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AFI1042 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).
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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.

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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.

References/Resources for group assignment

Islam, S.Z., Fundamental of Investment, Corpus Education (2016).

Reilly, Frank K. and Keith C, Brown, Investment Analysis and Portfolio Management
(10th
Edition), Thomson South-Western (2012): Chapters 10, 11, 12, 13, and 14.
[Much of the material in these chapters is covered in earlier courses and these
chapters should be used for revision purposes].

Search Bloomberg, Yahoo! Finance, Google Finance site for business and financial
market news. These deliver world economic news, stock futures, stock quotes, &
personal finance advice.

Damodaran, Aswath, Investment Valuation [3nd
Edition], available online at:
http://people.stern.nyu.edu/adamodar/New_Home_Page/Inv3ed.htm

Assignment submission procedure

All assignments must be submitted online through the course Blackboard as well as in
a hard copy. They must be accompanied by an assignments cover sheet and
submitted through Turnitin on the blackboard, a plagiarism checking tool. For
information on Turnitin see:

Student FAQ, http://www.rmit.edu.au/academicintegrity/studentfaq
Student procedures and account setup (pdf),
http://www.rmit.edu.au/academicintegrity/studentprocedures
Turnitin student information page,
Student Quick Guide - How to submit an assignment through Turnitin available from
the ADG webpage; http://www.rmit.edu.au/bus/adq

Turnitin will assess your work in approximately one minute, and return a colour
coded response for the originality of the text.

Penalties for late submission

All assignments will be marked as if submitted on time then the mark awarded will be
reduced by 10% each day (or part of a day) it is late. Assignments that are late by 7
days or more will not be marked and will be awarded zero marks.


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Presentation of Report

The report is to be presented in the form of a business report. It should have an
executive summary, outlining the main findings, at the beginning. The remainder can
be structured in line with the above points. Calculations should be included in
appendices.

Reports are to be typed in Arial/Times new roman with a font size 12 in single or one
and one-half space on A4 paper. Reports are to be stapled with two staples down the
left-hand side, or secured with a fold-back clip. Do not attach information you have
used in compiling the report, i.e. annual reports, newspaper articles etc., to the report.

Group Composition

Group members are strictly limited to three (3) students. Experience has shown that
numbers either smaller or larger than these are dysfunctional. Group composition is to
be formed within week 2.

Contribution Statement

All groups are expected to include a CONTRIBUTION STATEMENT detailing
(the form can be found in the Blackboard), in exact terms, what each person in the
group has done, when you submit the assignment.

Please note marks of the group assignment will be allocated to each members
based on their contribution percentage. That is all students are expected to
participate and contribute to the group assignment. Free riding would not be
rewarded. As such students would be given a zero mark if it is shown that s/he did not
contribute enough to the final output.

Investment Assignment
Silvia Zia Islam
silvia.islam@rmit.edu.au
RMIT University©2017 2
Executive Summary
Company overview
Historical performance reflects companies earnings
How the nature of the company decide the level of the
risk/return/earnings
Decisions that you made about the company based on
your analysis

[outside of the word limit]

BAFI1042 Investment RMIT University©2017 BAFI1042 Investment 3
Part 1 [10%]
Part 1 contains 4 questions:

Q1) Evaluate the company’s recent and overtime financial performance by analysing the companies
share price performance, financial statements and other relevant news during the last five years.
• Focus points:
1. Recent financial performance [past 2 years]
- choose a time frame (Look for any major public announcements)
2. Overtime financial performance [past 5 years]
- choose a time frame

Q2) Peer group comparison/industry analysis [only choose 5 major competitors from the list for
discussion]

Q3) Analyse the company’s/industry current issues and explain the impact of these issues on the
company’s future earnings
1. At Macro Level
- general factors that apply for the industry (income, growth of the industry, govt. regulation etc.)
2. At Micro Level
- the company specific requirements (operation, level of debt, directions/goals, competition etc.)

RMIT University©2017 4
Part 1 (cont.)
Q4) Estimate the ROE of the company for last five years [for example; 2010-2015] using the
DuPont ROE approach.

– DuPont Analysis can be done using either of the following steps
- 3 steps: Profit Margin, Total Asset Turnover and Financial Leverage
- 5 steps: In addition, Interest Expense rate and Tax Retention Ratio
Refer to chapter 4 or Topic 4 Lecture slides for formulas

– Compare the financial performances of the company with its peer groups
• Choose 2 peer (competitor) companies for comparison


[Approximately 2500 words!]
BAFI1042 Investment RMIT University©2017 5
Part 2 – Valuation [15%]
Part 2 contains 2 questions:

Q1) Start your valuation analysis with the CAPM estimation
You need 3 variables to calculate the CAPM:
– Estimate Beta (β): You can estimate beta by using regression analysis Or by manual
calculation
 For both approach you need to use the stock price data of
the company and ASX/S&P200 to estimate return for five years
 Then follow the formula of beta estimation on topic 3
– Risk-Free Rate of Return: Take the 10 year Govt. bond yield rate as a proxy for RFR
– Risk Premium: It is the difference between expected market return E(Rm) and RFR
 We have provided E(Rm)= 9.610% [source: Bloomberg]

Once you estimate the CAPM required rate of return denoted as E(Re) following the steps
above, you can use this return (also known as cost of equity, ke) in the valuation model

BAFI1042 Investment Part 2 (cont.)
Q2) Estimate the valuation model using two different techniques to estimate the intrinsic value
of the company discussed in topic 6 (chapter 6):
– Estimate dividend discount model or dividend valuation model (DDM)
– Estimate free cash flow to equity model (FCFE)
 Dividend Valuation Model (DDM): Follow the formula discussed in chapter 6
- Use CAPM return
- Estimate the growth rate (g = Retention ratio x DuPont ROE)
- Use assumptions if necessary
- Forecast dividends (if applicable)
 Free Cash flow to Equity (FCFE): Follow the formula discussed in chapter 6
- Growth rate of FCFE (you can take changes in FCFE values over the past five years to
predict the growth rate)
- Use assumptions if necessary
- Forecast FCFE (if applicable)


[Approximately 2000 words!]

RMIT University©2017
BAFI1042 Investment
6 RMIT University©2017 7
Part 3 [5%]
Part 3 contains the evaluation of the value/price of the company
Write this part answering the following questions:

Why the intrinsic value (you estimated) of the company differs from the
current/recent share price?
 Why the value of the company differs across different valuation models?
 Which model is the most appropriate and why?
 And most importantly, what is your investment decision based on your
evaluation?

[Approximately 1500 words!]
BAFI1042 Investment RMIT University©2017 8
Last Notes

• The report is to be presented in a form of a business report
• Reference
• No copy and paste
• Keep it short, but logical and concrete!!

Investment Assignment

Silvia Zia Islam

silvia.islam@rmit.edu.au

RMIT University©2017 2

Executive Summary

Company overview

Historical performance reflects companies earnings

How the nature of the company decide the level of the risk/return/earnings

Decisions that you made about the company based on your analysis

[outside of the word limit]

BAFI1042 Investment

RMIT University©2017 BAFI1042 Investment 3

Part 1 [10%] Part 1 contains 4 questions:

Q1) Evaluate the company’s recent and overtime financial performance by analysing the companies share price performance, financial statements and other relevant news during the last five years.

• Focus points: 1. Recent financial performance [past 2 years] - choose a time frame (Look for any major public announcements) 2. Overtime financial performance [past 5 years] - choose a time frame

Q2) Peer group comparison/industry analysis [only choose 5 major competitors from the list for discussion]

Q3) Analyse the company’s/industry current issues and explain the impact of these issues on the company’s future earnings

1. At Macro Level

- general factors that apply for the industry (income, growth of the industry, govt. regulation etc.)

2. At Micro Level

- the company specific requirements (operation, level of debt, directions/goals, competition etc.)

RMIT University©2017 4

Part 1 (cont.)

Q4) Estimate the ROE of the company for last five years [for example; 2010-2015] using the DuPont ROE approach.

– DuPont Analysis can be done using either of the following steps - 3 steps: Profit Margin, Total Asset Turnover and Financial Leverage - 5 steps: In addition, Interest Expense rate and Tax Retention Ratio

Refer to chapter 4 or Topic 4 Lecture slides for formulas

– Compare the financial performances of the company with its peer groups • Choose 2 peer (competitor) companies for comparison

[Approximately 2500 words!]

BAFI1042 Investment

RMIT University©2017 5

Part 2 – Valuation [15%]

Part 2 contains 2 questions:

Q1) Start your valuation analysis with the CAPM estimation

You need 3 variables to calculate the CAPM: – Estimate Beta (β): You can estimate beta by using regression analysis Or by manual

calculation  For both approach you need to use the stock price data of the company and ASX/S&P200 to estimate return for five years  Then follow the formula of beta estimation on topic 3 – Risk-Free Rate of Return: Take the 10 year Govt. bond yield rate as a proxy for RFR – Risk Premium: It is the difference between expected market return E(Rm) and RFR  We have provided E(Rm)= 9.610% [source: Bloomberg] Once you estimate the CAPM required rate of return denoted as E(Re) following the steps above, you can use this return (also known as cost of equity, ke) in the valuation model

BAFI1042 Investment

Part 2 (cont.)

Q2) Estimate the valuation model using two different techniques to estimate the intrinsic value of the company discussed in topic 6 (chapter 6):

– Estimate dividend discount model or dividend valuation model (DDM) – Estimate free cash flow to equity model (FCFE)

 Dividend Valuation Model (DDM): Follow the formula discussed in chapter 6

- Use CAPM return

- Estimate the growth rate (g = Retention ratio x DuPont ROE)

- Use assumptions if necessary

- Forecast dividends (if applicable)

 Free Cash flow to Equity (FCFE): Follow the formula discussed in chapter 6

- Growth rate of FCFE (you can take changes in FCFE values over the past five years to predict the growth rate)

- Use assumptions if necessary

- Forecast FCFE (if applicable)

[Approximately 2000 words!]

RMIT University©2017

BAFI1042 Investment

6

RMIT University©2017 7

Part 3 [5%]

Part 3 contains the evaluation of the value/price of the company

Write this part answering the following questions:

Why the intrinsic value (you estimated) of the company differs from the

current/recent share price?

 Why the value of the company differs across different valuation models?

 Which model is the most appropriate and why?

 And most importantly, what is your investment decision based on your evaluation?

[Approximately 1500 words!]

BAFI1042 Investment

RMIT University©2017 8

Last Notes

• The report is to be presented in a form of a business report

• Reference

• No copy and paste

• Keep it short, but logical and concrete!!

BAFI1042 Investment

Investment Assignment
Executive Summary
Part 1 [10%]
Part 1 (cont.)
Part 2 – Valuation [15%]
Part 2 (cont.)
Part 3 [5%]
Last Notes