Case Study-AW106

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Case Study Details
 

You are to select a public listed dividend paying company from the country of your study location (e.g. Australia for the Bentley campus) and conduct a detailed analysis on it. You may not select Dominos as this is the company that will be used in the lecture.
 
The purpose of this assignment is to use your acquired knowledge from this unit to investigate the financial strength of a public listed company. Your research should cover the areas of
 
 shareholder analysis;
 risk-return analysis; and
 cost of capital.
 
In each of the areas, you are to report your findings using the questions provided below as a guide. If the information is not from the company’s annual report, you will have to provide details on
 
1. where you sourced the information; and
2. comment on how you have verified its reliability.
3.1 Shareholder analysis (20%)
 
>Who are the typical investors in this stock?
>Who are the marginal investors in this stock?
 
3.2 Risk-return analysis (40%)
 
>What are the risks of this company? (Where is this risk coming from (market, firm, industry or currency)? How is the risk profile of the company changing?
> What return would you have earned investing in this company’s stock?
>How much would you have under or out-performed the market in the short term?
>In your view, how much of the performance can be attributed to management?
 
3.3 Cost of capital (40%)
 
>Calculate the company’s cost of equity using various methods (at least 2); showing your calculations and detailing the source of your data.
>Calculate the company’s cost of debt; showing your calculations and detailing your assumptions and the source of your data.
>Calculate the company cost of capital; showing your calculations.
 
Additional Guidelines
 
 You are preparing an analyst report for a client. Do not merely answers the questions in the case study.
 It should be written professionally in sentences and paragraphs; not in bullet point form.
 
 The questions 3.1 – 3.3 serve as a guide and are not to be repeated in your report.
 Where possible, calculations must be shown and assumptions must be clearly stated. Use of an appendix is recommended; however, there must be clear reference made to the main body.
 
 Where possible, use figures from the annual report; this is the most accurate source of information. For example, some websites may give you the ROE of the company, however, if you do not show your workings, you will not be awarded the marks for it.
 
 It is preferable that you reference your work using footnotes. This will help the marker to identify your source without referring to the back of your report. Please refer to the following document for additional help on footnotes: http://writing.wisc.edu/Handbook/PDF/chicago_turabian_uwmadison_writingcenter_j une2013.pdf
 
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Shareholder Analysis Guide (Bentley campus)
 
> Choose an Australian company listed on the stock exchange.
>Download the annual report from www.asx.com.au or the company’s website. Please use the latest available annual report. If the latest annual report is not available for the company, please select another company. Figures from last year’s annual report will not be accepted.
 
>Read the summary of the business.
 
What type of investor would invest in this company?
 
>Read the chairman’s/director’s message to the shareholders.
To whom is the message directed towards?
 
>Locate the top 20 shareholdings table in the annual report.
>Identify who the major shareholders are.
> What do you think is their motivation for investing in the company?
> What type of activity do you expect from the majority of the shareholders that you have identified?
 
Risk-return analysis guide
 
Read the risk disclosure section in the annual report.
 
>Summarise where the risks are coming from.
 
>From your understanding of the business describe the top three risks that investors should be mindful of and how will these risks will change in the future.
 
>The total return to the shareholder is the capital growth plus the dividend received.
 
>Use the ASX website, Yahoo Finance or other research sites to determine the one year change in share price of the stock. Use the closing price.
 
>Use the ASX website or annual report to determine the dividend paid for the year. If the share is franked, you will have to gross it up to account for franking credits. If the stock pays dividends in foreign currency, you will have to convert that home currency using the exchange rate of the date of dividend payment.
 
>Most Australian companies pay twice a year: interim and final dividend.
 
>Some companies may pay a special dividend. This should be included in calculating your total one year return.
 
>The dates used should match the dates of the annual report.
 
>DO NOT select a company that does not pay dividends.
 
>You can use the All Ordinaries (AORD) as a proxy for the market. Make sure the date selected for your start and end date correspond to the one you used to calculate your return for the stock. Review the summary of projects undertaken by the company in the annual report. Identify if there is a link to the under or over-performance of the stock relative to the benchmark due to capital investments/projects. How successful are the finance managers of the company in selecting good investments?
 
Cost of capital guide
 
 Use figures from the annual report to calculate the company’s cost of equity.
 CAPM (you will have to either calculate or source for the beta of the company. You can try www.morningstar.com.au or www.reuters.com.
 
 You can use the 10 year Australian government bond for the risk-free rate.
 Dividend growth model (DGM).
 
 Refer to the textbook for formulas and example.
 All information needed to calculate Rd using the DGM can be found in the annual report
 
 Do not include any special dividends as it is a once-off occurrence
 Select between CAPM and DGM method. Which one do you feel is more accurate/appropriate and why? Use this to calculate the WACC.
 
 Business loans rates vary with the terms of the contract. However, you can use the public available information as an estimation.
 Read the annual report to find the breakdown of the loans and the providers.
 
 Identify the long term liabilities; not short term and overdrafts. This is usually found in the balance sheet.
 Read the notes and fine print. Companies sometimes detail the lending institution or provide the interest rates if they are fixed.
 
 List the various borrowings and rank them in order (low to high interest rate). If there are no notes on the rates, you will have to make reasonable assumptions. Investigate if the loan is secured/unsecured, fixed/variable or straight/hybrid. If you are unable to determine the actual breakdown of fixed and variable rates assume it to be 100% variable.
 Establish a base rate. This can be a bank variable lending rate or cash rate. If your company is a bank, you cannot use another bank’s lending rate. You can however, use the chosen bank’s lending rate less a margin as your starting point.
 
 Assume a margin for each type of loan. Provide some form of evidence/research to support your assumption.
 Do not use the interest expense from the profit and loss statement to work out the interest rate.
 
 We do not expect you to source for exact rates.
 Ensure that you show your workings and include your source as footnotes.
 
 We are looking to see evidence of research and logical reasoning.
 What does your calculated cost of capital tell you about the type of future projects that the company can consider?
 
 How does knowing the cost of debt and capital help the financial managers in deciding the optimum capital structure?
 
Product code: Case Study-AW106
 
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