This is your second interview with a prestigious brokerage firm for a job as an equity analyst.

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Question:

This is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the Vice President of Equity. Everything has gone well. They want to test your ability as an analyst. You are seated in a room with a computer and a list with the names of two companies – Ford (ticker F) and Microsoft (ticker MSFT). You have to complete the following tasks

1. Download the annual income statements, balance sheets, and cashflow statements for the last four fiscal years from Market Watch (www.morningstar.com) Enter each company’s stock symbol and then go to “financials” and then “All Financials.” Export the statements to Excel by right-clicking while the cursor is inside each statement.

2. Find historical stock prices for each firm from Yahoo! Finance (http://finance.yahoo.com). Enter your stock symbol, click “Historical Prices” in the left column, and enter the proper date range to cover the last day of the month corresponding to the date of each financial statement. For each financial statement, use the same date for the start and end date. Use the closing stock prices (not the adjusted close). To calculate the firm’s market capitalization at each date, multiply the number of shares outstanding (see “Basic on the income statement “Weighted Average Shares Outstanding”) by the firm’s historic stock price.

3. For each of the four years of statements, compute the following ratios for each firm.

Valuation Ratios: Price-Earnings Ratio (for EPS use Diluted EPS Total), Price-to-Book Ratio

Profitability Ratios: Operating Profit Margin, Net Profit Margin,Return on Equity

Financial Strength Ratios : Current Ratio, Debt Ratio, Interest Coverage Ratio (Times interest earned)

4. Obtain industry averages for each firm from Reuters.com (http://www.reuters.com/finance/stocks). Enter the stock symbol on the top of the page in the “Symbol lookup,” click search, select the company from the list that appears, and then click the “Financials” tab.

a. Compare each firm’s ratios to the available industry ratios for the most recent year. (Ignore the “Company” column as your calculations will be different.)

b. Analyze the performance of each individual firm’s performance with respect to its industry. Identify any strengths or weaknesses you find in each firm.

5. Examine the industry price-to-book ratios to the one you calculated for each firm. Which, if any, of the two firms can be considered among “growth firms” within their industry and which, if any can be considered among “value firms” within their industry? Explain why.

6. Compare valuation ratios across the two firms. How do you interpret the difference between them?

7. Construct a portfolio consisting of these two companies, describing the five years of enterprise values that you would allocate to each. Explain why.