FINC5001 Foundations in Finance
Semester 1, 2023
Weighting: 20%
Due date: Sunday 5th May 2023
11:59 PM
You currently work as a team at a major investment bank and have been tasked by the Investment Management Division (IMD) to analyse a stock that will be incorporated into a portfolio with other assets from the same market. You will need to prepare a professional business report that will be submitted to the Investment Management Division (IMD) that answers the questions proposed in this investment brief as well as a final recommendation.
Stock Details [10 marks]
1. Select a publicly listed company that is a constituent of S&P/ASX 200 index (Australia), that has at least 10 consecutive calendar years (i.e., 1 January 2013 to 31 December 2022) of dividend history. The selected company cannot be one which is listed on the last page of the Assignment instructions. Describe the company that you have chosen, so that the IMD has a comprehensive understanding of its operations and risks. (If the company did not pay dividends in 2020 due to COVID-19 but paid dividends in every other year, including 2021 and 2022, this will be allowed) (1 mark)
2. List the Global Industry Classification Standard (GICS) sector, industry, and sub-industry for your chosen company. List one other public company that is in the same sub-industry as your chosen company and briefly describe its operations. This competitor does not have to be listed in any of the indices nor is subject to the restrictions in Task 1. (1 mark)
3. Present a table of a current “stock quote” with the following characteristics: (1) Current Price (2) 52 Week Range (3) Market Cap (4) Beta (5) P/E Ratio (6) EPS (7) Earnings Date (8) Forward Dividend and Yield, (9) Ex-Dividend Date, and (10) 1 year Target Estimate for both your chosen company and competitor. Define and interpret the following four measures including Market Cap, Beta, EPS, and Forward Dividend Yield. Compare and discuss the differences that you observe between the two companies in respects of the four measures including Market Cap, Beta, EPS, and Forward Dividend Yield. Note you should consider the comparability of the measures. (4 marks)
4. Define and interpret the P/E ratio. Compare the P/E ratios of your chosen company and the competitor to the average P/E ratio of the industry of your chosen company. Compare these numbers with the average P/E ratio of your chosen stock market index as well. Discuss in detail with references. (4 marks)
Summary Statistics and Risk Characterisation [30 marks]
5. List the current Government bond rates of the following maturities: (i) 2-year, (ii) 3-year, (iii) 5-year and (iv) 10-year in a table. Graph the 10-year government bond rate over the period from January 2012 to the most recent month with data available. How has the 10-year rate changed over this period? Why do you think this has occurred? Do you think the 10-year rate will go up or down in the future? Discuss with references to the appropriate academic literature. (5 marks)
6. Calculate the annual returns for the market index for the last: (i) 5-year period, (ii) 10- year period, and (iii) 20-year period. Calculate the average annual return and standard deviation of annual returns over these 3 time periods using both the arithmetic and geometric averages (for the standard deviation, you can use just the arithmetic average with clarifications). Display the results in a table. How have these values changed over time? What do these changes mean for the average investor? Discuss in detail. (5 marks)
7. Calculate the annual return (for each financial year) of your chosen company from 1st January 2013 to 31st December 2022. Annualise all dividends paid out. Calculate the average annual return and standard deviation of annual returns for the whole period using both the arithmetic and geometric averages (for the standard deviation, you can use just the arithmetic average with clarifications). Display the results in a table. How has your company performed over this period? Do the arithmetic and geometric averages differ for your company? Why or why not? Interpret these numbers for your manager. (5 marks)
8. Calculate the annual beta for your chosen company returns using the measures that you generated in Tasks 6 and 7. Report the formula that you followed to calculate the annual beta and explain how each variable in the formula is measured. Compare your calculated annual beta with the beta found in your stock quote. Are these values the same or different? Explain and discuss why they may be similar and/or different. (5 marks)
9. Using the Capital Asset Pricing Model (CAPM), calculate the required rate of return on equity for your chosen company. Select one of the different government bond rates in part (5), as proxies for the risk-free rate. Select one of the annual returns (i.e., arithmetic average or geometric average) calculations calculated in part (6), as a proxy for the expected market returns and justify your choices. Discuss how appropriate your choices areas proxies for the theoretical values in the CAPM equation. (10 marks)
Growth Rates and Valuation [30 marks]
10. Estimate the growth rate of your chosen company’s cash flows by using the following three methods:
(a) Calculate and list the annual growth rates for dividends from January 2013 to December 2022 (For any years within your sample with anomalous dividend growth rates discuss why this might have occurred. If your company did not pay dividends in 2020 due to COVID-19 just use an appropriate proxy and justify your choice). Calculate the arithmetic and geometric average annual growth rate of dividends over this period. Also calculate the arithmetic and geometric average annual growth rate of dividends for the subperiod between January 2013- December 2019 (pre-COVID-19) and compare the values. Do you think your company’sdividends will grow at these rates for the foreseeable future? Explain in detail why or why not with references. (5 marks)
(b) Calculate and list the annual growth rates for net income from January 2013 to December 2022 (For any years within your sample with anomalous net income growth rates discuss why this might have occurred). Calculate the arithmetic and geometric average annual growth rate of net income over this period. Also calculate the arithmetic and geometric average annual growth rate of net income for the subperiod between January 2013 to December 2019 (pre- COVID- 19) and compare the values. Do you think your company’s net income will grow at these rates for the foreseeable future? Explain in detail why or why not with references. (5 marks)
(c) Using the formula g = b * ROE, calculate and list the growth rates, plowback ratios, and ROE for the period between January 2013 to December 2022 (For any years within your sample with anomalous plowback ratios and/or ROE discuss why this might have occurred). Calculate the arithmetic and geometric average annual growth rate over this period (remove any rates that are negative from your sample). Also calculate the arithmetic and geometric average annual growth rate for the subperiod between January 2013-December 2019 (pre-COVID-19) and compare the values (again remove any rates that are negative from your sample). Do you think this method of calculating growth rates is useful for valuation? Explain in detail why or why not. (5 marks)
11. Using the Discounted Cash Flow (DCF) models you have learnt in FINC5001, determine the intrinsic value of your chosen company using the required rate of return from Task 9 and (a) growth rate(s) (from Task 10). Justify the choices and assumptions you have made in undertaking this calculation in detail and why you did not choose any other values instead. Discuss why you chose your valuation model and its key assumptions and why you believe your chosen rates satisfy these assumptions. When do you think the GGM is preferred to a two-stage or multi-stage growth model and why? Explain.
(If you make deviations from the choices in Task 9 and/or Task 10, clearly justify why you made these changes and why these new values are more sensible for this analysis). (10 marks)
12. The values that you have utilised in part (11) represent only one possible set of choices for a valuation model. Determine the intrinsic value of your chosen company using a range of values (+1% and -1% for your growth rates and +1% and -1% for your discount rate). You should have a total of 9 intrinsic value calculations like the table below:
|
g/r
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+1%
|
0
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-1%
|
|
+1%
|
|
|
|
|
0
|
|
Base Case
|
|
|
-1%
|
|
|
|
For example, the top left slot would calculate an intrinsic value using both a growth rate and required rate of return that is 1% higher than your chosen rates in part (11) (for any negative calculations just put N/A). Briefly discuss the results in this table. (5 marks)
Recommendation [20 marks]
13. Using the DCF analyses performed in Tasks 1-12, make a detailed recommendation for your chosen company as to whether to buy, sell or hold this stock. Along with your valuation model, you should use any relevant information about your chosen company, competitors, its industry, and the economic outlook to justify your recommendation. Detail the limitations of your analysis and assumptions as well as incorporate the sensitivity analysis done in Task 12 and what this analysis adds to your valuation. A well-justified recommendation properly connects outside information on how it relates to your valuation model via dividends, cash flows, growth rates, discount rates, and other financial factors. Remember, you are trying to present a report that convinces the IMD that you have done a thorough and detailed analysis of your chosen company. The recommendation must be cohesive and consistent with the analyses performed in the sections above.
Presentation and overall style. of the report [10 marks]
Marking Criteria
The criteria below will be followed when marking each part of the assignment:
1. The extent and quality of critical reasoning/critical thinking.
2. The demonstration of knowledge of relevant theory.
3. The successful usage and interpretation of relevant data.
4. The extent to which the work is clearly and concisely presented.
Weight of Final Mark: This assignment will be marked out of 100 marks and will be scaled to account for 20% of course total mark.
Formatting and Presentation:
1. The number of pages allowed ranges from a minimum of 15 to a maximum of 20, with 1.5 line spacing and a font size of 12 Arial or Calibri. It should have normal-sized (2.54cm) margins on all sides. Please number the pages of your report. Marks will be reduced by 5 for each page you exceed the lower and the upper page limit. For example, your mark will be reduced by 10 if the report is of a length of 22 pages or 13 pages. You will be penalised for inappropriate formatting.
2. Text presented in tables and graphs do not need to follow this formatting requirement. However, these will still need to be professionally presented in the report.
3. Ensure you use proper academic referencing in supporting the ideas and discussion
within your report. All reports must include a list of references in academic form using the APA 7th method. Further information on the APA referencing style can be found
here:https://libguides.library.usyd.edu.au/citation/apa7 . Failing to reference your sources maybe subject to further actions according to the University of Sydney Code of Conduct and will be dealt with by the School.
https://www.sydney.edu.au/students/academic-dishonesty.html
4. Pay particular attention to presentation. A component of your mark will be based on presentation. Avoid overdoing formatting and ensure that the report is very clear, logical, and professional. Pay attention to grammar. Clear and logical presentation is a major challenge in report preparation.
5. Preparing a concise report poses a major challenge. Brevity and conciseness are key ingredients of a highly successful report. Every part of the report should somehow add to the result; otherwise, it is superfluous and distracting.
6. Use headings in the report to separate key ideas. Using paragraphs will also assist with structuring ideas.
7. The report must be submitted as a PDF document. You must submit the report electronically via the Turnitin link on Canvas. Excel spreadsheets with all your calculations must be submitted as a .xlsx workbook. You must submit two files electronically via the link on Canvas.
What is included in the 15-20 page limit?
1. Report body
2. Tables
3. Diagrams
What is excluded from the 15-20 page limit?
1. Title page
2. Table of contents
3. Executive summary
4. Reference list
5. Appendices (For each set of data used in the report, present a screenshot of this data in the Appendix)
Submission:
1. The only acceptable form. of submission is electronic via the submission linkin the unit’s Canvas site. Hardcopy and email submissions will NOT be accepted. Late submissions will be penalized according to assessment policy. All submission will be checked through TURNITIN for similarity with external sources.
2. Submission format: Each group can only submit ONE project report. The group leader (as decided in your group meeting) is required to submit the assignment. (DO NOT submit if you are not the group leader). It is imperative that your project report is submitted in ONE document. Only a PDF format document will be accepted, and it is your responsibility to ensure all pages correctly display your original content. Missing or distorted figures and formulas will result in lower marks.
3. Cover page: Ensure the Student Identification Number (SID) of EACH student is on the cover page of your assignment. The name of student must NOT show up on the assignment to ensure the anonymous marking requirement. The cover page should be submitted with the assignment in a single file (as the frontpage).
4. Document name: Your project PDF file must be named in the following format: FINC5001_Groupnumber_2023.PDF Example: FINC5001_Group23_2023.PDF and your Excel file must be named in the consistent way such as FINC5001_Group23_2023.xlsx.
Group work ethics:
1. Every group member is expected to be actively engaged in the whole process of group assignment. Though it is hard to divide the work completely equally, “free-riding” practice will not be tolerated.
2. From week 4 to week 10, you are expected to meet at least four times to discuss the assignment tasks and to update your group members on your progress. At your first group meeting, please decide who will be the group leader. The group leader will be responsible for coordinating the work of the group and submitting the group report by the deadline.
3. Each group member will complete the Peer Performance Assessment Form (to be released on Canvas as a separate assignment approaching the due date) and submit the form. separately online. Due to the limited marking time, we must give all group members the same mark based on group performance. However, free riders will be penalised and the information you provide on the Peer Assessment Form. will be used to determine whether a group member has made a reasonable contribution to the group's work.
Data:
1. Yahoo Finance (https://au.finance.yahoo.com/) is a great place to download free data including price history, price quotes, financials, etc. of companies listed on the major stock exchanges.
2. The Reserve Bank of Australia (RBA) publishes economic and financial data on its website. (https://www.rba.gov.au/statistics/)
3. DatAnalysis Premium (Morningstar): Provides fundamental equity data for listed and delisted companies including revenue and expense breakdowns, financial ratios, growth rates, balance sheet and cashflow data, director buying and selling announcements, company appointments and resignations, merger and acquisition activity and annual reports. All data can be downloaded to Microsoft Excel. Search for the key word “ DatAnalysis premium” on University Library homepage and you will see the link to the database.
4. ProQuest: A major full-text database covering humanities, social sciences, education, health and medical, science and technology and business and management. This is a good database for academic references.
(http://ezproxy.library.usyd.edu.au/login?url=https://search.proquest.com/pqcentral/ advanced?accountid=14757)
5. Google Scholar: An important searching engine for scholarly publications. Read this instruction regarding how to link Google Scholar with the Library’s research databases to find full-text articles.https://usyd.libanswers.com/faq/241096
List of Prohibited Australian-listed Stocks:
1. Australia and New Zealand Banking Group Ltd. (ANZ)
2. Commonwealth Bank of Australia (CBA)
3. Domino’s Pizza Enterprises Ltd (DMP)
4. Telstra Corporation Ltd (TLS)
5. Wesfarmers Ltd (WES)
6. Woolworths Group Ltd (WOW)