FINM7401 Finance Semester 2 2024

Java Python FINM7401 Finance

Semester 2, 2024

Individual Project - Problem Set - Solutions

Due Date: Monday 21st  October 2024 at 10am.

Overview: The objective of this individual assignment is to assess students’ ability to apply the theoretical knowledge learnt during the lectures to a practical case. Some of the questions might go beyond what we covered during the lectures. Students are required to do additional readings in the reference book, in any other relevant books, or online.

Grade: The individual assignment counts for 30% of your final grade for this course. The maximum number of points is 45. There are 41 points for the practical case and 4 additional points for the presentation/writing of the final  document. The number of points  per sub- question is provided for each question in brackets.

Layout and presentation:

1.   Your document should be typed in Times New Roman font, size 12.

2.   The assignment should be 1.5 lines-spaced and have margins of 2.54 cm (standard).

3.   Include the cover page with your name, student number, date and signature.

4.   The answers to the different questions must be written in the document. For calculation questions, you need to show all your workings (including timeline if appropriate) and round your final answers to two decimal places (intermediate answers should keep at least 6 decimals). If you are using Excel, all results (including tables) need to be reported within the written document (but not the functions used in the cells).

5.   All your answers must be typed in, handwriting/drawing is not acceptable.

6.   If you  use  any  reference  (e.g.  Journal,  Book,  website  etc.),  you  must  reference  it according to UQ Harvard Referencing Style. You must also format your reference list (bibliography) in line with Harvard Referencing  Style. which  can be accessed here: https://web.library.uq.edu.au/research-tools-techniques/referencing-style-guides

7.   An additional 4 marks will be awarded for clear presentation and writing (academic English). Make sure that there are no mistakes and that your tables are well formatted before submitting the document!

Submission: Read the document ‘Individual Assignment  Submission Guidelines’ and follow the instructions. You must submit to Blackboard and Turnitin a single PDF document saved as “LastnameFirstname_FINM7401assign.pdf” file.

Late Penalties: Late penalties apply! 10% per calendar day (or part thereof)! Don’t submit at the last minute! Penalties start from Monday 21st  October 2024 at 10.01am.

Practical case: estimating a stock price (41 marks)

You have just graduated from UQ and have started your first job as a Financial Analyst at the Commonwealth Bank in Brisbane. Your first assignment is to analyse the stock price of an Australian listed company using the dividend discount model and the comparable model.

You will need to gather all the necessary financial data using CapitalIQ and attempt the set of questions presented below. Refer to Tutorial 1 for instructions on how to create a login and use CapitalIQ (note: do not use the Pro version).

1)  Select a company that satisfies the following requirements (using the Screen Builder helps):

i.      Primary listing on the Australian Securities Exchange (ASX)

ii.     Included in the S&P/ASX200 Index

iii.     Not part of the Financials, Utilities, and Real Estate primary industries

iv.      Market capitalisation on 30 June 2024 in excess of AUD 10 billion

v.      Share price on 30 June 2024 above 1 AUD

vi.      The company has had positive Basic Earnings per Share (EPS) for the past six fiscal years (i.e., FY2024-FY2019)

vii.      The company’s Dividend Payout Ratio (DPR) is a positive value smaller than 100% at the end of the past three fiscal years (i.e., FY2024-FY2022).

viii.     The latest analyst’s consensus estimates of future earnings growth for the company (mean

LT Growth) is positive

Required:  Provide a list of five companies that satisfy the criteria and select on FINM7401 Finance Semester 2, 2024 e of them for the rest of the project. [5 marks]

2)  For the company you have selected, provide 3 tables showing: [5 marks] Table 1:

i.      the company’s name

ii.     the company’s industry

iii.     the company’s market capitalisation on 30 June 2024 (in AUD)

iv.      the company’sprice on 30 June 2024 (in AUD)

v.      the company’s Dividend per Share for FY2024 (in AUD)

vi.      the latest analyst’s consensus estimates of future earnings and growth for the company (mean LT Growth)

vii.     the company’s latest Beta over the past five years (Beta 5Y)

viii.     the company’s Book Value per Share for FY2024 (in AUD) Table 2:

ix.     the company’s Basic Earnings per Share for FY2024-FY2019 (in AUD) Table 3:

x.      the company’s dividend Payout Ratio for FY2024-FY2022 xi.     the company’s Return on Equity for FY2024-FY2022

Note: this data is available in CapitalIQ under Tearsheet, Income Statement, Balance Sheet, Ratio, and CIQ Estimate.

3)  Estimate the annual growth of the firm using the following three approaches: [4 marks]

i.      Historical geometric mean of the annual EPS (Basic Earnings per Share) growth rate over the last five years (FY2024-2020)

ii.     Analyst’s consensus estimates of future earnings and growth (mean LT Growth)

iii.     Fundamental analysis: the average of the Retention Ratio * Return on Equity over the last three years (FY2024-2022)

4)  Calculate a weighted actual growth based on the three approaches above (thereafter, the short-term growth rate). [3 marks; max. 150 words]

Note: Combine the above estimates in anyway you feel appropriate. In making your choice, emphasize the advantages and disadvantages of each approach and justify your weightings.

5)  Discuss how long you might expect this growth rate to persist and why, and what you expect the growth rate to be afterwards (thereafter, the long-term growth rate). [2 marks; max. 150 words]

6)  Compute  the  cost  of equity  using  the  capital  asset  pricing  model  (CAPM).  Use  the company’s Beta over the past five years (Beta 5Y) and assume a risk-free rate of 5% and an expected market return of 14%. Discuss whether this cost of equity is appropriate, and if not, please provide your best estimate with justification. [3 marks; max. 150 words]

7)  Using the growth rates (short-term and long-term) and the cost of equity calculated under Q4-6, respectively, calculate the price per  share  of your  selected company using the dividend-discount model (DDM). Draw a timeline showing the dividends up to the long- term growth. [5 marks]

8)  Provide an assessment of your selected company in terms of its valuation relative to its competitors  (at  least  five  companies).  To  perform. the  comparable  analysis,  use  the following multiples for June 28, 2024 provided in CapitalIQ: Trailing P/E (P/LTMEPS), Forward P/E (P/NTMEPS), and P/B ratio (P/BV).

i.      Justify the choice of your comparable companies. [2 marks; max. 150 words]

ii.      Collect and present in a table the multiples for each comparable company. [3 marks]

iii.     For each of the three multiples, calculate the median across the comparable companies.    [1 mark]

iv.      Using  each  of the  three  multiples  individually,  estimate  the  share  prices  of your company. [3 marks]

Note: for P/E ratios you need to use your company’s Basic EPS and for P/B ratios, use your company’s Book Value per Share.

v.      Provide a final (unique) price estimate. Justify how you calculated it.  [1 mark; max. 100 words]

9)   Compare the stock prices calculated from the two methods to the actual stock price on 30 June 2024. What recommendations can you make as to whether clients should buy or sell the stock of the company based on your price estimates? [2 marks; max. 150 words]

10) Provide some explanations as to why your valuations differ from the market valuation (if it does differ). Specifically, address the assumptions implicit in the models themselves as well as those you made in preparing your analysis. [2 marks; max