FINC6001 – Finance: Theory to Applications Semester 1, 2022 MAJOR ASSIGNMENT
PART A – Written Report – 20% of overall grade
Motivation
Stock valuation is an important activity routinely performed by financial analysts. As discussed in Module 2, there are different methods that can be used to estimate the equity value of a corporation and we will explore some of these in this Written Report.
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As part of an investment fund, your group will need to issue a recommendation in relation to whether the stock of a specific company should be added to the fund’s portfolio. The name of the company assigned to the group will be disclosed once all groups have been formed.
Group Formation
The assignment has two components, a Written Report (due in Week 5) and a Video Presentation (due in Week 10). Both parts of the assignment should be developed through teamwork. Students are free to form their groups with the condition that each group must have a maximum of 4 members. Groups will be created on Canvas and those students that do not have a group by 5pm (Sydney time) on Wednesday 2nd March 2022 will be randomly allocated into one. A publicly listed company will be randomly assigned to each group and this will then be the object of the analysis.
Since the goal of the assignment is to provide an opportunity to gain and develop team working skills in a safe environment, no individual submissions are allowed. Moreover, as the Video Presentation will be an extension of the Written Report, the same group members will be assessed across the two parts of the assignment.
In order to issue a recommendation in relation to the stock analysed, the group will have to estimate the fair stock value and compare it to the corresponding market price. For this task, the discounted cash flow (DCF) methodology discussed in Module 2 will have to be employed using a 10-year horizon and with a terminal value calculated according to the following methods:
– Constant growth model
– Valuation by multiples (P/B and P/E ratios)
In applying the DCF methodology, a table containing the estimated free cash flows (FCFs) will have to be generated and, in particular, assumptions will need to be made in relation to the company’s profitability (ROA) and the growth rate of both (i) assets and (ii) earnings per share (EPS).
Estimates of the variables necessary to apply the DCF methodology will need to be generated for three different scenarios: optimistic, neutral, and pessimistic. Each of these scenarios will lead to a specific stock price; based on them, the group should provide a sensitivity analysis explaining the changes in prices vis a vis changes in the assumptions. The group will need to provide a narrative where the assumptions made in each scenario are internally consistent and plausible relative to the scenario.
Written Report
The main deliverable in Part A of the Major Assignment is a written report that all members of the group will need to contribute to. The report is to be structured as follows:
1. Cover Page
→Including group number, student names, and SIDs
2. Executive Summary
→Short summary of the analysis and recommendations presented in the report
3. Table of Contents (sections need to be individually page numbered)
4. Introduction
→Motivation (reason and purpose) for the Written Report
5. Company’s Overview and Update
→Discussion of the firm’s competitive environment and industry where it operates →Analysis of any recent information (up to one year ago) that might be relevant to the company’s current and future performance
6. Financial Information and Price Targets
→Presentation and explanation of the projections associated with three scenarios:
– Optimist – Neutral
– Pessimist
These projections should refer to the variables included in the estimation of FCFs
and should lead to a price target for each of the scenarios
7. Investment Thesis
→Based on the three scenarios described in the previous section, provide a recommendation in relation to whether the investment fund should add the assigned stock to the portfolio
→This section should contain the reasoning behind the group’s belief that the stock will over- or under-perform
8. Risk and Disclaimers
→Discussion of any risks identified and associated with investing in the stock →Discussion of any potential shortcomings associated with the analysis
9. References
10. Appendix
→List of the key input(s)/assumption(s) for each scenario
→Tables with DCF estimates (in case they are not in the body of the report)
Each group will need to submit two files for Part A of the Major Assignment. The Written Report as well as a spreadsheet containing the valuation model should be submitted by 11:59pm (Sydney time) on Friday 25th March 2022.
The above structure is provided as a guide of items that need to be covered in the Written Report. You may make amendments to this structure and ordering of items; however, the written report should not exceed 12 pages (excluding parts 1, 2, 3, 9, and 10 above).
You must ensure that all sources are properly referenced and that you provide a full reference list at the end of the Written Report. Remember, this is a report to the investment committee of a fund and should be presented with that in mind.
Tips for Writing the Report
– Refrain from writing in the first person
– Make use of charts and diagrams as they can better convey information than tables
– Label properly the sections of the report and the figures included on it
– Please make sure to include at least 5 references in your report. Citing articles from the
news media or the academic literature will offer extra support to the analysis
– All the references should be cited at least once in the body of the report; the list of references should be formatted following the APA 7th style (information about it can be
found here)
– Do not forget to include double quotation marks in case of direct quotations;
paraphrase your sources (if required) to avoid issues of academic integrity
– Avoid unduly lengthy paragraphs (more than 10 lines) as they compromise the flow and
understanding of the text
– Use 1.5 line spacing and size 12 Arial or Calibri font; margins should be normal sized
– Always put yourself in the shoes of the reader
– Proofread your report before submitting it on Canvas
Data sources
As mentioned previously, a public company listed in the ASX will be randomly allocated to each group. The data for the DCF analysis required in the report can be obtained from Analysis or IBISWorld or among other databases that The University of Sydney subscribes to. These sources contain a variety of resources that will assist you in generating projections towards calculating the price targets across the different scenarios. They also provide access to industry reports describing the competitive landscape where the company being studied operates. In addition, annual reports with relevant information to the Written Report can also be found on each companies’ website.
Report Submissions
Submission links will be provided on Canvas for your Written Report submissions. Only one member (the group leader) should submit the relevant files for Part A on behalf of the whole group. Consistent with Business School practice, a late submission penalty will be applied if your submission is not received by the announced due date/time.
As noted earlier, please make sure to include in your submission the written report (as a .pdf file) and the spreadsheet (as a .xlsx file) containing the valuation model.
Marking Guide
All the members of the group will be initially awarded the same mark as they are expected to equally contribute to the report.
The marking guide is as follows: Strategic analysis of the firm
Financial projections Investment thesis
Risk analysis Presentation and style
TOTAL MARKS
/10 marks /10 marks /10 marks /5 marks /5 marks
Following the submission of the Written Report in Week 5, students will be given the opportunity to provide feedback to each other. Students poorly evaluated by their peers will be contacted by the UoS Coordinators and their mark in this assessment task might be amended.
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