BAFI10342: Equity Investment and Portfolio Management-Report Writing - Accounting and Finance Assignment Help

Assignment Task

Evaluate the relative historical financial performance of the company among its peers

• identify the firm’s major competitors and discuss why they have been selected

• identify, and explain the relevance of, five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the company and its peers over a historical period of five financial years.

• explain the performance of the company compared to its peers using this analysis

• analyse and explain the reasons for changes in these ratios over the past five years and compared to the average of the past five years
• do not simply describe the changes in the ratios

 

Using the DuPont method estimate the ROE of the company and three major competitors for the most recent five years.

• DuPont Analysis should be done using the 3-step procedure

• 3 steps: Net Profit Margin, Total Asset Turnover and Financial Leverage

• analyse the company’s and your selected peer companies’ ROEs over the period

• show your own calculations for each component over the previous five years for the company and its three selected competitors

• compare the DuPont ROE of the company with its three peer group companies

• analyse and comment on the reasons for the change in ROE for the firm and its competitors with reference to the difference in the three components over five years
• relevant charts/graphs should be used to illustrate these figures

 

Analyse the company’s/industry’s current issues and explain the effect of these issues on the company’s future earnings

a) At the Macroeconomic Level                

• general factors that apply to the industry (GDP, employment, growth of the industry, regulation, global factors, supply, demand, prices, etc.)

b) At the Microeconomic Level

• the company- and industry-specific factors (operation, financials, objectives, competition, etc.)

c) As a SWOT analysis

• detail the Strengths, Weaknesses, Opportunities and Threats to the company

d) As either a PESTEL or a Porter analysis

• analyse the company's position in its industry using one of these techniques

 

Start your valuation analysis with the estimation of expected return using CAPM

You need 3 inputs to calculate the CAPM expected return

1. An Estimate of the company’s Beta

Use the daily closing price data for the company and the market index (provided on Canvas) to calculate daily holding period yields for the most recent five years. Using this data, you can estimate raw beta by using regression analysis from functions in Excel. Attach details of your work as an Appendix.

• Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33

 

2. The Risk-Free Rate of Return

Use the 10-year Australian Government bond yield as a proxy for the RFR. This yield can be found on Eikon page AU10YT=RR. Take the current Bid yield (do not use the bond price)

 

3. The Market Return

Use this estimate of the market return E(RM): 8.90% (Source: Canstar)

• The CAPM required return should be used as the discount rate in your valuation models

 

Estimate the intrinsic value of the company’s shares using the dividend discount model (DDM)

• you must use a Multi-Stage DDM. Follow the methodology discussed in the Equity Valuation slides

• justify the number of years used for each of your growth periods

• determine the growth rate for Stage 1 using the Retention Ratio and ROE formula      

• estimate the growth rate for Stage 2 using your discussion in the company’s/industry current issues section

• estimate the terminal (Stage 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value

• calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company

• provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
• provide justification and reasoning for your growth rate assumptions for growth in Stage 2 and Stage 3

 

Estimate the intrinsic value of the company’s shares using the Free Cash Flow to Equity (FCFE) model

• you must use a multi-stage FCFE model to calculate the intrinsic value of the stock

• source the components for FCFE from the company's financial statements using Eikon

• calculate the FCFE per share over the past six years and use the growth rate in FCFE per share as your growth for Stage 1

• estimate the growth of FCFE for Stage 2 using your macro and microanalysis

• estimate the terminal (Stage 3) growth rate using a proxy that represents the long term growth rate and calculate the terminal value

• calculate the present value of each future year’s FCFE to calculate present value, and then add them to calculate the intrinsic value of the company

• provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
• provide justification and reasoning for your growth rate assumptions for growth in Stage 2 and Stage 3
• are your estimated growth rates same as that used for your DDM model or different? Why?

 

Apply Relative Valuation techniques to ascertain the valuation of the firm

• compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers

• determine the relative valuation of the firm using these multiples (do not attempt to calculate the share price)

• analyse and comment on the relative valuation of the firm in comparison to its peers
• is it overvalued or undervalued using this methodology?

 

 

Using relevant charts, evaluate the company’s share price performance over the last five years

• compare the relative performance of the company to the S&P/ASX 200 Index (Eikon Code: .AXJO)

• compare the relative performance of the company to its peer group

• comment on these charts, referencing reasons for any significant changes you have identified
• use common-base charts from Eikon to give the best view of these relationships Perform a technical analysis of share price movements over the last five years

• use 50-day vs 200-day moving average lines and volume analysis to identify Buy and Sell signals

• show, and comment on, these analyses with reference to Eikon charts
• use volume analysis to confirm your price signals
• draw support and resistance lines to indicate price trends and channels Evaluate your findings

• Why do the intrinsic values you have calculated differ from the current/recent share price?

• How does this difference inform your investment recommendation?

• What is your investment decision based on your evaluation?

• Is your recommendation to Buy, Sell or Hold shares in this company?

• Is it different from the signal obtained from the technical analysis? Why?

• Does your qualitative analysis agree with your quantitative analysis? If not, why not?

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