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Assignment 2
Financial Management FNCE 90060
Semester 1, 2024
This assignment is due by 8 pm Friday 24 May 2024 via the Assignment 2 submission link on
the LMS. Late submissions will have marks deducted.
Groups may have a maximum of five (5) members. Group members may or may not be the
same as the Assignment 1 group. In any case, you must sign up for a new Assignment 2 group.
To sign up for a group, please click the People link in Course Navigation on the LMS and click
the Assignment 2 Groups tab. Then, click the Join link next to the name of an available group. If
you are the first in your group to sign up, be sure to join an empty group. If you are joining an
existing group, be sure you have identified the correct group to join. Do not add yourself to a
group if you are not a member of that group. You can self-sign up for a group until May 16th,
2024.
The Assignment 2 submission link will be activated on May 17th, 2024, when 'self group sign-up'
will be disabled for Assignment 2 Groups.
Only one group member needs to submit the assignment on behalf of the group. To submit your
assignment on behalf of your group, please click the Assignments link in Course Navigation on
the LMS and click the Assignment 2 link. Then, click the Submit Assignment button to submit
your assignment.
The system will only accept Excel documents (file format: .xlsx or .xls). You should first
download the attached Excel file (FNCE90060_2024_SM1_A2.xlsx) and fill in empty cells in the
worksheet (“Assignment 2”) to answer the questions. Then, save and submit the Excel file filled
with your answers.
Please make sure that the name of your Excel file has the following naming format:
A2_Group_GroupNumber (for example, A2_Group_150.xlsx). Also, please add the student ID
numbers of your group members to the top of your Excel file.
For questions 1 to 8, only the cells highlighted in yellow will be graded. However, in order to fill
them up, you will have to fill in other empty cells (highlighted in green) with the right numbers.
For question 9 and 10, type your answers in cells C60 and C65, respectively. Please be sure to
write clearly and concisely. Unnecessarily long, meandering answers will be marked down. (An
answer of no more than two sentences for each question is sufficient.) Along these lines, you will
want to proofread your submission, as unclear answers will be penalised. Any handwritten
assignments, scanned assignments or anything with screenshots/photos will not be accepted.
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In this assignment, you are asked to analyze the stock of IGO Ltd (IGO). The Excel workbook
contains a sheet entitled “Statements” which includes financial statements (income statement,
balance sheet, and cash flow statement) for IGO over the past four financial years.1
Answer the questions using the information about IGO provided below and in the financial
statements in the Excel workbook.
 EPS (TTM2): A$ 0.297
 # shares outstanding: 757.27 million
 Industry P/E ratio (TTM): 14.20
 Analyst consensus on expected sales growth for future 5 years (long-term expected sales
growth rate): 4.0%
A. Determine the stock value based on the discounted free cash flow method.
1. Based on the historical data from the attached financial statements, compute the four-year
average of the following financial ratios:
i. EBIT-to-sales ratio (= Operating Income / Total Revenue)
ii. Tax rate (= Provision for Income Taxes / Net Income Before Taxes)
iii. PPE-to-sales ratio (= Total Net Property, Plant, and Equipment / Total Revenue)
iv. Depreciation-to-PPE ratio (= Depreciation, Amortization and Depletion / Total Net
Property, Plant, and Equipment)
v. NWC-to-sales ratio (= [Total Current Assets–Total Current Liabilities]/ Total
Revenue)
2. Forecast future (annual) sales based on the most recent year’s total revenue growing at
the long-term expected sales growth rate for each of the next five years.3
1 The financial statements given in the spreadsheet differ from the actual ones. However, this assignment assumes that
the financial statements provided in the spreadsheet are accurate.
2 Trailing 12 months (TTM) is a term used to describe the past 12 consecutive months of a company’s performance
data, that’s used for reporting financial figures.
3 Regard the most recent year’s total revenue as the current total revenue.
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3. Use the average ratios computed in part 1 to forecast the following items for each of the
next five years4:
i. EBIT (= Total Revenue each year × EBIT-to-sales ratio)
ii. EBIT × 1 − τ (= EBIT each year × (1−Tax rate))
iii. PPE (= Total Revenue each year× PPE-to-sales ratio)
iv. Capital expenditures (= this year’s PPE − previous year’s PPE)
v. Depreciation (= PPE each year × depreciation-to-PPE ratio)
vi. Net working capital (= Total Revenue each year × NWC-to-sales ratio)
vii. Increase in net working capital (= this year’s NWC − previous year’s NWC)
4. [2 mark] Forecast the free cash flow for each of the next five years using your estimates
from part 3 and the following Free Cash Flow equation:
= EBIT × 1 − τ + Depreciation − Capital Expenditure
− Increase in Net Working Captial
5. [1 mark] Calculate the free cash flow in year 6, assuming a constant terminal FCF growth
rate of 3% beyond year 5. Determine the terminal enterprise value at the end of year 5
(EV5) using the following equation and a terminal FCF growth rate of 3% and a WACC of
7%.
FCFwacc gr
FCF
EV


6
5

6. [1 mark] Determine the current enterprise value (EV0) of IGO as the sum of present
values of the five-year free cash flows plus the terminal enterprise value, i.e.:
5
55
4
4
3
3
2
21
0
)1()1()1()1()1( waccwaccwaccwaccwacc r
EVFCF
r
FCF
r
FCF
r
FCF
r
FCF
EV











4 Regard the most recent year’s PPE and NWC as the current PPE and NWC.
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7. [1 mark] Estimate the stock price of IGO using the following equations. (Hint: debt and
cash amounts are provided in the worksheet. You can also find these amounts from balance
sheet.5)
Market Value of Equity = Enterprise Value *+, − Debt + Cash
Stock Price = Market Value of Equity/#Share Outstanding
B. Determine the stock value based on Comparable Firms.
8. [1 mark] To calculate an estimate of IGO’s stock price based on a comparable P/E ratio,
multiply the industry average P/E ratio by IGO’s EPS.
C. Compare the estimate with actual stock price.
9. [2 marks] Compare the stock price estimated by the discounted FCF model (i.e., the IGO
stock price estimated in Q7) to the actual stock price of IGO (as of April 26, 2024). What
recommendations can you make as to whether clients should buy or sell IGO stock based
on your price estimate from the discounted FCF method (i.e., the IGO stock price
estimated in Q7)? Why?
10. [2 marks] Explain why the stock price estimate from the discounted FCF model (i.e., the
IGO stock price estimated in Q7) differs from the actual stock price of IGO (as of April 26,
2024).
5 Regard the most recent year’s debt and cash amounts as the current debt and cash amounts.