5 PM Case Study on Corporate Finance for 2201AFE

5 PM Case Study on Corporate Finance for 2201AFE

Due: 29th September 5PM

Word length: Part A - 1500 words, Part B - 500 words

This assignment consists of two parts, total marks 30, weights 30%. This assignment will be due at 5 PM 29th September 2023. In the Part A, you will work on the allocated public firm listed on the ASX 300 and you will prepare a report based on the research the allocated company from the perspective of risk and return relationship of this companys shares. In the Part B, you will prepare a business-style response to a hypothetical but realistic situation and make recommendations on which project should the firm invest in.

Please note, the allocated company is used for Part A only. For Part B, a scenario is given for your analysis. Part B scenario is after the Excel example (Last page). For part B you will be using a weighted average cost of capital (WACC) calculated using data for your company. For the purpose of WACC, assume that company only has debt and ordinary equity in its capital structure. Ignore any preference equity.

Word limit 1500 words for Part A and 500 words for Part B excluding graphs and Tables.

Allocations of the company is available via L@G.

This is an individual assignment

Submit your response in one Excel file and one Word file. The Excel worksheets should contain the calculations and workings, while the Word file should contain reports where you present the findings, considerations, recommendations, conclusions or any other issues relevant to each task.

Part A: Case study report for selected company (Total 20 marks)

The purpose of this case study is to allow students to take some of the main concepts introduced in the course and provide a framework for applying them to a company of their choosing. One of the best ways of learning corporate finance is to apply the models and theories we encounter to the real-world contexts and problems. You will:

Task: Evaluate stock price, and estimate the impact of an important announcement on its stock prices (20 marks);

Scenario

You have recently started an internship position with Griffith Best Equity Management (GEM), a large asset management company with A$750 million Assets Under Management located in Brisbane CBD. The companys core investment focuses on domestic share market, however, investments in share markets have provided lower than expected returns in the recent years.

GEMs Chief Investment Officer (CIO) has assigned you to perform an investment appraisal on a single company listed on the ASX300 and provide recommendation if the company analysed should be included as part of GEMs investment.

Your personal values and experiences are important, you should base your response on the evidence provided in these tasks along with your knowledge gained in the course. It is important that you provide clear evidence of your ability to apply your knowledge of finance as learned in the course to the task. The CIO has requested that your analysis must be up-to-date analysis with at least 3 years of data. Price data should include data to the end of July 2023.

Your report must address the following issues,:

A brief description of the company analyzed

Analysis of companys share price using

the Dividend Discount Model (1-stage and 2-stage). You will determine if the share price is priced fairly or over/under-valued.

News/Announcement effect on companys share price. You will investigate the speed of share price adjustment to these announcements using graphs. You will discuss the share performance over the last 3 years, showing the major events (announcements) in the life of the company and discuss how these events (announcements) have impacted the share price. One of the events discussed should be from 2023.

On the same chart, present the performance of the major competitor and the market for comparison.

You will need to show calculations for 1 (a), (b), (c) and a graph for (d)

Your current internship position is under 3 months probation period. Upon completing the task on hand, your department secretary will arrange a meeting with CIO to discuss whether you have passed the probation period and be promoted to a Junior Corporate Finance Analyst.

Task: Evaluate stock price, and estimate the impact of an important announcement on its stock prices (20 marks)

Provided here is a guide on how to approach the assignment. You can use this as a template for your research assignment or feel free to get creative in writing your excel assignment.

Brief description of the company (1 mark)

Evaluate stock price, and estimate the impact of an important announcement on its stock prices

Stock beta: Download 3 years of weekly stock returns and ASX300 market index returns ending May 2023 from Yahoo Finance (or Bloomberg) and estimate the stock beta. Does the estimate of stock beta make sense to you? (The normal range of beta is from 0.5 to 3.) Provide reasoning, why or why not? If not, you have to use the stock beta from Yahoo Finance for the later parts. (4 marks)

Estimate the Cost of equity, using the CAPM return. Assume the market risk premium, Rm-Rf=6%, and use the current 10-year Government bond yield for the risk-free rate. (2 marks)

DPS is the total annual dividend per share paid for the financial year. Based on the previous 5-year pattern of DPS payments, estimate the intrinsic values using 1-stage models (the constant dividend growth model), and the 2-stage non-constant dividend growth model. Please use the 10-year Government bond yield as the Dividend growth rate in the equilibrium stage. You need to choose which model is the most appropriate one to use, and compare the intrinsic value versus the share price as of July 2023 (current price). Would you recommend to buy or sell the shares in July 2023? Calculate share price by adjusting your beta +-10% of estimated beta values in part (a).

Note: In stock valuation your decisions are based on the estimates of variables and if you make an error in these estimates your decisions can be wrong resulting in significant losses. By considering a range of these estimates you test robustness of your results and as such see how your decisions stack up in case your estimates are incorrect by up to 10%. This is a simple example there are other ways for testing robustness of results statistically.(10 marks)

You will study an announcement in 2023 from this company from ASX 300 firms (https://www.asx300list.com/). The announcement can be a new product, a scandal, an earnings announcement, a change in strategy, etc. What is your expectation of the market reaction to the announcement, good or bad news? (1 marks)

Please download the daily stock prices from one month before to one month after the announcement date, and compute the cumulative holding period returns and plot them in a graph.

Cumulative Holding period returns = [(1+r1)(1+r2) (1+r3)( 1+rt)]-1

Note: The holding period return is NOT the usual weekly return you calculated

Discuss the following aspects: Does the stock price react quickly or slowly to the news announcement? How does it relate to the theory we learned in class? (2 marks)

Choice of Company - You will be allocated a company randomly at the start.

A complete submission to Learning@GU/SafeAssign consists a Word file, an Excel file, and should include the following:

All input variables, such as risk-free rate, the market risk-premium, dividend growth rate, etc, and

All computations such as the beta estimate, cost of equity, intrinsic value, Analyst Expected Return, RRR, etc. Please put all input variables in an input box.

Font size: 12 of Calibri, Arial or Times New Roman

Margins: minimum 1 cm on the top/bottom and right/left.

NOTE:

If Bloomberg is not available, you may use https://au.finance.yahoo.com/ to download all historical stock price data required.

All submissions need to be clearly structured and calculations need to be clearly laid out.

Company TPG (2016 Dec.) Example

Assume Rm-Rf=6%, beta=0.547, Rf=2%,

DPS0= $0.2071, P0= $7.41

CAPM R= 2% + 0.547*6% = 5.28%

FYR= 2012 2013 2014 20115 2016

Dividend= 0.0786 0.1071 0.1322 0.1643 0.2071

growth= 0.3626 0.2344 0.2428 0.2605

geometric av. growth last 3 years = 0.2458

2-stage DDM model:

g = 0.2459 for 3 years; g =Rf = 2% afterward

Intrinsic value = D1/(1+R) + D2(1+R)2 + (D3+P3)/(1+R)3

= 0.2071*1.2459/1.0528 + 0.2071*1.24592/(1.0528)2 + (0.2071*1.24593 +

0.2071*1.24593*1.02/(0.0528-0.02)) /(1.0528)3

= 11.55 vs Stock Price___________

=> under-/ over- priced

Appendix 1: 1-stage and 2-stage models on valuation:

TPG

Rf 2%

Rm-Rf 6%

Beta 0.547

P0 (2016 Dec) 7.41

Target price 10

CAPM (R) 5.28%

EPS 0.45

2-stage DDM model:

Ex-Div. Date Amount Annual Div. Growth Geom. Avg. Growth

10/17/2016 0.1071 0.2071 0.2605 0.2458

04/18/2016 0.1

10/9/2015 0.0857 0.1643 0.2428

4/10/2015 0.0786

10/10/2014 0.0679 0.1322 0.2344

4/9/2014 0.0643

10/9/2013 0.0571 0.1071 0.3626

4/10/2013 0.05

10/10/2012 0.0393 0.0786

4/11/2012 0.0393

Div. growth rate First 3 years 24.59%

Afterward 2%

Year 0 1 2 3

DPS 0.2071 0.2580 0.3215 0.4005

P3 12.4554

Intrinsic value= $11.55

1-stage DDM model:

Constant growth model g=2%

Intrinsic value= $6.44

5366836385500Excel Layout

Note: that this sample used the weekly stock prices

Announcement Effect

PART B Task: Gold Coast & Co.

This assignment is worth 10 marks in total and is composed of one practical task. For each task the marks are allocated as follows:

Analysis 6 marks (correct calculation/workings and application of models/techniques)

Report 3 marks (relevant arguments, key points identified and recommendations)

Presentation 1 marks

Estimate WACC for the company using cost of equity from part A and the cost of debt from companys financial statements. Note: You may need to calculate cost of debt in some cases where debt is traded in market.

In this assignment, you will prepare a business-style response to a hypothetical but realistic situation. For the performance task, it includes information detailing your role, a scenario, and a task to which you are required to respond.

Task: Project evaluation

The First project

Will require purchase of land for $3.5 million, with development and construction building costs of $10 million, and plant and equipment of $6 million. You will also need to spend on working capital each year. The change in net working capital is estimated to be 3% of sales every year during the life of the project (the exception being the last year of the project which reverses the sum of all previous cash flows due to working capital). Sales are estimated to be $ 40 million in 2024, the first year of production, increasing by 8% per annum after that. The cost of goods sold is 60% of sales. Fixed costs will be $10 million in 2023, increasing by 5% per year. Both buildings and plant/equipment will be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 20% of cost and the plant and equipment will have no salvage value. At the end of the project, you will rehabilitate the site and sell the land for light industrial development for $16 million. Relevant company tax rate for the project is 30%.

The Second project

Is a modification of an existing plant you already own. The plant has been idle for a number of years, but with renovation would be well suited to furfuryl alcohol production. If not used for the proposed project, you will lease out the existing plant for $70,000 per year. The estimated development and construction building costs will be $15 million in 2023 alongside plant and equipment investment of $6 million. You will also need to invest in working capital, thus the change in net working capital is estimated as 2.5% of sales every year (the exception being the last year of the project which reverses the sum of all previous cash flows due to working capital). Sales will be $46 million in 2024, increasing by 4.5% per annum thereafter. The cost of goods sold will be 70% of sales. Fixed costs will be $5 million in 2023, increasing by 4% per year. Both buildings and plant/equipment will be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 30% of cost and the plant and equipment will have no salvage value. At the end of the project, the Plant will remain idle awaiting potential future developments at no cost. The company tax rate relevant for the project is 30%.

Task

Provide project evaluations using ARR, Payback period, IRR and NPV criteria. Which project you propose company invest in and a justification for your selection of the project and the choice of method used in your project selection. Are there any other factors you would consider in your evaluation?

Key words

ARR- Annual Rate of Return

Payback period

IRR Internal Rate of Return

NPV- Net present Value