This assignment will require you to analyse a firm of your choice from various perspectives. The assignment will cover the topics bond valuation, share valuation, cost of capital, market efficiency, and more.
You will analyse a firm of your choice from various perspectives. Each part of the assignment relates to a Business Finance topic covered in a different study week. In order to write a high-quality report, you will need to work on this assignment throughout the semester, and focus on each of the different parts of the assignment during the relevant teaching week.
Part A: Company Selection
Your task in the first part of the assignment is to select a publicly traded company, listed in either Australia or in the U.S. You will perform various analyses on this company during this semester. In order to be able to complete these analyses, there is a number of selection criteria for your company:
The company has outstanding bonds as well as shares.
The company’s shares have been paying dividends for at least 5 years.
Information on listed companies and their outstanding securities is available on public investing websites, such as investing.com, or Yahoo Finance. To find out whether a company that you are interested in has bonds outstanding, type the name of your company in the search bar on investing.com, and a dropdown menu will appear showing all outstanding securities of this firm (there should be shares as well as bonds). To find out whether a company you are interested in has been paying dividends, select the stock of your company on Yahoo Finance, and go to Historical Data, and select Show: Dividends Only. (Hint: firms that both pay dividends and have bonds outstanding are often mature, well-established firms)
Once you have found a company of your interest that fulfils all selection criteria, provide an overview of the company details, listing your company’s name, name of the stock exchange on which the firm’s stock is listed, its ticker symbol, and a list of a maximum of five of the firm’s outstanding bonds, including coupon rates and maturity dates. This page will also be the front page of your assignment, so make sure it looks attractive and professional. Feel free to add additional information which you think is relevant for investors in the company’s shares and bonds.
Part B: Company financials
Write a brief report describing the company’s financial situation, and the major opportunities and challenges in the coming years. Your analysis should be based on at least 3 reputable business publications (which are NOT publications of the company itself). One place to find the company’s financial statements is investing.com (select your company, and click on Financials).
Part C: Bond Analysis
The topic of this part of the assignment is covered in Week 3. In this part of the assignment you will analyse one of the firm’s outstanding bonds. Firstly, compute the credit spread of this bond, by comparing the yield-to-maturity on this bond with the yield on Treasury Bonds of comparable duration. (For information on current US treasury yields, go to Yahoo Finance, and type “treasury yield”. For AUS yields see the RBA website and look for “Capital Market Yields – Government Bonds – Monthly”). Secondly, estimate the bond’s price one year from now (assuming that interest rates remain constant), and comment on the reason behind the expected price change (if any) from the current price of the bond. Finally, provide a credit rating for the firm’s bonds, based on your analysis of the company bond, as well as your analysis in Part B of the assignment, and explain why you have given this rating.
Part D: Share Analysis
The topic of this part of the assignment is covered in Week 4. In this part of the assignment you will analyse your company’s shares. Firstly, provide a graph and comment on the company’s stock price changes in the previous three years. Explain what factors have caused the stock price to develop as it did, and link this investigation to your analysis in Part B of the assignment. Secondly, provide an overview of the firm’s dividend payments during the previous 5 years. If your company paid dividends more than once a year, sum up all dividends to find the total yearly dividend. Using the dividend discount model, estimate the return that investors currently require for holding your company’s stock. You can assume that the firm’s dividends will continue to grow indefinitely at the same rate as the average dividend growth rate in the previous five years, or you can make alternative assumptions on the future dividend payments, as you see fit.
Part E: Market efficiency
The topic of this part of the assignment is covered in Week 9. In this part of the assignment you will investigate the efficiency of the market in which your company is listed. You will do an event study, and investigate your company’s stock price around a recent earnings announcement of the company. Firstly, you will have to identify a date on which your company has done an earnings announcement. Go to Yahoo Finance, and type “earnings calendar”, and then type your company’s ticker code in the separate search bar. The announcement date is termed day 0. Next, download the daily stock prices of your company during the period around the earnings announcement date, and plot a graph of the stock price from trading day -5 to trading day 5. Trading days are all days during which the stock exchange is open. In event studies we ignore weekends, which means, for example, that if the announcement day (day 0) is a Monday, then (day -1) is going to be the previous Friday. Write a short essay to address the following questions. What is the efficient market hypothesis? If the market is efficient, what is the expected stock price reaction to an earnings announcement before day 0, on day 0 and after day 0? Look at the stock price of your company, is the market efficient?
Part F: Cost of Capital
The topic of this part of the assignment is covered in Week 10. In this part of the assignment you will have to estimate your company’s weighted average cost of capital (WACC).