Project Help Manual

8/14/2019 Project Help Manual

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Project Help Manual

This lists some of the questions that may come up in the context of theproject. You may also find answers to your questions in my emailsrelating to the project, which are listed here.

I. Corporate Governance Analysis

o To understand the relationship between managers and stockholders, try

answering the following questions. Note that you may not have the

information to answer every question, but try to keep your focus on the bigquestions.

1. The Chief Executive Officer

Who is the CEO of the company? How long has he or she been

CEO? If it is a family run company, is the CEO part of the family? If not,

what career path did the CEO take to get to the top? (Did he or she

come from within the organization or from outside?) How much did the CEO make last year? What form did the

compensation take? (Break down by salary, bonus and option

components) How much stock and options in the company does the CEO own?

2. The Board of Directors

Who is on the board of directors of the company? How long have

they served as directors? How many of the directors are inside directors? (i.e. employees or

managers of the company)

How many of the directors have other connections to the firm (assuppliers, clients, customers..)?

How many of the directors are CEOs of other companies?

Do any of the directors have large stockholdings or represent thosewho do?

3. Share Voting Structure

Are there differences in voting rights across shares? If so, do incumbent managers own a disproportionate share of the

voting shares?
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To understand the relationship between the firm and financial markets, try asking

the following questions:

1. Financial Market Concerns

o How many analysts follow the firm?o How much trading volume is there on this stock?

To understand the relationship between the firm and society try answering the

following questions:

1. Societal Constraints

o Does the firm have a particularly good or bad reputation as a corporate

citizen?

o If it does, how has it earned this reputation?o If the firm has been a recent target of social criticism, how has it

responded?

II. Stockholder Analysis

To understand who the average and marginal investors in the firm are, try

answering the following questions:

1. Who holds stock in this company?o How many stockholders does the company have?

o What percent of the stock is held by institutional investors?

o Does the company have listings in foreign markets? (If you can, estimate

the percent of the stock held by non-domestic investors)2. Insider Holdings

o Who are the insiders in this company? (Besides the managers and

directors, anyone with more than 5% is treated as an insider)o What role do the insiders play in running the company?

o What percent of the stock is held by insiders in the company?

o What percent of the stock is held by employees overall? (Include the

holdings by employee pension plans)o Have insiders been buying or selling stock in this company in the most

recent year?

III. Risk and Return

To understand the risk profile of the company, estimate risk parameters and the

hurdle rates for the firm, try answering the following questions:


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1. Estimating Historical Risk Parameters (Top Down Betas)

Run a regression of returns on your firm's stock against returns on amarket index, preferably using monthly data and 5 years of

observations (or)If you have access to Bloomberg, go into the beta calculation page andprint off the page (after setting return intervals to monthly and using 5years of data)

What is the intercept of the regression? What does it tell you about the

performance of this company's stock during the period of the regression?

What is the slope of the regression?

o What does it tell you about the risk of the stock?

o How precise is this estimate of risk? (Provide a range for the estimate.)

What portion of this firm's risk can be attributed to market factors? What portion

to firm-specific factors? Why is this important? How much of the risk for this firm is due to business factors? How much of it is

due to financial leverage?

1. Comparing to Sector Betas (Bottom up Betas)

o Break down your firm by business components, and estimate a business

beta for each component

o Attach reasonable weights to each component and estimate a unlevered

beta for the business.o Using the current leverage of the company, estimate a levered beta for

each component.

2. Choosing Between Betaso Which of the betas that you have estimated for the firm (top down or

bottom up) would you view as more reliable? Why?

o Using the beta that you have chosen, estimate the expected return on an

equity investment in this company to

a short term investor

a long term investoro As a manager in this firm, how would you use this expected return?

3. Estimating Default Risk and Cost of Debt

o If your company is rated,

What is the most recent rating for the firm?

What is the default spread and interest rate associated with thisrating?

If your company has bonds outstanding, estimate the yield to

maturity on a long term bond? Why might this be different from

the rate estimated in the last step?

What is the company's marginal tax rate?o If your company is not rated,


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Does it have any recent borrowings? If yes, what interest rate did

the company pay on these borrowing?

Can you estimate a synthetic rating? If yes, what interest ratewould correspond to this rating?)

4. Estimating Cost of Capital

o

Weights for Debt and Equity What is the market value of equity?

Estimate a market value for debt. (To do this you might have to

collect information on the average maturity of the debt, the interestexpenses in the most recent period and the book value of the debt)

What are the weights of debt and equity?

o Cost of Capital

What is the cost of capital for the firm?

IV. Measuring Investment Returns

To analyze the quality of the firm's existing projects and get a sense of the qualityof future projects, try answering the following questions:

1. Accounting Returns on Projects

o What is the return on equity earned by the firm? Based upon this return, is

the firm picking good projects?o What is the return on capital earned by the firm? Based upon this return, is

the firm picking good projects?

o Are there any trends in the accounting returns, and if so, what do they tell

you about future projects?

o Do you think the accounting return is a fair measure of the returns that thisfirm is making on existing projects? If not, how would you modify thereturn to make it a fairer measure?

2. Economic Value Added

o Compute the book value of equity invested in this company and compute

the equity economic value added. What, if anything, does this tell you

about this company?

o Compute the book value of capital invested in this company and compute

the economic value added. What, if anything, does this tell you about this

company?

o Why might a comparison based upon economic value added lead you to

different conclusions than one based upon the return differences in theearlier section?

V. Capital Structure Choices

To analyze the existing financial mix of the firm and to assess, from a qualitative

trade off between the benefits and the costs of debt, whether the firm has too

much or too little debt, try answering the following questions:


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To answer these questions, you might want to look at the following

1. Benefits of Debt

o What marginal tax rate does this firm face and how does this measure up

to the marginal tax rates of other firms? Are there other tax deductions that

this company has (like depreciation) to reduce the tax bite?o Does this company have high free cash flows (for eg. EBITDA/Firm

Value)? Has it taken and does it continue to have good investmentprojects? How responsive are managers to stockholders? (Will there be an

advantage to using debt in this firm as a way of keeping managers in line

or do other (cheaper) mechanisms exist?)

2. Costs of Debto How high are the current cash flows of the firm (to service the debt) and

how stable are these cash flows? (Look at the variability in the operating

income over time)o How easy is it for bondholders to observe what equity investors are doing?

Are the assets tangible or intangible? If not, what are the costs in terms ofmonitoring stockholders or in terms of bond covenants?

o How well can this firm forecast its future investment opportunities and

needs? How much does it value flexibility?

VI. Optimal Capital Structure

To assess the optimal financing mix of your firm, try the following questions:

1. Cost of Capital Approach

o What is the current cost of capital for the firm?o What happens to the cost of capital as the debt ratio is changed?

o At what debt ratio is the cost of capital minimized and firm value

maximized? (If they are different, explain)

o What will happen to the firm value if the firm moves to its optimal?

o What will happen to the stock price if the firm moves to the optimal, and

stockholders are rational?

2. Building Constraints into the Processo What rating does the company have at the optimal debt ratio? If you were

to impose a rating constraint, what would it be? Why? What is the optimal

debt ratio with this rating constraint?o How volatile is the operating income? What is the normalized operating

income of this firm and what is the optimal debt ratio of the firm at this

level of income?

To analyze whether the firm has too much or too little debt relative to the sector

and the market, try the following :


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1. Relative Analysis

o Relative to the sector to which this firm belongs, does it have too much or

too little in debt? (Do a regression, if necessary)o Relative to the rest of the firms in the market, does it have too much or too

little in debt? (Use the market regression, if necessary)

VII. Mechanics of Moving to the Optimal

To understand whether your firm should move to its optimal gradually or quickly,

and whether it should take projects or alter its existing mix, try answering thefollowing questions:

1. The Immediacy Questiono If the firm is under levered, does it have the characteristics of a firm that is

a likely takeover target? (Target firms in hostile takeovers tend to besmaller, have poorer project and stock price performance than their peergroups and have lower insider holdings)

o If the firm is over levered, is it in danger of bankruptcy? (Look at the bond

rating, if the company is rated. A junk bond rating suggests highbankruptcy risk.)

2. Alter Financing Mix or Take Projects

o What kind of projects does this firm expect to have? Can it expect to make

excess returns on these projects? (Past project returns is a reasonable place

to start - see the section under investment returns)

o What type of stockholders does this firm have? If cash had to be returned

to them, would they prefer dividends or stock buybacks? (Again, look atthe past. If the company has paid high dividends historically, it will end up

with investors who like dividends)

To analyze what kind of financing the firm should use to move to its optimal, try

the following:

1. Financing Type

o How sensitive has this firm's value been to changes in macro economic

variables such as interest rates, currency movements, inflation and theeconomy?

o How sensitive has this firm's operating income been to changes in the

same variables?

o How sensitive is the sector's value and operating income to the same

variables?


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o What do the answers to the last 3 questions tell you about the kind of

financing that this firm should use?

VIII. Dividend Policy

To analyze how much the firm has returned to stockholders in the past, and toassess, from a qualitative trade off, whether it should return more or less, try thefollowing:

1. Historical Dividend Policy

o How much has this company paid in dividends over the last few years?

o How much stock has this company bought back over the last few years?

2. Firm Characteristics

o How easily can the firm convey information to financial markets? In other

words, how necessary is it for them to use dividend policy as a signal?o Who is the average stockholder in this firm? Does he or she like dividends

or would they prefer stock buybacks?

o How well can this firm forecast its future financing needs? How valuable

is preserving flexibility to this firm?

o Are there any significant bond covenants that you know of on the firm's

dividend policy?o How does this firm compare with other firms in the sector in terms of

dividend policy?

IX. A Framework for Analyzing Dividends

To assess how much the firm could have returned to stockholders and whether itshould be returning more or less, try the following:

1. Affordable Dividends

o What were the free cash flows to equity that this firm had over the last few

years?

o How much cash did the firm actually return to its owners over the last few

years?o What is the current cash balance for this firm?

2. Management Trust

o How well have the managers of the firm picked investments, historically?

(Look at the investment return section)

o Is there any reason to believe that future investments of this firm will be

different from the historical record?3. Changing Dividend Policy


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o In what aspect of corporate finance (investment, financing or dividend

policy) does this firm lag? (You can build on the intrinsic analysis that you

have done so far, or use industry averages)o If you fixed the problem areas (i.e., take better projects, move to the

optimal debt ratio, return more or less cash to owners), what would happen

to the value of the equity in this firm?o What is the value of control in this firm?

Telecommunications InfrastructureDEFINITION: Organizations, personnel, procedures, facilities and networks employed to transmit and receiveinformation by electrical or electronic means.

Broadband Infrastructure(Broadband intelecommunications is a term which refers to a signalingmethod which includes or handles a relatively wide

range of frequencies which may be divided intochannels or frequency bins)

Company

Current

Perspective TierMomentum Status Vision

ADTRAN Neutral/Positive2nd

TierNeutral/Positive EstablishedNeutral/Positive

Alcatel-Lucent Positive1stTier

Positive Mature Positive

Calix Positive2nd

TierPositive EstablishedPositive

Cisco Positive1st

TierPositive Mature Positive

ECI Telecom Positive2nd

TierPositive EstablishedPositive

Ericsson Positive1st

TierNeutral/Positive EstablishedPositive

Huawei Positive1stTier

Positive EstablishedPositive

Juniper

NetworksNeutral/Positive

2nd


KEYMILE Positive2nd


Motorola Positive 2ndTier


NEC Neutral2nd

TierNeutral EstablishedNeutral

Nokia SiemensNetworks

Positive1stTier


Nortel Negative/Neutral2nd

TierNegative/NeutralEstablishedNegative/Neutral


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Occam

NetworksNeutral

3rd

TierNeutral Emerging Neutral/Positive

SiemensCommunications

Positive1stTier


Tellabs Positive2nd

Tier


UTStarcom Neutral2nd

TierNeutral Emerging Neutral/Positive

Zhone Positive2ndTier

Neutral/Positive EstablishedPositive

Carrier Infrastructure(Infrastructure is generally a set of interconnectedstructural elements that provide the framework supporting an entire structure)

CompanyCurrentPerspective TierMomentum Status Vision

Alcatel-Lucent Positive1st


Avici Neutral1st

TierNeutral EstablishedPositive

Ciena Neutral/Positive1stTier

Neutral/Positive EstablishedNeutral

Cisco Positive 1stTierPositive EstablishedVery Positive

ECI Telecom Neutral/Positive2ndTier

Positive Emerging Positive

Ericsson Neutral2nd


Extreme Neutral2nd


Force10Networks

Positive3rdTier

Positive Emerging Positive

Foundry

Networks

Neutral/Positive2nd

Tier

Neutral/Positive Emerging Neutral/Positive

Huawei Neutral/Positive2ndTier

Positive Emerging Negative/Neutral

Juniper

NetworksPositive

1st


Nokia Siemens


1st


Nortel Positive 1st Positive Mature Positive


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Tier

Siemens

CommunicationsNeutral/Positive

1st


Syndeo Neutral/Positive3rd

TierNegative/NeutralEmerging Neutral/Positive

Tellabs Neutral/Positive1stTierPositive EstablishedNeutral

Carrier IP Telephony(Carrier IP Telephony module covers thecompanies, products and strategies impacting the evolution of packet-

based networks into the preferred infrastructure for delivering voice-and multimedia-based communications, as well as the gradual

transition of the PSTN from circuit-based to packet-based technology.)

CompanyCurrentPerspective TierMomentum Status Vision

Acme Packet Positive1st

TierVery Positive EstablishedPositive

Alcatel-Lucent Neutral/Positive1st

TierPositive Mature Neutral/Positive

AudioCodes Neutral/Positive2nd

TierNeutral/PositiveEstablishedNeutral/Positive

BroadSoft Positive2nd

TierPositive Emerging Positive

Cisco Neutral/Positive1stTier

Neutral/PositiveEstablishedNeutral/Positive

Comverse Neutral/Positive2nd

TierNeutral/PositiveEmerging Neutral/Positive

CopperCom Neutral/Positive

2nd

TierNeutral Emerging Neutral

Ericsson Positive1stTier


GENBAND Neutral/Positive2nd

TierNeutral/PositiveEstablishedPositive

Italtel Neutral/Positive2ndTier

Neutral/PositiveEmerging Neutral/Positive

MetaSwitch Neutral/Positive2nd Neutral/PositiveEmerging Neutral/Positive


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Tier

NexTone Neutral/Positive3rd

TierNeutral Startup Neutral/Positive

Nokia Siemens


1st

TierPositive EstablishedNeutral/Positive

Nortel Neutral/Positive1stTierNeutral/PositiveMature Positive

Siemens


1st


Sonus Networks Neutral/Positive2nd

TierNeutral/PositiveEmerging Neutral

Sylantro

SystemsPositive

2nd

TierPositive Emerging Positive

Tekelec Neutral/Positive2nd

TierPositive Emerging Neutral/Positive

Thomson

(Cirpack)

Neutral/Positive2nd

Tier

Neutral/PositiveEmerging Neutral/Positive

Veraz Neutral/Positive3rd

TierNeutral/PositiveEmerging Neutral/Positive

Optical Infrastructure

CompanyCurrentPerspective Tier Momentum Status Vision

ADVA Optical

NetworkingPositive

3rd


Alcatel-Lucent Very Positive 1stTier


Ciena Positive2nd


Cisco Neutral/Positive2nd

TierNeutral Emerging Neutral

ECI Telecom Neutral/Positive2ndTier

Neutral/Positive EstablishedPositive

Ericsson Neutral/Positive1st

TierNeutral/Positive Mature Positive

Fujitsu Positive1st

Tier

Positive Mature Neutral/Positive

Huawei Positive1stTier

Very Positive EstablishedNeutral

Infinera Positive2nd

TierVery Positive Emerging Positive

NEC Neutral2ndTier

Negative/NeutralEstablishedNegative/Neutral

Nokia Siemens Neutral/Positive 2nd Neutral/Positive Mature Neutral/Positive


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Networks Tier

Nortel Neutral/Positive1st

TierNeutral/Positive Mature Neutral/Positive

Siemens


1st

TierNeutral Mature Positive

Tellabs Neutral/Positive 1stTier Neutral/Positive EstablishedPositive

Transmode Positive3rd

TierPositive Emerging Neutral/Positive

ZTE Neutral3rd

TierNeutral/Positive Emerging Negative/Neutral

Wireless Infrastructure

Company

Current

Perspective TierMomentum Status Vision

Alcatel-Lucent Positive1st


Alvarion Neutral/Positive 2ndTier

Neutral/Positive EstablishedNegative/Neutral

Cisco Positive1st

TierNeutral/Positive EstablishedNeutral/Positive

Ericsson Very Positive1stTier

Very Positive Mature Positive

Huawei Neutral/Positive2nd

TierNeutral/Positive EstablishedNeutral

Juniper

Networks

(Quickview)

Negative/Neutral2nd

TierNegative/NeutralEstablishedNegative/Neutral

LG Electronics Negative 3rdTier

Negative EstablishedNegative

Motorola Neutral/Positive1st

TierNeutral Mature Neutral/Positive

NEC Neutral/Positive1st

TierNeutral/Positive Mature Negative

Nokia SiemensNetworks

Positive1stTier



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Nortel Neutral1st

TierNeutral/Positive Mature Neutral

Samsung Negative/Neutral2ndTier

Negative/NeutralEstablishedNeutral/Positive

Siemens

Communications

Positive1st

Tier

Neutral/Positive Mature Positive

Starent

NetworksPositive

1st


UTStarcom Negative2ndTier

Negative Emerging Neutral

ZTE Negative/Neutral2nd

TierNegative/NeutralEmerging Negative/Neutral

Study strategy over the years and achieve the spirit ofthe warrior. Today is victory over yourself of yesterday;

tomorrow is your victory over lesser men.Miyamoto Musashi

Capital budgeting is important to the management due to the following reasons:

Their long-term consequences, significantly impact the companys future activities

Capital expenditure decisions often involve substantial cash outlays

Decisions once taken become difficult to reverse

Internet Usage and Population Statistics:

YEAR Users Population % Pen. Usage Source1998 1,400,000 1,094,870,677 0.1 % ITU

1999 2,800,000 1,094,870,677 0.3 % ITU

2000 5,500,000 1,094,870,677 0.5 % ITU

2001 7,000,000 1,094,870,677 0.7 % ITU

2002 16,500,000 1,094,870,677 1.6 % ITU

2003 22,500,000 1,094,870,677 2.1 % ITU

2004 39,200,000 1,094,870,677 3.6 % C.I. Almanac

2005 50,600,000 1,112,225,812 4.5 % C.I. Almanac

2006 40,000,000 1,112,225,812 3.6 % IAMAI

Gross National Income:GNI per capita is US$ 1,140 ('04) according to World Bank.

India Broadband Subscribers:188,600 broadband subscribers as of 1Q/2004 per WMRC.
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Importance of Cash FlowWhen planning the short- or long-term funding requirements of abusiness, it is more important to forecast the likely cash requirementsthan to project profitability etc. Whilst profit, the difference between

sales and costs within a specified period, is a vital indicator of theperformance of a business, the generation of a profit does notnecessarily guarantee its development, or even the survival. Bear inmind that more businesses fail for lack of cash flow than forwant of profit.

Metro Ethernet equipment market to double by 2008By Ed Gubbins

Apr 12, 2005 3:02 PM

The worldwide market for metro Ethernet equipment, which reached $3.8 billion in 2004, should double in thefollowing four years, reaching $7.6 billion in 2008, according to data released today by Infonetics Research.

The percentage of metro networking capital spent on metro Ethernet equipment will grow each year for the nextten years, Infonetics said, and Ethernet equipment revenue should grow in double digits through at least 2008. Theresearch firm also expects metro Ethernet ports to increase 433% between 2004 and 2008.

As the Metro Ethernet Forum further develops standards to clearly define carrier-class Ethernet services, themarket for so-called "carrier Ethernet" switches and routers will grow to $2.7 billion by 2008, representing 35% ofthe metro Ethernet equipment market, Infonetics said. In 2004, carrier Ethernet revenue accounted for only 2% ofthe metro Ethernet market, with $61 million in worldwide revenue.

Nortel Networks leads the global market for both Ethernet-over-Sonet/SDH equipment and Ethernet over

wavelength-division multiplexing (WDM), Infonetics added. Alcatel is second in the Ethernet-over-Sonet market,Adva Optical Networking is second in Ethernet-over-WDM, and Cisco Systems is a close third in both markets.

The biggest geographic market for metro Ethernet equipment in 2004 was Asia/Pacific, which contributed 39% ofthe market's revenue last year. North America contributed 35%; Europe, the Middle East and Africa represented21% and Central and Latin America accounted for 5%.

Metro Ethernet marketsegments in 2006 -

percentages of $5.9 billion -Brief Article

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