Corporate Finance
Question (Risks and Returns; Share - Returns, WCM, Dividends Payout; Portfolio)
Your retired Aunty Helen has some savings and due to the low interest rate environment now; she wants to invest in shares. She has never invested in shares before. She asked for your advice because she knows you are doing a Finance subject in your degree with IK College. Auntie Helen thinks you are able to advise her on a share listed on ASX which she is interested in.
From the list of ASX listed companies in Appendix 1; select a (ONE) stock to advise Aunty Helen.
NOTE: (We have selected AUSTRALIAN DAIRY FARMS GROUP for our Group Assignment)
Your approach in advising her will be along the guidelines (i.e. tasks) as follows-
1. Examine the share (or stock) price and history of traded volumes over the past five (5) years; identifying the main causes of changes in the share price during the period. How do you think the share performed? Briefly advise her on whether you think she should buy or not.
2. Calculate the holding period return (%) if she was to hold the share for the past year. What is the yield return (%) for the same period? Assuming she follow your advice to buy the share now, what will be her expected current dividend yield?
3. What is the Market Capitalization; Gearing Ratio and Beta of the share? (Note: State the source of your information for analysis.)
Using CAPM, calculate the expected return of investing into that share assuming the overall average market return / premium for ASX shares is 8%. Explain to Aunty Helen what the stock's Beta means and why you think its Beta for that share is justify. Do you consider the share to be volatile?
4. Describe the working capital strategy of the company. What major factors would they have consider in determining their working capital strategy. (Review current ratios and cash flow positions to analysis.)
5. Examine the dividends paid over the past 5 years. Describe the company's dividend policy and dividend trends. Advise Aunty Helen accordingly. (Aunty Helen being a pensioner paying no taxes is interested in getting more dividends with franking credits.)
Aunty Helen is risk averse as she is retired and from your study you know investing in one stock can be risky. So you also decide you also need to explain how she can diversify her investment risks.
6. Explain the concept of diversification to Aunty Helen. How do you think she can diversify with the selected share into a portfolio?
7. Identify and briefly discuss two (2) systemic and two (2) non-systematic risks factors impacting the share you have selected. You can draw on some of the news release about the company and the industry it is in.
Attachment:- APPENDIX.rar