Project Help Manual

Project Help Manual This lists some of the questions that may come up in the context of the project. You may also find answers to your questions in my emails relating 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 big questions.

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 ìinsideî directors? (i.e. employees or managers of the company)  How many of the directors have other connections to the firm (as suppliers, clients, customers..)?  How many of the directors are CEOs of other companies?  Do any of the directors have large stockholdings or represent those who 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?

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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:

1. Estimating Historical Risk Parameters (Top Down Betas) Run a regression of returns on your firm's stock against returns on a market index, preferably using monthly data and 5 years of observations (or) If you have access to Bloomberg, go into the beta calculation page and print off the page (after setting return intervals to monthly and using 5 years of data) • •

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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 ìriskî 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 Betas o 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 investor o 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 this rating?  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,

Does it have any recent borrowings? If yes, what interest rate did the company pay on these borrowing?  Can you estimate a ìsyntheticî rating? If yes, what interest rate would 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 interest expenses 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 quality of 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 this firm is making on existing projects? If not, how would you modify the return 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 the earlier 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:

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 investment projects? 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 Debt o 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 of monitoring 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 Process o 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 ìnormalizedî operating income of this firm and what is the optimal debt ratio of the firm at this level of income?

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To analyze whether the firm has too much or too little debt relative to the sector and the market, try the following :

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 the following questions:

1. The Immediacy Question o 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 be smaller, have poorer project and stock price performance than their peer groups 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 high bankruptcy 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 at the past. If the company has paid high dividends historically, it will end up with investors who like dividends)

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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 the economy? 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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What do the answers to the last 3 questions tell you about the kind of financing that this firm should use? VIII. Dividend Policy

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

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 it should 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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Given the relationship between dividends and free cash flows to equity, and the trust you have in the management of this firm, would you change this firm's dividend policy?

To measure whether your company is paying too much or too little relative to the sector and the market, try the following:

1. Comparing to Sector and Market o Relative to the sector to which this firm belongs, does it pay too much or too little in dividends? (Do a regression, if necessary) o Relative to the rest of the firms in the market, does it pay too much or too little in dividends? (Use the market regression, if necessary) X. Valuation •

To pick the right model, estimate inputs and value your firm, try the following:

1. Cash Flow Choice o How does this company's dividends compare to its free cash flow to equity? o How stable is leverage expected to be at this firm? If leverage is expected to change, use FCFF If leverage is stable and dividends are equal to FCFE, use Dividends If leverage is stable and dividends are not equal to FCFE, use FCFE. If you cannot estimate FCFE or FCFF, use dividends o How high is inflation in the local currency? (If it is in double digits, you might consider doing a real valuation or a valuation in a different currency) 2. Growth Pattern Choice o How fast have this company's earnings grown historically? o How fast do analysts expect this company's earnings to grow in the future? o What do the fundamentals suggest about earnings growth at this company? (How much is being reinvested and at what rate of return?) o If there is anticipated high growth, what are the barriers to entry that will allow this high growth to continue? For how long? 3. Valuation o What is the value of this firm, based upon a discounted cash flow model? o How much of this value comes from the expected growth? o How sensitive is this value to changes in the different assumptions? 4. Value Enhancement

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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) 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? What is the value of control in this firm?

Telecommunications Infrastructure DEFINITION: Organizations, personnel, procedures, facilities and networks employed to transmit and receive information by electrical or electronic means.

Broadband Infrastructure(Broadband in telecommunications is a term which refers to a signaling method which includes or handles a relatively wide range of frequencies which may be divided into channels or frequency bins) Company

Current Perspective

TierMomentum Status Vision 2nd ADTRAN Neutral/Positive Neutral/Positive EstablishedNeutral/Positive Tier 1st Alcatel-Lucent Positive Positive Mature Positive Tier 2nd Calix Positive Positive EstablishedPositive Tier 1st Cisco Positive Positive Mature Positive Tier 2nd ECI Telecom Positive Positive EstablishedPositive Tier 1st Ericsson Positive Neutral/Positive EstablishedPositive Tier 1st Huawei Positive Positive EstablishedPositive Tier Juniper 2nd Neutral/Positive Neutral/Positive EstablishedPositive Networks Tier 2nd KEYMILE Positive Neutral/Positive EstablishedPositive Tier 2nd Motorola Positive Positive Mature Positive Tier 2nd NEC Neutral Neutral EstablishedNeutral Tier Nokia Siemens 1st Positive Positive EstablishedPositive Networks Tier 2nd Nortel Negative/Neutral Negative/NeutralEstablishedNegative/Neutral Tier

Occam Neutral Networks Siemens Positive Communications Tellabs

Positive

UTStarcom

Neutral

Zhone

Positive

3rd Neutral Tier 1st Positive Tier 2nd Positive Tier 2nd Neutral Tier 2nd Neutral/Positive Tier

Emerging Neutral/Positive EstablishedPositive EstablishedPositive Emerging Neutral/Positive EstablishedPositive

Carrier Infrastructure(Infrastructure is generally a set of interconnected structural elements that provide the framework supporting an entire structure) Current Company Perspective TierMomentum Status Vision 1st Alcatel-Lucent Positive Positive Mature Positive Tier 1st Avici Neutral Neutral EstablishedPositive Tier 1st Ciena Neutral/Positive Neutral/Positive EstablishedNeutral Tier 1st Cisco Positive Positive EstablishedVery Positive Tier 2nd ECI Telecom Neutral/Positive Positive Emerging Positive Tier 2nd Ericsson Neutral Neutral EstablishedNeutral Tier 2nd Extreme Neutral Neutral/Positive EstablishedPositive Tier Force10 3rd Positive Positive Emerging Positive Networks Tier Foundry 2nd Neutral/Positive Neutral/Positive Emerging Neutral/Positive Networks Tier 2nd Huawei Neutral/Positive Positive Emerging Negative/Neutral Tier Juniper 1st Positive Positive Mature Positive Networks Tier Nokia Siemens 1st Neutral/Positive Neutral EstablishedNeutral Networks Tier Nortel Positive 1st Positive Mature Positive

Tier Siemens 1st Neutral/Positive Neutral EstablishedNeutral Communications Tier 3rd Syndeo Neutral/Positive Negative/NeutralEmerging Neutral/Positive Tier 1st Tellabs Neutral/Positive Positive EstablishedNeutral Tier

Carrier IP Telephony(Carrier IP Telephony module covers the

companies, products and strategies impacting the evolution of packetbased networks into the preferred infrastructure for delivering voiceand multimedia-based communications, as well as the gradual transition of the PSTN from circuit-based to packet-based technology.) Current Company Perspective TierMomentum Status Vision 1st Acme Packet Positive Very Positive EstablishedPositive Tier 1st Alcatel-Lucent Neutral/Positive Positive Mature Neutral/Positive Tier 2nd AudioCodes Neutral/Positive Neutral/PositiveEstablishedNeutral/Positive Tier 2nd BroadSoft Positive Positive Emerging Positive Tier 1st Cisco Neutral/Positive Neutral/PositiveEstablishedNeutral/Positive Tier 2nd Comverse Neutral/Positive Neutral/PositiveEmerging Neutral/Positive Tier 2nd CopperCom Neutral/Positive Neutral Emerging Neutral Tier 1st Ericsson Positive Positive EstablishedPositive Tier 2nd GENBAND Neutral/Positive Neutral/PositiveEstablishedPositive Tier 2nd Italtel Neutral/Positive Neutral/PositiveEmerging Neutral/Positive Tier MetaSwitch Neutral/Positive2nd Neutral/PositiveEmerging Neutral/Positive

Tier 3rd NexTone Neutral/Positive Neutral Startup Neutral/Positive Tier Nokia Siemens 1st Neutral/Positive Positive EstablishedNeutral/Positive Networks Tier 1st Nortel Neutral/Positive Neutral/PositiveMature Positive Tier Siemens 1st Neutral/Positive Positive EstablishedNeutral/Positive Communications Tier 2nd Sonus Networks Neutral/Positive Neutral/PositiveEmerging Neutral Tier Sylantro 2nd Positive Positive Emerging Positive Systems Tier 2nd Tekelec Neutral/Positive Positive Emerging Neutral/Positive Tier Thomson 2nd Neutral/Positive Neutral/PositiveEmerging Neutral/Positive (Cirpack) Tier 3rd Veraz Neutral/Positive Neutral/PositiveEmerging Neutral/Positive Tier

Optical Infrastructure Company ADVA Optical Networking

Current Perspective Positive

Alcatel-Lucent

Very Positive

Ciena

Positive

Cisco

Neutral/Positive

ECI Telecom

Neutral/Positive

Ericsson

Neutral/Positive

Fujitsu

Positive

Huawei

Positive

Infinera

Positive

NEC

Neutral

Nokia Siemens

Neutral/Positive

Tier 3rd Tier 1st Tier 2nd Tier 2nd Tier 2nd Tier 1st Tier 1st Tier 1st Tier 2nd Tier 2nd Tier 2nd

Momentum

Status

Vision

Neutral/Positive EstablishedPositive Positive

Mature

Positive

Positive

EstablishedNeutral/Positive

Neutral

Emerging Neutral

Neutral/Positive EstablishedPositive Neutral/Positive Mature

Positive

Positive

Mature

Neutral/Positive

Very Positive

EstablishedNeutral

Very Positive

Emerging Positive

Negative/NeutralEstablishedNegative/Neutral Neutral/Positive Mature

Neutral/Positive

Networks Nortel Siemens Communications Tellabs Transmode ZTE

Tier 1st Neutral/Positive Tier 1st Neutral/Positive Tier 1st Neutral/Positive Tier 3rd Positive Tier 3rd Neutral Tier

Neutral/Positive Mature

Neutral/Positive

Neutral

Positive

Mature

Neutral/Positive EstablishedPositive Positive

Emerging Neutral/Positive

Neutral/Positive Emerging Negative/Neutral

Wireless Infrastructure Company

Current Perspective

TierMomentum Status Vision 1st Alcatel-Lucent Positive Positive Mature Positive Tier 2nd Alvarion Neutral/Positive Neutral/Positive EstablishedNegative/Neutral Tier 1st Cisco Positive Neutral/Positive EstablishedNeutral/Positive Tier 1st Ericsson Very Positive Very Positive Mature Positive Tier 2nd Huawei Neutral/Positive Neutral/Positive EstablishedNeutral Tier Juniper 2nd Networks Negative/Neutral Negative/NeutralEstablishedNegative/Neutral Tier (Quickview) 3rd LG Electronics Negative Negative EstablishedNegative Tier 1st Motorola Neutral/Positive Neutral Mature Neutral/Positive Tier 1st NEC Neutral/Positive Neutral/Positive Mature Negative Tier Nokia Siemens 1st Positive Positive Mature Positive Networks Tier

1st Neutral/Positive Mature Neutral Tier 2nd Samsung Negative/Neutral Negative/NeutralEstablishedNeutral/Positive Tier Siemens 1st Positive Neutral/Positive Mature Positive Communications Tier Starent 1st Positive Positive Mature Positive Networks Tier 2nd UTStarcom Negative Negative Emerging Neutral Tier 2nd ZTE Negative/Neutral Negative/NeutralEmerging Negative/Neutral Tier Nortel

Neutral

Study strategy over the years and achieve the spirit of the 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:

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Their long-term consequences, significantly impact the company’s future activities Capital expenditure decisions often involve substantial cash outlays Decisions once taken become difficult to reverse

Internet Usage and Population Statistics: YEAR 1998 1999 2000 2001 2002 2003 2004 2005 2006

Users

Population % Pen.

1,400,000 2,800,000 5,500,000 7,000,000 16,500,000 22,500,000 39,200,000 50,600,000 40,000,000

1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,094,870,677 1,112,225,812 1,112,225,812

0.1 % 0.3 % 0.5 % 0.7 % 1.6 % 2.1 % 3.6 % 4.5 % 3.6 %

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.

Usage Source ITU ITU ITU ITU ITU ITU C.I. Almanac C.I. Almanac IAMAI

Importance of Cash Flow When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival. Bear in mind that more businesses fail for lack of cash flow than for want of profit. Metro Ethernet equipment market to double by 2008 By 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 the following 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 next ten years, Infonetics said, and Ethernet equipment revenue should grow in double digits through at least 2008. The research 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, the market for so-called "carrier Ethernet" switches and routers will grow to $2.7 billion by 2008, representing 35% of the metro Ethernet equipment market, Infonetics said. In 2004, carrier Ethernet revenue accounted for only 2% of the 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% of the market's revenue last year. North America contributed 35%; Europe, the Middle East and Africa represented 21% and Central and Latin America accounted for 5%.

Metro Ethernet market segments in 2006 percentages of $5.9 billion Brief Article