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.
BAFI1042 Investment Company Valuation Assignment (30%)
Semester 1 2017
Company: Primary Health Care Limited (PRY)
Website: www.primaryhealthcare.com.au
Submission Date: Monday 01. 05. 2017, 5:00pm (Beginning of Week 9)
[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 (10%)
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 (15%)
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
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 (5%)
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.
3
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.
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