Question 1

Word limit: 1800 words

LO2: Apply earnings capitalisation multiples and other methodologies to value businesses and securities.
LO3: Analyse the results of a valuation of a business or equity securities.

Note: You need to construct a spreadsheet for your answers to (a), (c) and (e). It should be clearly marked ‘Worksheet 1'. The Excel spreadsheet needs to be uploaded separately to the Word document that contains your report when submitting your assignment. Be sure to cross reference your material clearly.

(a) Analyst 1 has undertaken a discounted cash flow (DCF) equity valuation of AZJ, as a whole and on a per share basis, using only the information provided above to generate a proxy for cash flow to stakeholders (i.e. debt providers and shareholders) and a terminal value of 8 times EBITDA.

Replicate Analyst 1's workings, assuming the basis of the workings is correct.

(b) What are the principal shortcomings of Analyst 1's valuation approach in general, and in the way it is applied to AZJ?

(c) Analyst 2 has also undertaken a DCF equity valuation of AZJ, as a whole and on a per share basis, using only the information provided above but using forecast cash flows attributable to equity holders and a terminal value of 25 times earnings.
Replicate Analyst 2's workings, assuming the basis of the workings is correct.

(d) What are the principal shortcomings of Analyst 2's valuation approach in general, and in the way it is applied to AZJ?

(e) What range of values would Analyst 3 derive for AZJ, as a whole and on a per share basis, based on all the information provided above for comparables, Asciano and Toll Holdings?

(f) What are the principal shortcomings of Analyst 3's equity valuation approach in general, and in the way it is applied to AZJ?

Question 2

Word limit: 2200 words

LO1: Evaluate the qualitative factors that impact a business and its industry.
LO3: Analyse the results of a valuation of a business or equity securities.

The recent sell down of the government's stake in the business represents a value reference point. You are required to prepare a report for the chief investment officer (CIO), which analyses the value of the business in reference to the recent events. The CIO has left copies on your desk of the following documents. These documents are provided on the ‘Assignment' page of KapLearn.

• QR National share offer document
• AZJ 2013 annual report
• Queensland Rail (QR) 2005 draft access undertaking including pages relating to WACC calculations
• a hand-scribbled memorandum, which outlines the following four key issues (see (b)) they expect to be addressed in your report.

Note: Your report should be set out as per the sections below.
(a) Valuation
Provide your view of a fair value range for the ordinary share valuation (per unit) of AZJ as at 31 December 2013 with supporting spreadsheet calculations. Your workings should be clearly marked ‘Worksheet 2' on your spreadsheet and clearly referenced in your report. In forming this view, the CIO has asked that you must not limit yourself to the comparables and the forecasts of the junior analysts. In fact, you must seek to overcome their shortcomings - for example, the analysts limit themselves to relatively simplistic forecasts and comparables. You must prepare your own forecasts, include new comparables and include a discussion on AZJ's real options in your framework.

(b) Analysis
Provide an analysis of the factors that would critically affect your forecast and hence your valuation. The CIO has listed:

• access network that the regulator has allowed versus growth and sustenance capex in the unregulated areas

• state ownership overhang, both in respect of a large parcel of shares that may be sold and influence, if any, on management

• escrow conditions and liquidity issues surrounding your stake (if purchased)

• AZJ's stated intent to buyback up to 10% of the shares outstanding and how that could positively or adversely affect the valuation and your decision as their four major concerns, but asked that you not limit yourself to just addressing those concerns. (10 marks)

(c) Recommendation
Make a firm recommendation (a clear yes or no) on whether the manager should accept the invitation to participate in the off-market transaction and if yes, to what extent.

Provide a summary of the reasons for your recommendation.

Attachment:- Assignment--Business Valuation.rar