Case Study on Market Efficiency
The purpose of this case study is to allow students to take some of the main concepts introduced in the course and provide a framework for applying them to a company of their choosing. One of the best ways of learning corporate finance is to apply the models and theories we encounter to real-world contexts and problems. You will evaluate the company stock price, and estimate the impact of an important announcement on its stock prices. Most importantly, you will learn skills to work collaboratively with your team members.
SCENARIO:
You have recently started an internship position with QLD Titanium Equity Management (Q10), a large asset management company with A$750 million Assets Under Management(AUM) located in Brisbane CBD. The company's core investment focuses on domestic share market, however, investments in share markets have provided lower than expected returns in the recent years.
The CIO has requested that your analysis must be up-to-date analysis with at least 3 years of data.
Your report must address the following issues:
1. A brief description of the company analyzed.
2. Analysis of company's share price using:
a. the Dividend Discount Model, orthe Reward to Risk Ratio Method.You will determine if the share price is priced fairly or over/under-valued.
b. News/Announcement effect on company's share price. You will investigate the speed of share price adjustment to these announcements.
c. You will need to show calculations for 2(a) and a graph for 2(b).
Your current internship position is under 3 months' probation period. Upon completing the task on hand, your department secretary will arrange a meeting with CIO to discuss whether you have passed the probation period and be promoted to a Junior Corporate FinanceAnalyst.
Guidance on Case Study:
1. Give a brief description of the company's business, strategy and its competitions
2. Estimate the stock beta, the cost of equity, and the intrinsic value
a) Stock beta: Download 3 years of weeklystock returns and ASX200 (Bloomberg: "AS51 Index") market index returns ending June 2017 from Bloomberg (see Appendix 1), and estimate the stock beta. Does the estimate of stock beta make sense to you? (The normal range of beta is from 0.5 to 3.) Provide reasoning, why or why not? If not,you have to use the stock beta from Bloombergfor the later parts.
b) Estimate the Cost of equity, using the CAPM return. Assume the market risk premium, Rm-Rf=6%, and use the current 10-year Government bond yield for the risk-free rate.
c) DPS is the total annual dividend per share paid for the financial year. Based on the previous 5-year pattern of DPS payments, estimate the intrinsic valuesusing1-stage models (the constant dividend growth model), andthe 2-stage non-constant dividend growth model.Please use the 10-year Treasury bond rate as the Dividend growth rate in the equilibrium stage. You need to choose which model is the most appropriate one to use, and compare the intrinsic valueversus the share price as of June 2017 (‘current price'). Would you recommend to buy or sell the shares in June 2017?
d) The alternative method is the Reward-to-Risk Ratio (RRR) method, where you would compare the RRR versus the Market Risk Premium. In RRR computations, Analyst Expected Return is computed based onmedian 12-month target price and dividend per share as a fraction of current price (as of Jun. end 2017). The median target price for your company is available from Bloomberg.
e) Please provide clearly your calculations and formulas used.
3. Announcement Effect on stock prices
a) Each group will study an announcement in 2015-2017 from this company from ASX 200 firms (https://www.asx200list.com/). The announcement can be a new product, a scandal, an earnings announcement, a change in strategy, etc.What is your expectation of the market reaction to the announcement, good or bad news?
b) Please download the daily stock prices from one month before to one month after the announcement date, and compute the cumulativeholding period returns(=(1+r1)(1+r2)..-1) and plot them in a graph.
Note: The holding period return is NOT the usual weekly return you calculated
c) Discuss the following aspects: Does the stock price react quickly or slowly to the news announcement? How does it relate to the theory we learned in class?
Choice of Company
You can choose any company from ASX200 (except for TPG) that has been listed on the stock exchange for at least 3 years, and with positive earnings and positive dividend for the 2016/2017 financial year. As soon as you have chosen your company, please use the online signup tools to sign up your group members by week 6. Please contact us if you don't have a group yet by that time, we may be able to assign you to a group.
Forming Groups
Students will sign up using the online group sign-on sheet and nominate the company the group will be analysing.Students can work in a group of 3-4 and select one company to provide an in-depth analysis.
A complete submission to LearningGU/SafeAssign consists a Word filelimited to 15 pages and should include the following:
a. Discussion of the points 1-3on pages 2-3
b. All input variables, such as risk-free rate, the market risk-premium, dividend growth rate, etc, and
c. all computations such as the beta estimate, cost of equity, intrinsic value, Analyst Expected Return, RRR, etc. Please put all input variables in an input box.
d. Font size: 12 of Calibri, Arial or Times New Roman
e. Margins: minimum 1 cm on the top/bottom and right/left.