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), Russell 1000 Index (US), or CSI 300 Index (China) that has at least 10 consecutive years of dividend history from 2013-2022. 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 2022, this will be allowed).

2.     Find  three  news  articles  from  June  1st   to  September  10th,  2023  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.

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) Forward Dividend and Yield, and (8) 1 year Target Estimate for both your chosen company and competitor. Interpret and compare each characteristic for your chosen company and its competitor  for  your  IMD.  Be  specific  about  what  the  values  for  your  company  and competitor mean.

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 numbers with the average P/E ratio of your chosen stock market index as well. Discuss in detail.

Summary Statistics and Risk Characterisation [22 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 overtime? What do you think 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 2012-2022. How has the 10-year rate changed over this period? In particular, has there been a shift in the 10-year rate from 2019-2022 (post-COVID- 19)? Why do you think this has occurred? 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 2013-2022. Annualiseall dividends paid out. Calculate the average annual return and standard deviation of annual returns from 2013-2022 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 2013-2022 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 2013-2019 (pre-COVID-19) and compare this number with your other betas. Compare and discuss the stability (or  instability)  of  your  company’s   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 mayor may not be the case for your company.

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 areas proxies for the theoretical values in the CAPM equation for your specific company.

Growth Rates and Valuation [28 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 2013-2022 (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 2013- 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 2013-2022 (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 2013-2019 (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 2013-2022 (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 (remove any rates that are negative from your sample). Also calculate the arithmetic and geometric average annual growth rate for the subperiod between  2013-2019 (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 for your specific company? 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 for your specific  company.  Do  you  think  the  GGM  is  preferred  to  a  two-stage  or  multi-stage growth model for your company? Why? Explain all the questions above in detail. (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 for your specific company).

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. In the cash flow timeline, include annual projected cash flows up to at least the year 2026.

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

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  recommendation,  in  one paragraph (max word count 200), for your chosen company as to whether to buy, sell, or hold this stock, using your analysis in parts 13-14 as your main guide.

18.  Large language models (LLM) such as ChatGPT have become a very powerful tool for financial analysis. Nevertheless, like any tool, using it without a solid understanding of underlying financial concepts may lead to misleading answers. Ask ChatGPT to make both a positive and negative stock recommendation for your chosen company. You will use this information for part 19. Summarize the ChatGPT input in your own words in one paragraph (max word count 150). Cite the output link for ChatGPT within the Appendix. Find the appropriate citations for any used in your summary. (Example text: Give me a positive recommendation for Coca-Cola stock.)

19.  For which range of values for your future estimates of growth rates and discount rates would you suggest a buy recommendation, and which range of values would you suggest asell recommendation (i.e. for growth rates greater/lower than X% and discount rates greater/lower than Y%,  I  recommend  buy/sell)?  Which  of  these  ranges  sound  more reasonable to you and why? Does your original recommendation in part 17 still sound reasonable? Using both your findings in this entire report along with part 18, discuss in detail why or why not. Within your discussion detail the limitations of your analysis and assumptions relative to your specific company chosen. For parts of the ChatGPT analysis that sound reasonable to you, be sure to find the proper citation. Also do not just copy and paste ChatGPT’s output but summarize and take the key points you find reasonable for your analysis. You are also free to use external information outside of the ChatGPT analysis from part 18 if you feel it bolsters your analysis.

20.  Using your findings in parts 17-19 make a final recommendation, in one paragraph (max word count 150), for your chosen company as to whether to buy, sell, or hold this stock.

Presentation and overall style of the report [5 marks]

Peer evaluation (will be made available after the due date) [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.  For  the  ChatGPT  analysis,  provide  the  output  link  that ChatGPT provides.

• 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.

• With the rise of generative AI (i.e. ChatGPT), it has become apparent when students use these tools without citation as there are stylistic and tonal inconsistencies within student reports. Please keep a consistent style throughout. A good idea is to task one member (ideally your best writer) to keep the style of the report consistent. Any suspected misuse of generative AI or large stylistic inconsistencies in the report maybe deducted a penalty of up to 15%, with significant breaches reported to the academic integrity team as stated below.

Use of AI Rules:

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

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 penalisedif 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 ahighly 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)

Presentation and style of report /5 marks

Peer evaluation /8 marks

Penalties

Incorrect dating of data sources

Incomplete screenshots of datasets in Appendix

Inappropriate use of literature

Incorrect referencing

Failure to comply with formatt