AEB 4138 Advanced Agribusiness Management

AEB 4138 Advanced Agribusiness Management

AEB 4138 – Advanced Agribusiness Management Fall 2018

Critical Thinking Assignment 3: Valuing Target Corporation For this case study you will take on the role of Rachel (or Ricky) Martin, an investment analyst with Fair Trade Brokerage and Financial Advisors. Your job is to determine if Target Corporation (TGT) is a worthy investment for your new and existing clients. Furthermore, your job is to convince your clients of your position. As such, you must convince your clients that your analysis is correct and clearly explain how you arrived at the stock’s intrinsic (fundamental) value and purchase recommendation. Analysts at Fair Trade suggest that clients purchase a stock when the intrinsic value is as at least 15 percent higher than the current market price. Please use Yahoo Finance, the US Treasury website, and other reliable sources to find the information necessary for this assignment. Please properly cite all information obtained from on-line sources. For reference formatting requirements refer to: http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf In class, we discussed the discounted cash flow (DCF) method and the dividend discount model (DDM) of calculating stock price or the stock’s fundamental value or intrinsic value, and showed how these two methods are equivalent. In the DDM, stock price is a function of dividends, growth, and required returns (with dividend projections supported by earnings projections, hence the equivalence of the DDM to the DCF method). To complete the analysis you will need to make well-justified assumptions regarding dividends, the growth rate, and the rate of return require by equity holders (cost of equity). Recall that the Gordon Growth Model can only be used if the rate of return require by equity holders is greater than the growth rate. If this is not the case, then you will need to make additional assumptions pertaining to: 1) the short-term growth rate, 2) how many periods the short-term growth rate lasts for before switching to a lower, long-term growth rate, and 3) the long-term growth rate. A detailed analysis of how you arrived at your assumptions regarding each of these factors (D1, Re, g1, g2 and n) is critical. Furthermore, your analysis should test the sensitivity of stock’s intrinsic value to all five of these assumptions. In other words, you need to conduct sensitivity analysis for each of the factors (D1, Re, g1, g2 and n). Remember that sensitivity analysis is not scenario analysis. To conduct sensitivity analysis, you will need to change only one factor (i.e. one of your assumptions) at a time. In addition to the discounted cash flow method/dividend discount model method of calculating stock price, you should support your recommendation by using at least two other stock valuation methods discussed in class (i.e. multiplier methods such as P/E; Price/Sales; PEG; etc.). Note that while you are asked to compute the fundamental value of the stock using three methods (DCF/DDM and two multiplier methods) and explore the sensitivity of the intrinsic value to your assumptions, you must arrive at one intrinsic value and a clear purchase recommendation. In other words, you will need to determine which of the valuations method is “best”.

AEB 4138 Advanced Agribusiness Management

http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf
AEB 4138 – Advanced Agribusiness Management Fall 2018

AEB 4138 Advanced Agribusiness Management

For this assignment you should write a memo to your clients. While many of your clients are savvy investors and follow the market, none of them are well versed in finance. Thus, you will need to discuss financial concepts in a manner appropriate for finance novices in your write-up (say it so your mama can understand). For example, if you use CAPM, you will need to discuss this model – and remember a novice will not know about beta or the risk-free rate so the various parts of the model will also need to be explained. Your clients are looking for advanced analysis with evidence of critical thinking. Furthermore, your clients always appreciate well-written memos that make appropriate use of correct grammar and spelling. They are also very busy, so memos written in a concise manner are well received. While your memo should be concise, it should also contain a detailed appendix of your calculations. If you have just one page of writing, I will not read it. You will earn a zero. The course website will only allow you to submit one document. Thus, you will need to “insert” your

AEB 4138 Advanced Agribusiness Management

Excel tables as “objects” in your word document before uploading your write-up to the course website. I must receive both a hardcopy and electronic version submitted through the course website by the due date and time. Otherwise, the write-up is considered late and will not be graded. Extra Credit Opportunity: I will award an additional 5 points (essentially half a letter grade) to any memo that properly references at least two relevant articles from Harvard Business Review, Economist, Bloomberg, NY Times, Wall Street Journal, or equivalently reputable popular press source. The Harvard Business Review (HBR) is a magazine typically written by academics (i.e., professors and other researchers) for practitioners (i.e., managers). The HBR, therefore, is written in a manner that is very accessible and relatively enjoyable to read. Many senior-level managers read the HBR to learn about the most cutting-edge management, marketing, human resource, and finance research. The HBR is easily accessed via the UF Libraries website. Note, to receive extra credit you must show evidence that you have read and understood the articles and use the articles to support your analysis/recommendation. If you simply quote directly from the article, you will not receive extra credit. Stock price quotes do not count toward the extra credit. For reference formatting requirements refer to: http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf

AEB 4138 Advanced Agribusiness Management

http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf
AEB 4138 – Advanced Agribusiness Management Fall 2018

Topics

————————–Achievement Level————————–

Weight Unsatisfactory

(Level 1) Barely adequate

(Level 2) Satisfactory

(Level 3) Good

(Level 4) Excellent (Level 5)

Explicitly stated intrinsic value and

AEB 4138 Advanced Agribusiness Management

purchase recommendation

No intrinsic value or purchase recommendation given

Vague intrinsic value given at the end of the memo

Clear intrinsic value given at the end of the memo, but no purchase recommendation is given

Clear intrinsic value and purchase recommendation given at the end of the memo

Clear intrinsic value given in the first sentence of the memo and purchase recommendation is given in the first paragraph of the memo

5%

Calculations of intrinsic value

using DCF method

No intrinsic value calculated using DCF/DDM method

Intrinsic value is calculated using DCF/DDM method, but the explanation of assumptions are vaguely discussed

Intrinsic value is calculated using DCF/DDM method and the assumptions are clearly discussed

Level 3 and the assumptions are clearly justified

Level 4 and the purchase recommendation is clearly justified using the DCF/DDM

30%

AEB 4138 Advanced Agribusiness Management

Sensitivity analysis

Sensitivity analysis for one of the assumptions with a clear discussion of how changing this assumption affects the stock’s fundamental value

Sensitivity analysis for two of the assumptions with a clear discussion of how changing each of these assumptions affects the stock’s fundamental value

Sensitivity analysis for three of the assumptions with a clear discussion of how changing each of these assumptions affects the stock’s fundamental value

Sensitivity analysis for four of the assumptions with a clear discussion of how changing each of these assumptions affects the stock’s fundamental value

Sensitivity analysis for all five of the assumptions with a clear discussion of how changing each of these assumptions affects the stock’s fundamental value

25%

Calculations of intrinsic value

using alternative methods

No alternative method of calculating intrinsic value

One alternative method of calculating intrinsic value, but the explanation is vague

Two alternative methods of calculating intrinsic value, but the explanations are vague

One alternative method of calculating intrinsic value with a clear explanation of how the information was used to arrive at the purchase recommendation

Two alternative methods of calculating intrinsic value with clear explanations of how each calculation was used to arrive at the purchase recommendation

20%

Grammar Several spell check errors

No spell check errors, but spelling errors exist

Level 2 and no spelling errors Level 3 and no grammatical errors Level 4 and pronoun use is correct

10%

AEB 4138 Advanced Agribusiness Management

Readability

Memo is one giant run on sentence or bullet points

Memo uses paragraphs, but the paragraphs often contain several thoughts

Memo uses paragraphs and well-structured sentences

Level 3 and memo uses headings to guide the reader, graphs and tables to illustrate key points, and is appropriate for finance novices

Level 4 and graphs and tables are well labeled

10%

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