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?
• 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:
 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)

• 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?

• 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)

• 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?
 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 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
 o 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
 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 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)
Current
Company 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 3rd
Neutral Neutral Emerging Neutral/Positive
Networks Tier
Siemens 1st
Positive Positive EstablishedPositive
Communications Tier
2nd
Tellabs Positive Positive EstablishedPositive
Tier
2nd
UTStarcom Neutral Neutral Emerging Neutral/Positive
Tier
2nd
Zhone Positive Neutral/Positive EstablishedPositive
Tier

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 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.)
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
Current
Company Perspective Tier Momentum Status Vision
ADVA Optical 3rd
Positive Neutral/Positive EstablishedPositive
Networking Tier
1st
Alcatel-Lucent Very Positive Positive Mature Positive
Tier
2nd
Ciena Positive Positive EstablishedNeutral/Positive
Tier
2nd
Cisco Neutral/Positive Neutral Emerging Neutral
Tier
2nd
ECI Telecom Neutral/Positive Neutral/Positive EstablishedPositive
Tier
1st
Ericsson Neutral/Positive Neutral/Positive Mature Positive
Tier
1st
Fujitsu Positive Positive Mature Neutral/Positive
Tier
1st
Huawei Positive Very Positive EstablishedNeutral
Tier
2nd
Infinera Positive Very Positive Emerging Positive
Tier
2nd
NEC Neutral Negative/NeutralEstablishedNegative/Neutral
Tier
Nokia Siemens Neutral/Positive 2nd Neutral/Positive Mature Neutral/Positive
Networks Tier
1st
Nortel Neutral/Positive Neutral/Positive Mature Neutral/Positive
Tier
Siemens 1st
Neutral/Positive Neutral Mature Positive
Communications Tier
1st
Tellabs Neutral/Positive Neutral/Positive EstablishedPositive
Tier
3rd
Transmode Positive Positive Emerging Neutral/Positive
Tier
3rd
ZTE Neutral Neutral/Positive Emerging Negative/Neutral
Tier

Wireless Infrastructure
Current
Company 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
Nortel Neutral 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

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:

• 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 Users Population % Pen. Usage Source
1998 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.
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