FINC5001 Foundations in Finance Semester 1, 2022


Weighting: 20%
Due date: Sunday 8th May 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 [17 marks]
1. Select a publicly listed company that is a constituent of the S&P/ASX 300 index (Australia),
S&P 500 Index (US) or CSI 300 Index (China) that has at least 10 consecutive years of
dividend history from 2012-2021. The selected company cannot be one which is listed
on the last page of the Assignment instructions. 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, this will be allowed)

2. Find three news articles from the last 4 weeks about your chosen company and briefly
summarise each article (1-2 sentences). Briefly explain how the event(s) detailed in the
news articles have affected your company.

3. 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 any of the indices nor is subject to the restrictions in part 1.

FINC5001 Foundations in Finance Semester 1, 2022

4. 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, interpret, and compare each
characteristic for your IMD.

5. Compare the P/E ratio of your chosen company and the competitor to the average P/E
ratio of the industry of your chosen company. Compare these number with the average
P/E ratio of your chosen stock market index as well. Discuss in detail.

Summary Statistics and Risk Characterisation [20 marks]

6. Calculate the annual returns (from January 1st to December 31st for each year) for the
market index that your chosen company belongs to 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).
How have these values changed over time? What do these changes mean for the average
investor? Discuss in detail.

7. List the current Government bond rates of the following maturities: (i) 1-year, (ii) 5-year,
(iii) 10-year, (iv) 20-year, and (v) 30-year. List and graph the 10-year government bond
rate over the time period 2010-2021. 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.

8. Calculate the annual returns (from January 1st to December 31st for each year) of your
chosen company from 2012-2021. Annualise all dividends paid out. Calculate the average
annual return and standard deviation of annual returns from 2012-2021 using both the
arithmetic and geometric averages (for the standard deviation, you can use just the
arithmetic average). 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.

9. Calculate the annual beta for your chosen company returns using the annual returns from
2012-2021 along with the annual returns and standard deviation of your market index.
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. Calculate the annual beta for the subperiod between 2012-2019 (pre-COVID-
FINC5001 Foundations in Finance Semester 1, 2022

19) and compare this number with your other betas. Compare and discuss the stability of
your beta values with references to the appropriate academic literature.

10. Graph and compare the annual returns and standard deviation of your company with the
market index. Discuss and relate this comparison to your company’s beta(s). Does your
beta calculation explain your company’s returns with respect to the market? Explain in
detail why this may or may not be the case.

11. Using the Capital Asset Pricing Model (CAPM), calculate the required rate of return on
equity for your chosen company using all the different government bond rates in part (7),
as proxies for the risk-free rate. Select one of the annual return calculations calculated in
part (6), as a proxy for the expected market returns and justify your choice. Discuss how
appropriate your choices are as proxies for the theoretical values in the CAPM equation.


Growth Rates and Valuation [30 marks]
12. 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 2012-2021 (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 the
dividends in the prior year as a proxy). Calculate the arithmetic and geometric average
annual growth rate of dividends over this period. Also calculate the arithmetic and
geometric average annual growth rate of dividends for the subperiod between 2012-
2019 (pre-COVID-19) and compare the values. Do you think your company’s dividends
will grow at these rates for the foreseeable future? Explain in detail why or why not.

(b) Calculate and list the annual growth rates for net income from 2012-2021 (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. Also calculate the arithmetic and geometric
average annual growth rate of net income for the subperiod between 2012-2019 (pre-
COVID-19) and compare the values. Do you think your company’s net income will grow
at these rates for the foreseeable future? Explain in detail why or why not.

(c) Using the formula g = b * ROE, calculate and list the growth rates, plowback ratios,
and ROE for the time period between 2012-2021 (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
FINC5001 Foundations in Finance Semester 1, 2022

(remove any rates that are negative from your sample). Also calculate the arithmetic
and geometric average annual growth rate for the subperiod between 2012-2019
(pre-COVID-19) and compare the values (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.

13. Using the Discounted Cash Flow (DCF) models you have learnt in FINC5001, determine
the intrinsic value of your chosen company using an appropriate required rate of return
(from part 11) and (a) growth rate(s) (from part 12). 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 part (11) and/or part (12), clearly
justify why you made these changes and why these new values are more sensible for this
analysis).

14. Draw a cash flow timeline (like discussed in the Modules) of your company’s future
dividends (implied by your valuation model in part 13) to support the discussion above.

15. Calculate the Present Value of Growth Opportunities (PVGO) for your chosen company
using the current stock price. Interpret this value for your manager.

16. The values that you have utilised in part (13) represent only one possible set of choices
for a valuation model. Determine the intrinsic value of your chosen company using a
range of values (+1 and -1 for your growth rates and +1 and -1 for your discount rate).
You should have a total of 9 intrinsic value calculations like the table below:

g/r +1 0 -1
+1
0 Base Case
-1

For example, the top left slot would calculate an intrinsic value using both a growth rate
and required rate of return that is 1% higher than your chosen rates in part (13) (for any
negative calculations just put N/A).

Recommendation [20 marks]
17. Using the DCF analyses performed in parts 1-16, make a detailed recommendation for
your chosen company as to whether to buy, sell or hold this stock. Along with your
FINC5001 Foundations in Finance Semester 1, 2022

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 part 16 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.


Presentation and overall style of the report [5 marks]

Peer evaluation [8 marks]
• List and date all your data sources. Depending on the day and time with which you collect
the data, this will be different. For each set of data used in the report, present a screenshot
of this data in the Appendix.
• Justifications in the report should be made with references to appropriate academic
literature.
• The Excel workbook needs to be properly formatted and appropriately labelled such that
the instructors can read, interpret your calculations, and replicate all results presented in
the report without assistance.

Assessment Criteria:
1. Conforming with instructions (e.g. word length, font, other instructions)
2. Presentation, communication & style (written)
3. Clarity of expression (incl. accuracy, spelling, grammar, punctuation)
4. Referencing
5. Use of literature/knowledge of theory
6. Data/information gathering/processing
7. Conclusions
8. Analysis
9. Problem solving
10. Reflection/evaluation
FINC5001 Foundations in Finance Semester 1, 2022

Formatting and Presentation:
1. The maximum number of pages allowed is 25 pages with 1.5 line spacing and size 12 Arial
or Calibri Font. 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 page
limit. Hence, your mark will be reduced to zero if the report exceeds 40 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. You will be penalised if you forget to
reference your sources or use inappropriate referencing.
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 end 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.


The page limit for the report is 25 pages.


What is included in the 25 page limit?
• Report body
• Tables
• Diagrams

What is excluded from the 25 page limit?
• Title page
• Table of contents
• Executive summary
• Reference list
• Appendices (For each set of data used in the report, present a screenshot of this data in
the Appendix)
FINC5001 Foundations in Finance Semester 1, 2022

Marking Guide:
Company A selection, description, and news articles /8 marks
Financial data – company and competitor /9 marks
Returns – market index, Government bonds, company /10 marks
Beta calculation and discussion with risk and returns /6 marks
Required rate of return on equity – company /4 marks
Growth rates /12 marks
Stock valuation /10 marks
PVGO and sensitivity analysis /8 marks
Final recommendation /20 marks

Presentation and style of report /5 marks
Peer evaluation /8 marks

Penalties
Incorrect dating of data sources up to -10 marks
Incomplete screenshots of data sets in Appendix up to -10 marks
Inappropriate use of literature up to -10 marks
Incorrect referencing up to -10 marks
Failure to comply with formatting requirements up to -10 marks
Poorly presented report, tables, graphs up to -10 marks

Incorrect selection of companies -50 marks
Failure to submit Excel file with calculations -25 marks
Failure to complete peer evaluation (individual deduction) -15 marks
Each page over the 25 page limit -5 marks per page



TOTAL MARKS /100 marks

FINC5001 Foundations in Finance Semester 1, 2022

List of Prohibited US-listed Stocks:
1. 3M (MMM)
2. Abbott Laboratories (ABT)
3. American Express (AXP)
4. Amgen (AMGN)
5. Apple Inc (AAPL)
6. AT&T Inc (T)
7. Bank of America (BAC)
8. Best Buy Co Inc (BBY)
9. Boeing (BA)
10. Caterpillar Inc (CAT)
11. Chevron Corporation (CVX)
12. Cisco Systems (CSCO)
13. ConocoPhillips (COP)
14. Colgate-Palmolive (CL)
15. Costco (COST)
16. Dow Inc. (DOW)
17. Estee Lauder (EL)
18. Exxon Mobil Corp (XOM)
19. FedEx Corporation (FDX)
20. Goldman Sachs (GS)
21. The Home Depot (HD)
22. Honeywell (HON)
23. IBM (IBM)
24. Intel (INTC)
25. Johnson & Johnson (JNJ)
26. JPMorgan Chase (JPM)
27. Lockheed Martin Corporation (LMT)
28. Mastercard Inc (MA)
29. McDonald’s (MCD)
30. Merck & Co (MRK)
31. Microsoft (MSFT)
32. Nike, Inc (NKE)
33. PepsiCo (PEP)
34. Pfizer Inc (PFE)
35. PPG Industries (PPG)
36. Procter & Gamble (PG)
37. Salesforce (CRM)
38. Starbucks (SBUX)
39. Target Corp (TGT)
40. The Coca-Cola Company (KO)
41. The Travelers Companies (TRV)
42. Texas Instruments Incorporated (TXN)
43. UnitedHealth Group (UNH)
44. Verizon Communications (VZ)
45. Visa Inc (V)
46. Walgreens Boots Alliance (WBA)
47. Walmart (WMT)
48. The Walt Disney Company (DIS)
FINC5001 Foundations in Finance Semester 1, 2022


List of Prohibited Australian-listed Stocks:
1. Australia and New Zealand Banking Group Ltd. (ANZ)
2. Commonwealth Bank of Australia (CBA)
3. Domino’s Pizza Enterprises Ltd (DMP)
4. Telstra Corporation Ltd (TLS)
5. Wesfarmers Ltd (WES)
6. Woolworths Group Ltd (WOW)