FINM7401 Finance

Semester 2, 2021

Team Project

Assignment Due: 22nd October 2021 at 2:00pm. Submit electronically through Blackboard –

one assignment per group.

Group: This is a group assignment. Your group should contain 4-5 students.

Overview: The objective of this group assignment is to assess students’ ability to use

discounted cash flow method to value the equity of a public company. Each group will need to

choose a company listed in the top 200 of the Australian Securities Exchange (ASX) that

satisfies the following requirements:

1) The company is from a non-financial industry.

2) The company has a positive Basic Earnings per Share (EPS) for the past three fiscal years.

3) The company’s dividend payout ratio (DPR) is a positive value smaller than 100% at the

end of the fiscal year 2020. You need to calculate the DPR using the Dividend per Share on

Basic EPS.

Each group will need to gather all the necessary financial data either through the financial

websites or databases (see useful resources below) within UQ to attempt a set of questions

presented below. The total marks are 100 and count towards 30% of your final grade.

Useful Resources:

Capital IQ provides a wealth of financial data about listed companies with an array of tools

for analysis, ideation, and efficiency. Click on “New User” to

register.

ASSIGNMENT QUESTIONS

Fundamental Analysis: (90 marks)

1) Provide a description on the business of your selected company. Prepare a SWOT analysis

in identifying the Strengths, Weaknesses, Opportunities, and Threats for your selected

company relative to its competitor within the same industry based on the current Australian

economy and financial landscape. [15 marks]

2) Based on the 2020 financial year-end earnings of your selected company, compute the free

cash flows and discuss how you estimate all the inputs needed for this calculation. [5 marks]

3) Estimate the growth of the firm using the following three approaches. [5 marks]

Historical geometric growth rate

You may select the length of the horizon.

Analyst’s consensus estimates of future earnings and growth

Based on analyst recommendations report.

Fundamental analysis

o Retention ratio * Return on equity (ROE)

4) Select an actual growth based on the three approaches above. [5 marks]

Your choice can combine the above estimates in any way you feel appropriate. In

making your choice, emphasize the advantages and disadvantages of each approach and

how that led to your weighting of estimates.

Discuss how long you might expect this growth rate to persist and what you expect the

growth rate to be thereafter.

5) Compute the cost of equity using the capital asset pricing model (CAPM). Compute the cost

of debt based on the yield to maturity (YTM) of the long-term corporate bonds. [5 marks]

6) Compute the weighted average cost of capital (WACC). Assume corporate tax rate of 30%.

[5 marks]

7) Use both dividend-discount model (DDM) and discounted free-cash flow method (DCF) to

estimate the price per share of your selected company. [10 marks]

8) Compare your valuations based on DDM and DCF to the current market value. Provide

some explanations why your valuation differs from market valuation (if it does differ). Discuss

the limitation of the DDM and DCF analysis. [10 marks]

9) What would the estimates of growth rate in both DDM and DCF models have to be in order

for your valuations in question (7) to be closely aligned with the market valuation? Are these

estimates realistic? Discuss. [10 marks]

10) Given the slowdown in Australia’s economy in recent years, comment on how your

valuations in question (7) change if: (1) growth rate decreases by 1%; and (2) WACC decreases

by 1%. Provide a general assessment on the sensitivity of your estimates. In other words, do

your valuation estimates being more or less sensitive to the changes in growth rate, and WACC.

[10 marks]

3

11) Provide an assessment on your selected company in terms of its valuation relative to its

competitor (at least two companies) within the same industry. Comparison can be done using

valuation multiples as discussed in the lecture. In your capacity as an analyst, would you

recommend investors buying/selling your selected company and explain why? [10 marks]

Assessment: (10 marks)

The purpose of this project is to give you a preliminary feel for fundamental analysis.

Do not worry if your estimates differ a lot from the actual price as we often make

assumption. Results are often very sensitive to different assumptions that are being

made.

It is very easy to input pre-existing estimates into certain valuation models to arrive

with the valuation of your selected company. I am not particularly interested in the

inputs but rather the reasoning that led you to the inputs.

Therefore, it is very critical for you to demonstrate your own thinking and justify your

workings and your final valuation. Whenever possible, discuss how you estimate all the

inputs needed for the calculation.

Note that an additional 10 marks will be awarded for clear presentation and writing.

Submission:

Excel:

Your Excel file should include all workings and calculations for each question. Formulas for

the calculations should have cell references wherever possible. If you have computed a number

incorrectly and just typed that number into the spreadsheet (or typed a formula using numbers

when cell references could have been used), you will not receive partial credit for any portion

of your computation that is correct.

Written Report:

Please provide a written report (not exceeding 2,500 words). The report should provide answers

to questions specified above. This includes a detailed calculation of all results, discussion of

assumptions made, justification of estimates relative to market value and its limitation,

discussion of the sensitivity analysis, and assessment of selected company relative to its

competitors. Please provide references where appropriate. References are not included in the

word count.

Note: Attach the coversheet as the first page of your written report. Please also make sure to

have the full names and student numbers of all members of the team on the first tab of the Excel

file.

Final Submission:

Team should submit the entire assignment (ONE SUBMISSION PER TEAM) by

attaching TWO files as follow:

o PDF written report and Excel spreadsheet on Blackboard Submission

(Submit HERE) link. When you save your assignment, name it based on your

tutorial delivery mode and team number. For example, if you are enrolled in

tutorial external 1 (i.e. Monday, 9am to 10am) and your team number is 5,

then name the file as “FINM7401_External_1_Team_5.pdf” and

“FINM7401_External_1_Team_5.xlsx”; and

o PDF written report on Team Project link. Please name file as “FINM7401_

External_1_Team_5.pdf” and such written report will be cross-checked for

potential plagiarism. Note that you do not need to submit Excel spreadsheet

here.

Please make sure that only ONE member of your team submits through Turnitin. If

more than one team member submits the answer, Turnitin will treat it as plagiarism.

You may re-submit as many as you like, but only your last submission will be graded

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