Reference no: EM134046003

Corporate Finance

Assessment - Case Study

Assessment Description

Equity valuation and market efficiency.
The capital budgeting techniques; especially discounted payback and net present value.
Calculating free cash flow.
The weighted average cost of capital.
And capital structure.

Assessment Instructions

Activity 1: Group Case Study

You must form groups of 4 to 5 members before Week 12.

You will then complete the case study questions in your group, but only one group member needs to submit the final answers (for the entire group).

All questions for the group case study are based on the article on the following page.

The group case study will be marked out of 10 and is worth 5% of your final mark for the subject.

All group members will get the same mark.

The group case study is an open book, but AI prohibited assessment. This means you can only use learning materials obtained from the FIN203 subject portal.

Activity 2: Individual Quiz

The individual quiz will take place after the group case study. The quiz will consist of short answer questions and multiple choice questions.

One of the short answer questions is based on the article on the following page.

The individual quiz will be marked out of 50 and is worth 25% of your final mark for the subject.

The individual quiz is an open book, but AI prohibited assessment. This means you can only use learning materials obtained from the FIN203 subject portal.

Generative AI

You may not use generative AI, including ChatGPT, at any time during this assessment.

Any use of generative AI, including ChatGPT, will result in a penalty for academic misconduct, including but not limited to a mark of zero for this assessment.

Some questions in both Activity 1 and Activity 2 will be based on the information reported below. Make sure you are familiar with this information.

Choosing shares to buy

The right shares can help you grow your wealth. So take your time, watch for economic and market changes, and diversify across different sectors. Like any investment, there is risk involved. So be clear about your financial goals and strategy, and get financial advice if you need it.

Stay up-to-date with economic and market changes

Economic and market changes can impact a company's earnings. The more reliable the information you have, the better your decisions will be. Stay up-to-date with factual sources such as:
the Reserve Bank of Australia's quarterly Statement on Monetary Policy - for commentary on the Australian economy
business and finance sections of reputable websites, magazines and newspapers - for new economic information
research departments of banks and stockbrokers - for forecasts about economic conditions

Look at topics like:
the Australian economy
interest rates
government policy
exchange rates
investor sentiment
industry-specific or regional influences
relevant overseas economies and markets

Find shares to buy

Take your time. Experienced investors often spend months checking out shares before buying.

Blue chip companies. If you want to choose your own shares, a good place to start is the S&P/ASX 50. This is a list of Australia's top 50 companies - known as 'blue chip' companies. These are well-established, stable companies that suit an investor looking for steady returns with less risk.

Speculative companies. 'Speculative companies' do not have a long market history, and are not in Australia's top 100 companies. You may get a large return - or a large loss. These suit a more experienced investor prepared to risk capital in the hope of getting higher returns.

Emerging market companies. Some companies listed on Australian exchanges have business operations or assets outside Australia. It pays to check where a company operates, so you can assess the risk of investing. Consider issues like language, distance and currency. There could be different standards of regulation, risk management, internal controls or auditing. Your investment may have less protection than under Australian law. More established markets include the United States, Hong Kong, Japan and New Zealand. Less established markets include other parts of Asia and the Pacific, Central and South America, Africa, Eastern Europe and The Middle East.
Companies operating in these areas are known as 'emerging market companies'.

Capital growth or income. Work out what you want from your shares. Do you want regular income or just capital growth? If you want regular income, consider companies with a track record of paying high dividends. These tend to be larger companies on the Australian Securities Exchange (ASX).
Smaller companies often focus on growth. So they are more likely to reinvest profits in the business, rather than paying dividends to shareholders.

Buy what you know. Start with an industry or business sector you know. This gives you a better chance of recognising if a company is strong or weak. Look at the ASX list of companies for a breakdown of sectors. Make a list of companies you're interested in. Then check:
What is the company's position in the market?
What competition does it face, and how does it compare to others in the sector?
Are the goods and services it provides likely to be in demand in years to come?
Are there opportunities for the company to grow in the future?

Market sectors. Each sector of the market has its own pros and cons. Generally:
Finance - Banks and other financial institutions usually offer steady income through high dividends.
Resources - Mining companies offer potential for high capital growth, but tend not to give high dividends. This sector can be highly cyclical. It does well when the international economy is healthy, but badly when not.
Consumer - Retailers offer medium-sized dividends. This sector tends to move up and down with the Australian economy.
International - Gives you access to larger markets outside Australia. Enables investment in other sectors or asset classes, giving broader diversification. Potential for higher returns at times, along with greater exposure to volatility.

Australian shares. To decide if investing in Australian shares is right for you, consider the following.

Pros:
Potential capital gains from owning an asset that can grow in value over time
Potential income from dividends
Lower tax rates on long-term capital gains Cons:

Company share prices can fall dramatically, even to zero
If a company goes broke, you may not get your money back
The value of your shares will go up and down from month to month, and the dividend may vary

International shares. If you're thinking about buying international shares, consider these pros and cons.

Pros:
You can invest in companies or industries not represented, or under-represented, in the Australian share market
Enables geographic diversification, so a slow-down in one market may have less impact on your portfolio

Cons:
Greater volatility from movements in currency exchange rates
Regulatory or political changes could impact your investments
Delay in trades and information due to markets operating in different time zones
Different tax treatment on income from international investments may mean you need professional tax advice

Research and compare companies

The value of your investment depends on the health of the business. Here's how to go about researching a company. Look at:
Annual reports
Company alerts
Prospectuses
Research reports

Compare companies in the same industry

Comparing a company to its competitors is one way of assessing its value. No single measure will give you the answer, so use a range of sources. Here are some basic comparisons you can make:

Earnings per share (EPS) - The part of a company's profit allocated to each share. The higher the EPS, the more a share could be worth. To get the EPS, see the company's website or annual report, or the ASX website.

Price-earnings ratio (P/E) - A way of working out if the price of a share is over or undervalued compared to its competitors. In general, the lower the ratio, the better. A low ratio could also mean the market expects earnings to be lower in future. To work out the P/E ratio, divide the share price by the EPS.

During times of higher market volatility, such as COVID-19, past earnings may not be indicative of future earnings. It can also be more difficult to forecast future earnings. So the P/E ratio may not be a reliable indicator. Look at other metrics.

Dividend yield (%) - A company pays dividends from profits, so this can show how it's performing. Generally, a high yield is good. But it's not good if dividends come from borrowings. To work out the yield, divide the dividend per share by the share price.

Diversify your portfolio

One of the best ways to protect your portfolio is to diversify. That is, to spread your investments between different industry sectors. By diversifying, you take advantage of each company's strengths. And you are better protected if one industry has a bad year. If a company fails, you lose only part of your investment, not your whole portfolio.