on a hypothetical initial investment of $1000 in the stock.

The Analysis

Within the scope of the data you collected comment on the performance of this company. You may choose any format you find useful to accomplish this. Be sure to keep your reader in mind. Think about convincing the reader that you have a good "solution" and that reader can readily determine that from reading the report. So organize it.


In grading the project I will assign a score between 0 and 4. Most individuals will receive a two (2) which means that you have, in general, done the project completely and competently. If you have some problems with your solution you will receive a one (1). If you turn in an assignment that is essentially a piece of paper, but does not complete the project you will receive a zero, meaning the project does not count.



Without Part I













 If you make an obvious effort to complete the assignment it is unlikely that you will receive a zero. A three can be earned by doing a particularly good job. This could be an innovative approach to the solution, and/or an extra effort in the quality of presentation or explanation. A four (4) is reserved for a rare event. Every once in a while someone does an extraordinary presentation. The numbers can be converted to a percentage by the scale given in the box above, on the right.



Figure 3

To print the statements use the page setup options in Excel or other spreadsheet you are using. All have similar options. In this case choose landscape, and choose to fit the output to 1 page tall and 1 page wide. Also set the margins to about .5 inch. You can find these options on the File menu, page setup.

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© Copyright 2007 Pieter A. Vandenberg. All rights reserved.