Assignment: Investment Company Valuation
Company: Primary Health Care Limited (PRY)
[Group Composition for Group Assignment: strictly 3 students per group within the same tutorial]
For this assignment you are required to use publicly available information to analyse a publicly listed company and prepare a report which provides an assessment of the company's current position and future prospects, and which incorporates the use of a range of valuation models to arrive at an estimate of the company's share price. To provide structure the assignment should include the points listed below:
The final submission of the assignment should include the following:
Part 1: Conduct Financial Performance and Analyse Current Issues
In this section, students are expected to provide:
• An evaluation of the company's brief recent history and financial performance over time and also include peer group analysis.
• Conduct ROE for the company following the DuPont ROE approach and include peer group comparison.
• An analysis of the current issues facing the company, the industry it operates in, and explain the impact of the issues on the company's future earning.
Part 2: Estimate Valuation Models
The second part/section of the assignment should contain the estimation of the value of the company's share using:
- Dividend discount/valuation model (DDM)
- Free cash flow to equity model (FCFE)
You are expected to use the Capital Asset Pricing Model (CAPM) - discussed in topic
3 - to estimate the required rate of return or discount rate needed for each model. For CAPM estimation, you are required to calculate the following:
1. Beta: You cannot pick a beta value estimated elsewhere (e.g., Bloomberg) and use it in your report. Follow topic 3 lecture notes and relevant chapter (chapter 3) of the prescribed textbook to estimate the beta of the company and attach details of your work as an appendix. Also adjust the raw beta using appropriate methodology (refer to topic 3 lecture notes).
2. Risk-Free Rate: Use 10 years Govt. Bond Yield as a proxy for the risk-free rate. Indicate any advantages or disadvantages if there are any.
3. Market Risk Premium: The estimation of the expected market risk premium is crucial. You must carefully explain what you do and any assumption you make while estimating market risk premium.
• Risk Premium Estimation
To estimate the risk premium, first, you have to estimate the expected market return (ASX200 is your market portfolio). Then, subtract the RFR from the expected market return and arrive at your market risk premium.
Once you estimate these three figures (1-3) you will be able to estimate the required rate of return or discount rate following CAPM that can be used in valuation models.
Important points to be covered in Part 2:
• Explain any assumptions made in implementing the models.
• Where appropriate, explain how you arrived at the variables you are using. E.g., it is not enough to say you are assuming a 2 percent growth rate. You would be expected to provide justification/motivation of how you arrive at 2 per cent growth rate.
Part 3: Evaluate/Discuss the value/price of the company
Comment on your valuations from part 2, including a discussion of possible explanations of why your valuations differ from the current/recent share price. If appropriate, discuss why some of the above models may be unsuitable for valuing the company.
Maximum word limit for the Company Valuation Assignment is 6,000 words excluding executive summary and appendices.
Note:
Every single member of the syndicate is expected to do a part of implementing the valuation models. That is to say, there should not be the situation where a member only does the history and financial performance of the company without any input in the actual implementation of valuation model.
The focus of this assignment is on the valuation, specifically generating the inputs into the valuation process and applying valuation models to these inputs to arrive at a range of share price estimates. The requirements outlined above have been designed to aid this process. For the discounted cash flow valuation models the primary requirement is to produce the appropriate expected return measures and discount rates to use in the models.
It is important that forecasts of expected returns reflect the impact of the factors identified as current issues facing by the company. A common mistake is to identify a range of issues which will impact on the company's future earnings or cash flows, but then produce a set of return forecasts which are simply extrapolations of historical returns, ignoring the impact of the factors identified as current issues. The development of return estimates requires judgement; it is not simply a statistical or mathematical forecasting exercise.
References/Resources for group assignment
Islam, S.Z., Fundamental of Investment, Corpus Education (2016).
Reilly, Frank K. and Keith C, Brown, Investment Analysis and Portfolio Management (10th Edition), Thomson South-Western (2012): Chapters 10, 11, 12, 13, and 14.
[Much of the material in these chapters is covered in earlier courses and these chapters should be used for revision purposes].
Search Bloomberg, Yahoo! Finance, Google Finance site for business and financial market news. These deliver world economic news, stock futures, stock quotes, & personal finance advice.
Damodaran, Aswath, Investment Valuation [3nd Edition], available online at:
Assignment submission procedure
All assignments must be submitted online through the course Blackboard as well as in a hard copy. They must be accompanied by an assignments cover sheet and submitted through Turnitin on the blackboard, a plagiarism checking tool. For information on Turnitin see:
Presentation of Report
The report is to be presented in the form of a business report. It should have an executive summary, outlining the main findings, at the beginning. The remainder can be structured in line with the above points. Calculations should be included in appendices.
Reports are to be typed in Arial/Times new roman with a font size 12 in single or one and one-half space on A4 paper. Reports are to be stapled with two staples down the left-hand side, or secured with a fold-back clip. Do not attach information you have used in compiling the report, i.e. annual reports, newspaper articles etc., to the report.
Group Composition
Group members are strictly limited to three students. Experience has shown that numbers either smaller or larger than these are dysfunctional. Group composition is to be formed within week 2.
Contribution Statement
All groups are expected to include a CONTRIBUTION STATEMENT detailing (the form can be found in the Blackboard), in exact terms, what each person in the group has done, when you submit the assignment.
Please note marks of the group assignment will be allocated to each members based on their contribution percentage. That is all students are expected to participate and contribute to the group assignment. Free riding would not be rewarded. As such students would be given a zero mark if it is shown that s/he did not contribute enough to the final output.
Investment Assignment
Executive Summary
- Company overview
- Historical performance reflects companies earnings
- How the nature of the company decide the level of the risk/return/earnings
- Decisions that you made about the company based on your analysis
[outside of the word limit]
Part 1
Part 1 contains 4 questions:
Q1) Evaluate the company's recent and overtime financial performance by analysing the companies share price performance, financial statements and other relevant news during the last five years.
• Focus points:
1. Recent financial performance [past 2 years]
- choose a time frame (Look for any major public announcements)
2. Overtime financial performance [past 5 years]
- choose a time frame
Q2) Peer group comparison/industry analysis [only choose 5 major competitors from the list for discussion]
Q3) Analyse the company's/industry current issues and explain the impact of these issues on the company's future earnings
1. At Macro Level
- general factors that apply for the industry (income, growth of the industry, govt. regulation etc.)
2. At Micro Level
- the company specific requirements (operation, level of debt, directions/goals, competition etc.)
Part 1 (cont.)
Q4) Estimate the ROE of the company for last five years [for example; 2010-2015] using the
DuPont ROE approach.
- DuPont Analysis can be done using either of the following steps
- 3 steps: Profit Margin, Total Asset Turnover and Financial Leverage
- 5 steps: In addition, Interest Expense rate and Tax Retention Ratio
Refer to chapter 4 or Topic 4 Lecture slides for formulas
- Compare the financial performances of the company with its peer groups
• Choose 2 peer (competitor) companies for comparison
[Approximately 2500 words!]
Part 2 - Valuation
Part 2 contains 2 questions:
Q1) Start your valuation analysis with the CAPM estimation
You need 3 variables to calculate the CAPM:
- Estimate Beta (β): You can estimate beta by using regression analysis Or by manual calculation
- For both approach you need to use the stock price data of the company and ASX/S&P200 to estimate return for five years
- Then follow the formula of beta estimation on topic 3
- Risk-Free Rate of Return: Take the 10 year Govt. bond yield rate as a proxy for RFR
- Risk Premium: It is the difference between expected market return E(Rm) and RFR
- We have provided E(Rm)= 9.610% [source: Bloomberg]
Once you estimate the CAPM required rate of return denoted as E(Re) following the stepsabove, you can use this return (also known as cost of equity, ke) in the valuation model
Q2) Estimate the valuation model using two different techniques to estimate the intrinsic value of the company discussed in topic 6 (chapter 6):
- Estimate dividend discount model or dividend valuation model (DDM)
- Estimate free cash flow to equity model (FCFE)
- Dividend Valuation Model (DDM): Follow the formula discussed in chapter 6
- Use CAPM return
- Estimate the growth rate (g = Retention ratio x DuPont ROE)
- Use assumptions if necessary
- Forecast dividends (if applicable)
- Free Cash flow to Equity (FCFE): Follow the formula discussed in chapter 6
- Growth rate of FCFE (you can take changes in FCFE values over the past five years to predict the growth rate)
- Use assumptions if necessary
- Forecast FCFE (if applicable)
[Approximately 2000 words!]
Part 3
Part 3 contains the evaluation of the value/price of the company
Write this part answering the following questions:
- Why the intrinsic value (you estimated) of the company differs from the current/recent share price?
- Why the value of the company differs across different valuation models?
- Which model is the most appropriate and why?
- And most importantly, what is your investment decision based on your evaluation?
Last Notes
• The report is to be presented in a form of a business report
• Reference
• No copy and paste
• Keep it short, but logical and concrete!!
Attachment:- Assignment_Information.pdf