FINC2011 Corporate Finance I
Semester 2, 2024
FINC2011: Major Group Assignment
Key Information
• Due Date: 11th Oct 2024, 23:59 (Sydney Time)
• Attach a cover sheet as the first page of your work
• The group assignment has a total mark of 100, which count towards 30% of your final grade.
• An optional group peer evaluation will be made available to individuals to complete after the due date of the group assignment.
Objective: This assignment will give you a teaser of how to conduct equity research. An equity research report is a document prepared by an analyst that recommends buying, holding, or selling shares of a public company. It is intended to help investors decide whether to invest in a stock. This assignment also requires you to examine how to construct a portfolio using the equity you’ve researched, and to make a portfolio recommendation.
Deliverable: The report should have a maximum of 10 pages (excluding cover sheet, spread- sheets, reference list, and appendix). You should include all critical information in these ten pages so that your reader can understand your analysis, justification, and recommendation. Your clients should not need to go through either the Excel spreadsheet or appendix to acquire the necessary information.
You are free to create your report in any style. you prefer. There is no special requirement for the font style. or size. With a ten-page limit, you have ample opportunity to include charts and graphs to enhance the layout and presentation of your report. It is important to present your report profession- ally.
• The Report (pdf document) should include all of your work and solutions. You are expected to disclose the key information of your analysis in the report. Your audience should not need to go through your Excel spreadsheet to understand your logic and approach for the evaluation. Support your argument with numerical analysis, where possible. Make sure you show the list of inputs and state your assumptions clearly. You are expected to synthesise your ideas with your researched sources when developing arguments.
• The EXCEL spreadsheet should include the financial data that you used to carry out your analysis. The detailed and chunky analysis (i.e., calculating returns with hundreds of rows of data) should be included in the Excel spreadsheet. If your audience requires in-depth details on your analysis, they could refer to an Excel spreadsheet.
Submission instructions: When you save your documents, name them as “ Group Name.pdf ” For example, if you are in Group 15, then save your assignment as “ Group 15.pdf ”
Submit your report (in PDF format) and Excel spreadsheet to Canvas. You can submit the document for an unlimited number of times. However, only the last version will be marked. Instructions can be found here: Click here to learn more on TurnItIn Submission
Start of the Question
You are an equity researcher at InvestWithUs, an advisory firm. Your manager has asked you to perform. an equity analysis on Metcash Ltd. (ASX:MTS), an Australia-based wholesale distribution and marketing company, and subsequently provide portfolio recommendations featuring Metcash as the main asset. Your work for this report should be based solely on publicly available information up to 1st September 2024.
Part 1: Company Overview(20 marks)
1. (5 marks) Describe the company’s business. Equity research usually starts with researching the company’s basic information. The description should deliver the key aspects of the company, including, but not limited to, the industry the company operates in, the company’s primary operation, key drivers of revenues and expenses and key competitors.
2. (5 marks) Conduct a simple overview of the industry to understand the industry environment the company operates in and provide an industry future outlook.
By offering insights into the industry’s future outlook, you can build a foundation for projecting the company’s future earnings. It’s important to synthesise how industry trends and dynamics will specifically affect the company being analysed. After all, a company cannot operate in isolation from its industry.
3. (10 marks) Choose from one of two options below to discuss the company
• Option 1: Discuss the company’s corporate governance in managing the agency problem. In your analysis, consider aspects such as board composition, ownership structure, compensation policies, and shareholder rights. Critically evaluate the effectiveness of the mechanisms the company employs to manage the agency problem. Please support your analysis with relevant references.
• Option 2: In the current business environment, companies are expanding their focus beyond just maximising shareholder wealth. How does the company integrate aspects of stakeholder theory, or corporate social responsibility (CSR), or environmental, social, and governance (ESG) principles into its operations? What could be the potential impacts of such an ap- proach on the company and its shareholders? You are encouraged to read the company’s 2024 sustainability report and consider media exposure as an insightful gauge of market reactions.
Part 2: Valuation (55 marks)
4. (45 marks) Carry out a valuation on MTS’s equity using the Dividend Discount Model (DDM) with the following requirements/key components:
(a) (8 marks) Estimating equity cost of capital using the Capital Asset Pricing Model (CAPM). You are required to choose an appropriate measurement for the risk-free rate, β , and the expected market return and justify your choice.
(b) (20 marks) Estimate the future growth rates of the company. You are required to state what is your growth rates and clearly show how you measure growth rate.
• As part of your estimation for future growth rates, you are required to evaluate the firm’s historical performance and discuss how historical growth rates will (will not) help you estimate the growth rates for the company. State clearly and justify the variable(s) of the choice and the historical time horizon of the analysis.
• Provide a forecast for the short and long-term growth rates. Justify your estimations.
(c) (5 marks) Estimate the future dividend payments. You need to state your assumptions and provide justifications for estimating future dividends. Investigate whether the company has a clear dividend policy and identify any associated policies that could impact shareholder benefits.
(d) (12 marks) Use inputs you specified in part (a) to part (c) to carry out a DDM valuation. What is your recommendation (Buy, Sell, or Hold) for this stock? You should also discuss the creditability of your evaluation (i.e. provide a sensitivity analysis).
Notes: When conducting DDM analysis, it’s crucial to consider both quantitative and qualitative factors to conduct the analysis.
5. (10 marks) Provide an assessment of the company using at least 2 distinctive value multiples. Interpret the multiples and discuss the company’s relative position compared to comparable firms or the industry average. Based on your analysis of the multiples, would you revise your recom- mendation from the Dividend Discount Model (DDM)?
Part 3: Portfolio Construction (15 marks)
After completing the stock analysis, you are now required to create and recommend a portfolio for a client, Alex. Alex is keen on achieving an investment mix that ofers the best possible trade-of between risk and return. He prefers to own assets that provide a measure of protection against market downturns. He is interested in investing in the stock and/or bond markets. He does not want to take any short positions in his investment portfolio.
Alex plans to hold your recommended portfolio for 3-5 years and currently does not have any other investments. He prefers to have at least 4 assets included in his portfolio. He has a specific preference for holding Metcash and requires that at least 30% of his investment be allocated to it.
6. (10 marks) Portfolio Description: Justify the construction of your portfolio. Explain why you chose the specific assets, and provide the annualised risk and return information for each individual asset. Additionally, calculate and disclose the portfolio’s annualised return and risk, along with its composition. Describe how this portfolio satisfies your client’s requirements, especially how these assets as part of your investment would be a good complementary for MTS.
Your discussion should be sufficiently detailed to allow your manager to understand your rationale for constructing the portfolio without requiring additional research.
7. (5 marks) Portfolio Performance Forecast: Conduct a risk assessment for the portfolio. As- sess how the portfolios are likely to perform. over the next three to five years, taking into ac- count potential changes in the macroeconomic environment. You are expected to discuss how you think your portfolio’s performance could be influenced by prevailing or anticipated macroeconomic trends.
Cohesiveness, consistency and formatting (10 marks)
Remember that the essence of a group report’s cohesiveness is the seamless integration of content, reflecting collaborative effort. A report might have excellent content but can score low on cohesiveness if it lacks integrated effort. Pay extra attention to the data continuity and consistency and ensure your conclusion is aligned with the data for analysis. (If your group is dividing tasks rather than delegating them, it is very likely that the coherence of your work will be poor.)
Formatting and professionalism are fundamental for any report. They not only enhance readability but also reflect the diligence and attention to detail of the authors. An executive summary should be included in a report to summarise the core analysis and state the recommendation.
Consistency is key. Whether it’s in the layout, formatting, tone, or citations, consistency enhances the report’s professionalism.
Proper citations reflect a respect for intellectual property and an adherence to academic and pro- fessional integrity. Ensure that references are not only present but also consistently and correctly formatted using the APA(7th edition) style, which can be accessed through https://libguides . library.usyd .edu .au/citation/apa7.