Instructions for Group Project

Instructions for Group Project

The purpose of the group project is to help you develop the skills necessary to conduct an equity analysis. The project will help you appreciate the challenges involved in valuation and the complexity of the
task involved. It will help you develop knowledge of a particular company and its industry. You will also
understand how companies are affected by broader macro-economic factors. The project will give you hands
on experience of analysing financial statements and will, thus, help you connect theory with practice. Finally,
you will learn how to forecast financial statements and use them for estimating the value of equity.
Please write your project report in a report form. You may consult sample equity reports for Woolworths
by Macquarie Wealth Management and Credit Suisse to help you structure your report. The project should
begin with an introduction, outlining which company you are valuing, and a brief company profile.1 The
project is divided into the following parts:
Capital Market Analysis (5 marks)
Your analysis should cover the following points:
1. Plot the stock price and trading volume movement (present charts) of your company over the last 5
years (if your company does not have 5 years’ data, use as much past data there is available). Please
also plot the movement of a suitable market index (such as the Australian All Ordinaries – ∧AORD).
Compare the price movement of your company with the market index. You should plot monthly prices
and trading volume. Please describe the results.
2. Identify at least two significant events during the last five years that might have affected the stock
price of your chosen company. You will need to search the internet for this information. You could
use the Factiva database available from the library for this purpose. Please describe how these events
might affect the performance of your company.
3. Calculate the monthly bid-ask spreads and trading volume over the last five years (if your company
does not have 5 years’ data, use as much past data there is available) and compute the average spread
and volume over the full time period. Remember to describe how you measure the bid-ask spread
and trading volume. Please note that “bid” and “ask” prices are not directly available. However, the
historical data available from Yahoo! Finance includes the daily (or weekly or monthly) high and low
prices. The high (low) price is a reasonable proxy for the ask (bid) price.
Industry Analysis (5 marks)
Your analysis should cover the following points:
1. What is the main industry that your company operates in? How big is the industry (measured in terms
of number of listed companies and industry sales2
)? What is the relative position of your company (in
terms of sales)?
1This information is available from Yahoo! Finance and DatAnalysis Premium. However, do not copy from these sources
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Industry sales can be measured by adding the sales of individual companies in the industry. You will need to obtain data
from DatAnalysis Premium.
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2. At what rate is your market expected to grow in the next year, five years? What are the key expected
growth areas?
3. Identify the main competitors of your company.
4. Use Porter’s Five Forces to explain the current position of the company being followed. You need to
discuss the relative importance of the different forces.
5. Identify three major risks that the company faces (other than competition) which threaten its profitability.
6. What are the average analyst target price and recommendation for your company? What do they
mean for your company’s outlook?
Business Strategy Analysis (5 marks)
Your analysis should cover the following points:
1. Explain the strategies of the company that may create competitive advantage, e.g. product differentiation, cost leadership, etc.
2. Has the company announced any strategies to build or consolidate its market share?
3. How successful has the company’s strategy been? You may need to compare the company’s sales and
profit growth with that of the industry.
Corporate Governance Analysis (5 marks)
Your analysis should cover the following points:
1. Describe the board structure of the company. How does the company’s board structure compare to its
main competitors?
2. What are the different board committees of the company? How independent are they?
3. What is the remuneration structure of top management staff? How does it compare with that of key
competitors? Is the remuneration structure reasonable?
Accounting Analysis (20 marks)
Your analysis should cover the following points:
1. Calculate earnings persistence over the last ten years (or over the maximum time period available,
if your company has a history of less than ten years). Compare this with the average trend of the
industry and comment on earnings persistence. You could use interim earnings to estimate earnings
persistence. Using interim earnings increases the sample size. Remember to be consistent – use interim
financial statements for the industry if you use interim financial statements for your company.
2. Compare the cash flow from operations with net profit after tax. What does this comparison tell you?
3. Are there any red flags? On what basis have you identified them? What do the adjusted financial
statements look like?
Financial Analysis (15 marks)
Your analysis should cover the following points:
1. Conduct the simple and advanced DuPont analysis of your company for the current year.
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2. Compute and compare the profitability ratios for your company and the industry over the last five
years. What does this comparison tell you?
3. Compute and compare the asset management ratios for your company and the industry over the last
five years. What does this comparison tell you?
Forecasting and Cost of Capital (15 marks)
Your analysis should cover the following points:
1. Generate pro forma Income Statements and Balance Sheets for your company. What growth assumptions have you made? Why?
2. Estimate the weighted average cost of capital of your company. You must clearly state the assumptions
you have made.
Valuation (30 marks)
Your analysis should cover the following points:
1. Use at least two discounted cash flow valuation methods. Describe the valuation models. What
terminal growth rate have you assumed and why?
2. Use relative valuation to provide further evidence in support of your valuation.
3. What is your estimate of the value of equity (provide both estimated value of equity and estimated
share price)? What is your stock recommendation?
4. Present valuations under a pessimistic and an optimistic scenario and reconcile with original valuation.
Remember to include a conclusion.
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