Reference no: EM132310380

Assignment details

Your group will conduct research and analyse a publicly traded company in Australia, write a miniresearch report and make a recommendation of buy, sell, or hold.

Make sure that you select your allocated company according to the company selection guide below.

Section 1: Executive summary

The executive summary should state what this report is about, what methods you have used and your recommendation (buy/sell/hold) for the stock.

Section 2: Macroeconomic and Industry analysis

• Discuss the industry of your company. How is it generally performing in recent years and what is its future outlook? How does it react to economic boom or recession?

Identify a minimum of 4 major risk factors, such as supply and demand, currency risk, policy changes, etc., faced by the industry and make a connection with the macroeconomic environment in your discussion about each risk factor. Explain how the risk will affect the industry as a whole.

• Support your arguments by citing reliable references and preferably elaborate on borrowed arguments using your own words.

Section 3: Company analysis

• Provide a short description of the company chosen.

• Read the company's annual reports and identify and discuss one (or more) major risk(s) faced by the company. Explain how the risk may affect the company's revenue, expenses, financing cost, etc. (The"Directors' Report" section in the company's annual report may help)

• If you identify multiple risk factors, it is better to discuss one or two risks that matter the most for the company in greater depth. During the discussion, support your arguments by citing reliable references and preferably elaborate on any borrowed arguments using your own words.

• In addition, financial ratio analysis is encouraged and should be relevant to the DCF analysis if you decide to include it (e.g. using ratios to verify the assumptions made in the DCF analysis).

Section 4: DCF analysis

In the excel file:

1) copy and paste the four most recent income statements and balance sheets into the excel sheets; use separate sheets and name each sheet: ‘2015', ‘2016', ‘2017'. ‘2018'

2) compute the average of the following ratios in a separate sheet ‘averages' for EBIT/sales, property, plant and equipment/sales, depreciation/property, plant and equipment, net working capital/sales from the "Financial Statements" section of the company's annual reports; clearly specify which items from the statements you have used to compute each of the ratios.

3) Make an assumption about an appropriate tax rate. Compute it using income tax expense/income before tax; record in the same sheet as step 2). Provide an explanation of your assumptions/rationale in your report.

4) Forecast a sales growth rate for the next five years and use this rate to compute the sales for the next three or five years accordingly; make adjustments to the growth rate, if necessary, based on your discussion in the previous two sections; record in the same sheet as step 2).

Provide a detailed explanation of how you arrived at this rate in your report. This step is critical! Adjustments must align with your discussion in section 3.

5) use the average ratios computed in step 2) to forecast EBIT, property, plant and equipment, depreciation and net working capital for the next three to five years; record in the same sheet as step 2).

6) forecast the free cash flows for the next five years; record in the same sheet as step 2).

7) determine the horizon enterprise value for year 3 or year 5 depending on step 4), 5), 6), using Eq. 10.6; record in the same sheet as step 2).

8) estimate the long-term growth rate and justify your estimate in your report based on your discussion in the previous two sections; record in the same sheet as step 2).

9) apply CAPM to estimate the cost of capital by searching for information on the require variables in the formula; be clear about the source of such information in your report; discuss the beta and link it to your discussion in the previous two sections; record in the same sheet as step 2).

10) compute the market value of equity using Eq. 10.1; record in the same sheet as step 2).

11) find the number of shares outstanding; record in the same sheet as step 2).

12) estimate the share price for the company; record in the same sheet as step 2).

13) repeat the analysis with an optimistic scenario and a pessimistic scenario. In your report, explain and justify the variables that were changed to model each scenario.

In the report:

• Summarise your DCF analysis and particularly address steps 4), 8), 9) in the above;

• Compare your estimated share price with the current price and issue a recommendation

• Discuss any difference between the estimated price and the current price with regard to the assumptions you have made in applying the DCF analysis

• Discuss your scenarios in 13). Use these scenarios to critically discuss potential shortcomings of your analysis.

• Note: if your estimates are vastly different from the current market price, then get each of the group members to go back over the calculations and assumptions. The market is rarely ‘wrong'!