To prepare an analyst report on a public listed dividend paying company. Students will form groups of 4 in order to complete the case study. Students should complete the group sign-up form and return it to their lecturer by week 3. Students who do not return the form will be allocated to a group and will then have a further week to meet with group members, complete the form and return it to the lecturer. Students who do not follow this guideline will be allocated a score of zero for the assessment. Once assigned to a group it is not possible to change. Only electronic copy must be submitted through turnitin. The assignment will be assessed according to the rubrics provided at the end of this document and to the criteria contained in the assessment form that is available on Blackboard. Students are required to attach this assessment form as a cover / front page to the assignment. Further details are provided on Blackboard. Skills acquired: ? discipline knowledge; ? thinking skills; ? learning how to learn Specifically, conduct research on a company and report on key areas of shareholder analysis, risk-return analysis, cost of capital and financial statement analysis. 3.2 Submission instructions This assignment is due on Friday, 18th of May at 4 pm. This is a group assignment. You have to commence work on your assignment from the end of week 3 and make considerable progress every week. The presentation of the case study should be in 1.5 lines spacing and 12pt font. It should not be more than 5,000 in words. The word count excludes tables, diagrams, charts, footnotes and references. Your document must be typed and submitted through Turnitin on the Blackboard by the due date. No email copies will be accepted. Page 6 of 13 3.3 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 must not select the following company as they will be used in the lecture: ? Domino's Pizza ? JBHiFi 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; ? cost of capital; and ? financial statement analysis 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. The report must be written completely by you and your group members. You are not to purchase or reproduce commercial stock reports. There are four parts to the assignment. 3.21 Shareholder analysis (20%) – Who are the owners of the company and the implication to the choice of methods used to calculate the cost of return. 3.22 Risk-return analysis (20%) – Analyse the return received over the market for the apparent risks identified in the company. 3.23 Cost of capital (40%) – Calculate the cost of capital using various methods and analyse your findings. 3.24 Financial statement analysis (20%) – Determine the future of the company by analysing the performance of the company Page 7 of 13 3.3 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 3.21 – 3.24 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. Do not use calculated figures from the websites (for example ROE) ? Do not include definitions or theories from textbooks. This includes definitions of marginal investors, nominees, etc ? 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 3.31 Shareholder analysis guide (Bentley campus example) ? 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 o What type of investor would invest in this company? Describe what type of returns they are looking for; capital growth or dividends? ? Read the chairman’s/director’s message to the shareholders o To whom is the message directed towards; institutional investors or “mom and dad” investors? Locate the top 20 shareholdings table in the annual report o Identify who the major shareholders are ? Nominees and banks are assumed to be marginal investors. You do not need to investigate them ? You should focus on identifying the non-marginal investors o Present a table showing the percentage of marginal vs non-marginal investors. You may need to make some assumptions of the shareholders not captured in the top 20 list o What type of investment decisions do you expect from the majority of the shareholders that you have identified? ? What is the implication of your analysis on the percentage of marginal investors? Page 8 of 13 3.32 Risk-return analysis guide ? Read the risk disclosure section in the annual report o 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 o You have to show evidence of these risks. This can be done via relevant newspaper articles, correlation with identified variables, trend analysis, and comparison with competitors, etc. o Reproduction of the risks stated in the annual report will not be acceptable. ? The total return to the shareholder is the capital growth plus the dividend received. o Use start and ending share price for the financial year as stated in the annual report to determine the one year change in share price of the stock. Use the closing price o Use the dividend paid for the financial year as stated in the annual report. 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 o Most Australian companies pay twice a year: interim and final dividend. o Some companies may pay a special dividend. This should be included in calculating your total one year return o The dates used should match the dates of the annual report o DO NOT select a company that does not pay dividends ? You can use the All Ordinaries (AORD) or any suitable sector index 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. Your market return cannot be negative o A SML is not needed ? Review the summary of capital projects undertaken by the company in the annual report. Comment on the market’s reaction/assessment of the projects that have been announced Page 9 of 13 3.33 Cost of capital guide ? Use figures from the annual report to calculate the company’s cost of equity. o 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. o You can use the 10 year Australian government bond for the risk-free rate. o You cannot have a negative Rm ? Changing the time period of all your proxies used in CAPM would be the easiest. However, you may have to end up calculating the beta This is described in 'Resource - How to estimate beta.pdf' found on blackboard ? Another approach for you is to choose a different proxy. Here is a list of all various indices: http://www.asx.com.au/asx/statistics/indexInfo.do ? If you are still unable to get a suitable Rm, you will have to take a historical average. Investigate the market returns over the last 5 years and make a reasonable estimation o Dividend growth model (DGM). ? Refer the chapter ‘The value of common Stocks’ of 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 o 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. o Read the annual report to find the breakdown of the loans and the providers. o Identify the long term liabilities. This is usually found in the balance sheet. Read the notes and fine print. Investigate if the loans are 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. o List the various loans in your report and rank them in order (low to high interest rate) o Companies sometimes detail their lending institution or provide the interest rates if they are fixed o Go to the lending institution’s website and locate the interest rate. If the lending institution is not mentioned, you will have to select a major bank o Do not use the interest expense from the profit and loss statement to work out the interest rate o If you have complex loans like foreign loans or notes, you will have to establish a base rate and add a margin on top of the rate. Provide some form of evidence/research to support your assumptions ? 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? Page 10 of 13 3.34 Financial statement analysis guide ? Calculate financial ratios of the company to analyse its performance measures. Performance measures include; market value added, market-to-book ratio, EVA, ROC, ROE, and ROA ? You should cover at least 3 ratios; one of them must be an analysis of the return on assets using the Du Pont System ? Ensure that you show all calculations and footnote the page number of the annual report where you obtained the figures ? Do not reproduce pages/sections of the annual report. ? Compare your ratios with a competitor taking note of its: o Size (market capitalisation) o Age o Sector/market/industry o Scope of operations ? If there are not comparable competitors, you may have to select a few closely related ones to perform your comparison ? The DatAnalysis Morningstar database from the Curtin library (online) is an available resource that you can use to obtain the ratios of competitors. Calculations of competitors’ ratios are not required ? Analyse and comment on the ratios of your company against the benchmarks ? Calculations of ratios without analysis and comment will receive a null grade for this section