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FINM1416 Workshop 2 Assignment

This is a group assignment to be completed in groups during and after your workshop.

Important:

You must have read this task sheet before taking part in the Group Workshop.

Attending the workshop is highly recommended, as you will form groups during the workshop. If you are unable to attend the workshop, you will be randomly put into groups.

Attending the workshop is important as we will cover a relevant case study and answer any questions you may have with this group assignment.

This group assignment accounts for 15% of the course assessment, and will be due at 1 pm, 17 Oct.

After submitting your group component work, you are required to complete the Peer Assessment individually on Blackboard to evaluate the level of contributions in various aspects made by your group peers. The Peer Assessment implies that not everyone in the same group will have the same mark. The due date for the Peer Assessment is at the same time exactly one week after the due date of your group report (1 pm, 24 Oct).

Preparation

The purpose of this workshop assignment is to complete a share valuation using different methods and consider trends in the industry. Tutorial 6 is a base for several parts of this workshop. Therefore, make sure you attend and understand the material covered during Tutorial 6. Further, make sure you have reviewed Chapter 6 from the Pressbook and attended and understood  Lecture 4.  Failing to do this will  likely cause confusion and delay your  progress  in this assignment.

Problem

This workshop will give you the chance to see how our dividend valuation formula and P/E ratio work with publicly traded  companies  on NASDAQ/NYSE.  You  will  analyse  the  following  four  companies  (stock  symbols  in bold in parentheses):

1. Tesla (TSLA)

2.    General Motors (GM)

3.    Harley-Davidson Inc. (HOG)

4. Thor Industries (THO)

You will value each of the above companies using different valuation models from this course. For one of the questions, you should listen to the following podcast: The Economist - Changing gears – has the world passed “peak car” (available on Blackboard). Then, in your discussion groups, you will discuss your answers, the assumptions made in your calculations, the challenges the car industry is facing, the position of each of the companies in the changing industry and, if you had to choose one, which company you would invest in. Finally, you will write an 800-word group report.

Required

Task 1 – Complete the following questions in the Excel template provided

You will be valuing the shares at 31/12/2024 using 2 valuation methods: the Perpetual Dividend Model (Q3-4) and P/E ratios (Q5). In Q1 and Q2, you will first estimate two growth rates for a perpetual dividend growth. We use the average of these two growth rates in Q3 and Q4 to estimate share prices. In Question 5, you will use the P/E method to estimate the share price.

Question 1: Estimating a perpetual growth rate using EPS

Find all four companies’ reported earnings per share (EPS) for the year ending 31 December 2024. Also, find the consensus EPS forecast for the years 2025, 2026 and 2027. You must use theNASDAQ websiteto obtain the forecast information, andYahoo Financefor the 2024 EPS. You should use the EPS information in the Earnings tab (Nasdaq) and Financials tab (Yahoo Finance). After collecting EPS information, calculate the 3-year average of forecasted EPS growth rates for all these companies. If an EPS for a year is missing, assume that it is equal to the average of the previous years’ EPS. If 2024 EPS is missing, use the Revenue EPS tab to find the information; however, if it is still missing in the Revenue EPS tab, then assume that it is equal to double the sum of the two quarterly EPS available for the company. If you have other assumptions, justify them in a separate sheet named “assumptions” .

Question 2: Estimating a perpetual growth rate using historical dividends

Find all four companies’ historical dividends for the years 2021-2024. You should use theNASDAQ websiteto obtain the information for Nasdaq stocks.  In the Dividend History tab, you can find dividends paid by the companies. You should use the Ex/EFF DATE (ex-dividend date). For non-Nasdaq stocks, you should use Yahoo Financeto find the historical dividend (Historical Data tab). After collecting historical dividend information, calculate the 3-year average of historical dividend growth rates for all four companies. If a company has a missing dividend for a given year, assume that it did not pay the dividend in that year.

Question 3: Estimating share prices using the 2024 dividends

In estimating share prices using the dividend, assume the following:

1)   The  company’s  dividends will  grow in perpetuity at a constant rate equal to the average of (i) the 3-year average of EPS growth rates computed in Question 1, and (ii) the 3-year average of historical dividend growth rates calculated in Question 2. The dividends for 2024 can be found on the NASDAQ website, under the Dividend History tab. For non-Nasdaq stocks, you should use Yahoo Financeto find the historical dividend (Historical Data tab).

2)   A required return of 8.43% for Tesla, 8.59% for General Motors, 7.5% for Harley-Davidson, and 7.79% for Thor.

3)    If the average growth rate that you have calculated is negative, assume it is zero.  If it is greater than the discount rate, use a revised growth rate that is equal to the discount rate minus 1%. Find the actual share price from the Summary tab on the NASDAQ website

Question 4: Estimating share prices using forecasted dividends

Repeat Question 3 above, but this time estimate share prices using a forecasted 2025 dividend. We can forecast a dividend using a forecasted EPS and a dividend payout ratio (the proportion of EPS paid out as a dividend), where Forecasted Dividend = Forecasted EPS × Dividend Payout Ratio. Assume a dividend payout ratio of 30% to forecast the dividend.

Question 5: estimating share prices using P/E benchmarking

An alternative method for valuing a company, especially for a non-dividend-paying stock, is to use the P/E valuation multiple method. Re-value all four companies using the P/E ratio method (assume a valuation date of 31/12/2024). Use the industry forward P/E ratio available from Prof. Damodaran website as the benchmark P/E ratio to estimate share prices. (Forward PE is the ratio of price to the first-year forecasted EPS). If you are unsure of which Industry Name the companies fall under, make sure to click the “Download Detail” button on which companies are included in each industry. The download takes a minute or so to complete due to the file size. If you have difficulty downloading the file, you can try switching to a different browser (Firefox, Google Chrome, Safari, etc.) or you can use the file in the assignment folder.

Task 2 – Group report (up to 800 words in total) to cover the following questions

Prepare a group report (up to 800 words in total) to cover the following points:

1.    What are the estimated share prices for all four companies in Q3-5? A table summarising your findings is useful.

2.    For each of the three valuations (Q3-5), what assumptions were made and how realistic are they? (Name and explain at least 1 assumption for each).

3.    Some actual share prices have been much higher or lower than your valuation. Pick the stock that has the largest difference and explain what you think might be the reason for such a difference? List three reasons and explain.

4.    Based  on  the  podcast: The  Economist -  Changing gears:  has the world  passed  “peak car” (available  on Blackboard), what are the two main challenges the car industry is facing? The podcast was recorded in 2020, has anything changed since then? Which of the companies do you think is best positioned to address the challenges, and why? (You will need to do additional research to answer the last two questions; make sure to reference appropriately - use either Harvard or APA style but just be consistent).

5.    If you had to pick one stock to invest in as a group, who would it be? What was the main reason for this choice?

Marking

Your final score for the workshop will be computed out of 100 marks. Marks will be allocated as follows: