FINC5001 Foundations in Finance Semester 1, 2024
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FINC5001 Foundations in Finance Major Assignment
Part A: Report
Weighting: 25%
Due date: Sunday 5th May 2024
11:59 PM
You currently work as a team at a major investment bank and have been tasked by the
Investment Management Division (IMD) to analyse a stock that will be incorporated into a
portfolio with other assets from the same market. You will need to prepare a professional
business report that will be submitted to the Investment Management Division (IMD) that
answers the questions proposed in this investment brief as well as a final recommendation.
Stock Details [10 marks]
1. Select a publicly listed non-financial company that is a constituent of S&P 500 index (The
US), that has at least 10 consecutive calendar years (i.e., 1 January 2014 to 31
December 2023) of dividend history. Describe the company that you have chosen, so
that the IMD has a comprehensive understanding of its operations and risks. (If the
company did not pay dividends in 2020 due to COVID-19 but paid dividends in every
other year, including 2021 and 2022, this will be allowed) (1 mark)
2. List the Global Industry Classification Standard (GICS) sector, industry, and sub-
industry for your chosen company. List one other public company that is in the same
sub-industry as your chosen company and briefly describe its operations. This
competitor does not have to be listed in the S&P 500 index. (1 mark)
3. Present a table of a current “stock quote” with the following characteristics: (1) Current
Price (2) 52 Week Range (3) Market Cap (4) Beta (5) P/E Ratio (6) EPS (7) Earnings Date
(8) Forward Dividend and Yield, (9) Ex-Dividend Date, and (10) 1 year Target Estimate
for both your chosen company and competitor. Define and interpret the following four
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measures including Market Cap, Beta, EPS, and Forward Dividend & Yield. Compare and
discuss the differences that you observe between the two companies in respects of the
four measures including Market Cap, Beta, EPS, and Forward Dividend & Yield. Note you
should consider the comparability of the measures. (4 marks)
4. Define and interpret the P/E ratio. Compare the P/E ratios of your chosen company
and the competitor to the average P/E ratio of the industry of your chosen company.
Compare these numbers with the average P/E ratio of your chosen stock market index
as well. Discuss in detail with references. (4 marks)
Summary Statistics and Risk Characterisation [30 marks]
5. List the current Government bond rates of the following maturities: (i) 1-month, (ii) 1-
year, (iii) 5-year and (iv) 10-year in a table. Graph the 10-year government bond rate1
over the period from January 2012 to the most recent month with data available. How
has the 10-year rate changed over this period? Why do you think this has occurred? Do
you think the 10-year rate will go up or down in the future? Discuss with references to
the appropriate academic literature. (5 marks)
6. Calculate the annual returns for the market index (i.e. S&P 500) for the last: (i) 5-year
period, (ii) 10- year period, and (iii) 20-year period. Calculate the average annual return
and standard deviation of annual returns over these 3 time periods using both the
arithmetic and geometric averages (for the standard deviation, you can use just the
arithmetic average with clarifications). Display the results in a table. How have these
values changed over time? What do these changes mean for the average investor?
Discuss in detail. (5 marks)
7. Calculate the annual return (for each financial year) of your chosen company from 1st
January 2014 to 31st December 2023. Annualise all dividends paid out2. Report the formula
that you've followed to calculate the annual return. Calculate the average annual return and
standard deviation of annual returns for the whole period using both the arithmetic
and geometric averages (for the standard deviation, you can use just the arithmetic
average with clarifications). Display the results in a table. How has your company
performed over this period? Do the arithmetic and geometric averages differ for your
company? Why or why not? Interpret these numbers for your manager. (5 marks)
8. Calculate the annual beta for your chosen company returns using the measures that you
generated in Tasks 6 and 7. Report the formula that you followed to calculate the
1 You can generate the graph using either monthly data or daily data. However, make sure to indicate the type of
data clearly in your report.
2 Add up all dividends paid (not declared) during the period from 1st January to 31st December of each year.
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annual beta and explain how each variable in the formula is measured. Compare your
calculated annual beta with the beta found in your stock quote. Are these values the
same or different? Explain and discuss why they may be similar and/or different. (5
marks)
9. Using the Capital Asset Pricing Model (CAPM), calculate the required rate of return on
equity for your chosen company. Select one of the different government bond rates in
Task 5, as proxies for the risk-free rate. Select one of the annual returns (i.e., arithmetic
average or geometric average) calculations calculated in Task 6, as a proxy for the
expected market returns and justify your choices. Discuss how appropriate your
choices are as proxies for the theoretical values in the CAPM equation. (10 marks)
Growth Rates and Valuation [30 marks]
10. Estimate the growth rate of your chosen company’s cash flows by using the
following three methods:
(a) Calculate and list the annual growth rates for dividends from January 2014 to
December 2023 (For any years within your sample with anomalous dividend growth
rates discuss why this might have occurred. If your company did not pay dividends
in 2020 due to COVID-19 just use an appropriate proxy and justify your choice).
Calculate the arithmetic and geometric average annual growth rate of dividends
over this period. Do you think your company’s dividends will grow at these rates for
the foreseeable future? Explain in detail why or why not with references. (5 marks)
(b) Calculate and list the annual growth rates for net income from January 2014 to
December 20233 (For any years within your sample with anomalous net income
growth rates discuss why this might have occurred). Calculate the arithmetic and
geometric average annual growth rate of net income over this period. Do you think
your company’s net income will grow at these rates for the foreseeable future?
Explain in detail why or why not with references. (5 marks)
(c) Using the formula g = b * ROE, calculate and list the growth rates, plowback ratios,
and ROE for the period between January 2014 to December 2023(For any years
within your sample with anomalous plowback ratios and/or ROE discuss why this
might have occurred). Calculate the arithmetic and geometric average annual
growth rate over this period (remove any rates that are negative from your sample).
Do you think this method of calculating growth rates is useful for valuation? Explain
in detail why or why not. (5 marks)
3 Historical financial data can be obtain from https://www.macrotrends.net/stocks/research
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11. Using the Discounted Cash Flow (DCF) models you have learnt in FINC5001, determine
the intrinsic value of your chosen company using the required rate of return from Task
9 and (a) growth rate(s) (from Task 10). Justify the choices and assumptions you have
made in undertaking this calculation in detail and why you did not choose any other
values instead. Discuss why you chose your valuation model and its key assumptions
and why you believe your chosen rates satisfy these assumptions. When do you think
the GGM is preferred to a two-stage or multi-stage growth model and why? Explain.
(If you make deviations from the choices in Task 9 and/or Task 10, clearly justify why
you made these changes and why these new values are more sensible for this analysis).
(10 marks)
12. The values that you have utilised in part (11) represent only one possible set of choices
for a valuation model. Your task is to perform a sensitivity analysis on the intrinsic
value of the chosen company. Create a two-way sensitivity table to show how changes
in key variables of the DCF model affect the intrinsic value. Discuss the results. (5
marks)
Recommendation [20 marks]
13. Using the DCF analyses performed in Tasks 1-12, make a detailed recommendation for
your chosen company as to whether to buy, sell or hold this stock. Along with
your valuation model, you should use any relevant information about your chosen
company, competitors, its industry, and the economic outlook to justify your
recommendation. Detail the limitations of your analysis and assumptions as well as
incorporate the sensitivity analysis done in Task 12 and what this analysis adds to your
valuation. A well-justified recommendation properly connects outside information on
how it relates to your valuation model via dividends, cash flows, growth rates, discount
rates, and other financial factors. Remember, you are trying to present a report that
convinces the IMD that you have done a thorough and detailed analysis of your chosen
company. The recommendation must be cohesive and consistent with the analyses
performed in the sections above.
Writing and overall style of the report [10 marks]
Marking Criteria
The criteria below will be followed when marking each part of the assignment:
1. The extent and quality of critical reasoning/critical thinking.
2. The demonstration of knowledge of relevant theory.
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3. The successful usage and interpretation of relevant data.
4. The extent to which the work is clearly and concisely presented.
Weight of Final Mark: This assignment will be marked out of 100 marks and will be scaled to
account for 25% of course total mark.
Formatting and Presentation:
1. The number of pages allowed ranges from a minimum of 15 to a maximum of 20, with
1.5 line spacing and a font size of 12 Arial or Calibri. It should have normal-sized
(2.54cm) margins on all sides. Please number the pages of your report. Marks will be
reduced by 5 for each page you exceed the lower and the upper page limit. For example,
your mark will be reduced by 10 if the report is of a length of 22 pages or 13 pages. You
will be penalised for inappropriate formatting.
2. Text presented in tables and graphs do not need to follow this formatting requirement.
However, these will still need to be professionally presented in the report.
3. Ensure you use proper academic referencing in supporting the ideas and discussion
within your report. All reports must include a list of references in academic form using
the APA 7th method. Further information on the APA referencing style can be found
here: https://libguides.library.usyd.edu.au/citation/apa7. Failing to reference your
sources may be subject to further actions according to the University of Sydney Code
of Conduct and will be dealt with by the School.
https://www.sydney.edu.au/students/academic-dishonesty.html
4. Pay particular attention to presentation. A component of your mark will be based on
presentation. Avoid overdoing formatting and ensure that the report is very clear,
logical, and professional. Pay attention to grammar. Clear and logical presentation is a
major challenge in report preparation.
5. Preparing a concise report poses a major challenge. Brevity and conciseness are key
ingredients of a highly successful report. Every part of the report should somehow add
to the result; otherwise, it is superfluous and distracting.
6. Use headings in the report to separate key ideas. Using paragraphs will also assist with
structuring ideas.
7. The report must be submitted as a PDF document. You must submit the report
electronically via the Turnitin link on Canvas. Excel spreadsheets with all your
calculations must be submitted as a .xlsx workbook. You must submit two files
electronically via the link on Canvas.
What is included in the 15-20 page limit?
1. Report body
2. Tables
3. Diagrams
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What is excluded from the 15-20 page limit?
1. Title page
2. Table of contents
3. Executive summary
4. Reference list
5. Appendices (For each set of data used in the report, present a screenshot of this data
in the Appendix)
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Submission:
1. The only acceptable form of submission is electronic via the submission link in the unit’s
Canvas site. Hardcopy and email submissions will NOT be accepted. Late submissions
will be penalized according to assessment policy. All submission will be checked through
TURNITIN for similarity with external sources.
2. Submission format: Each group can only submit ONE project report. The group leader
(as decided in your group meeting) is required to submit the assignment. (DO NOT
submit if you are not the group leader). It is imperative that your project report is
submitted in ONE document. Only a PDF format document will be accepted, and it is
your responsibility to ensure all pages correctly display your original content. Missing or
distorted figures and formulas will result in lower marks.
3. Cover page: Ensure the Student Identification Number (SID) of EACH student is on the
cover page of your assignment. The name of student must NOT show up on the
assignment to ensure the anonymous marking requirement. The cover page should be
submitted with the assignment in a single file (as the front page).
4. Document name: Your project PDF file must be named in the following format:
FINC5001_Groupnumber_2023.PDF Example: FINC5001_Group23_2023.PDF and your
Excel file must be named in the consistent way such as FINC5001_Group23_2023.xlsx.
Group work ethics:
1. Every group member is expected to be actively engaged in the whole process of group
assignment. Though it is hard to divide the work completely equally, “free-riding”
practice will not be tolerated.
2. From week 4 to week 10, you are expected to meet at least four times to discuss the
assignment tasks and to update your group members on your progress. At your first
group meeting, please decide who will be the group leader. The group leader will be
responsible for coordinating the work of the group and submitting the group report by
the deadline.
3. Each group member will complete the Peer Performance Assessment Form (to be
released on Canvas as a separate assignment approaching the due date) and submit the
form separately online. Due to the limited marking time, we must give all group
members the same mark based on group performance. However, free riders will be
penalised and the information you provide on the Peer Assessment Form will be used to
determine whether a group member has made a reasonable contribution to the group's
work.
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Data:
1. Yahoo Finance (https://au.finance.yahoo.com/) is a great place to download free data
including price history, price quotes, financials, etc. of companies listed on the major
stock exchanges.
2. The Federal Reserve publishes economic and financial data on its website.
(https://www.federalreserve.gov/data.htm)
3. Macrotrends (https://www.macrotrends.net/stocks/research) is a research
platform that enables users to screen and research stocks, commodities, precious
metals, oil, gas, global metrics. You can obtain 10 year financial ratios from this website.
4. ProQuest: A major full-text database covering humanities, social sciences, education,
health and medical, science and technology and business and management. This is a
good database for academic references.
(http://ezproxy.library.usyd.edu.au/login?url=https://search.proquest.com/pqcentral/
advanced ?accountid=14757)
5. Google Scholar: An important searching engine for scholarly publications. Read this
instruction regarding how to link Google Scholar with the Library’s research databases
to find full-text articles. https://usyd.libanswers.com/faq/241096