FIN924 Financial Statement Analysis for Business

Trimester 3 2020
Case Study Analysis Report
Description:
You are required to analyse the financial statements of a company listed on the Australian Securities Exchange (ASX), and to write a report based on the results of your analysis. Your analysis will include valuation exercises involving the following three techniques: discounted cash flow (DCF) analysis, the residual earnings model and reverse engineering of implied growth rates. The company will be allocated to your group by the subject coordinator.
You are required to search for and use other relevant information sources of business and industry news. You must properly reference all information sources using the Harvard style of referencing. Sources such as Wikipedia and Investopedia are not suitable for this assignment and must not be referenced.
Instructions:
Your report must contain each of the following sections:
Executive summary
Free cash flow and DCF analysis
Residual earnings valuation
Implied growth rates (reverse engineering with the residual earnings model)
Conclusions
References
A detailed description of the expected content of each section is as follows:
Executive Summary
The executive summary will include a table showing important information and calculations from your report followed by a brief summary of the key points of each section. It must be consistent with the subsequent sections in your report and any recommendations or conclusions made therein. It should be no more than one page in length. The table at the beginning of the executive summary should be the following with all entries completed:
Company Name
Code
Required return
DCF valuation (Intrinsic value)
Residual earnings valuation (intrinsic value)
Implied growth rate
Final recommendation (BUY / SELL / HOLD)

Free cash flow and DCF analysis
Using all the relevant information for your company, calculate your company’s free cash flows for the last financial year. Tabulate your results, making sure that you show all relevant data used in the calculation.
Discuss whether DCF analysis is an appropriate valuation method for your company. If so, estimate the intrinsic value of your company’s equity assuming free cash flow with an estimated growth rate, which needs to be justified, and then make an investment recommendation (either buy, sell, or hold). If you believe DCF analysis to be an inappropriate valuation method for your company, you need to contact the subject coordinator to be assigned another company.
Residual earnings valuation
Using all the relevant information for your company, calculate your company’s required return, book value per share, return on common equity, residual earnings per share and price-to-book ratio, as at the last financial year end. Show all relevant data used in the calculations and the relevant page numbers of the annual report from where you obtained your data.
Estimate the intrinsic value of your company’s equity using the residual earnings model with an estimated growth rate, which needs to be justified. On the basis of your calculation, make an investment recommendation (either buy, sell, or hold) and justify your recommendation.
Implied growth rates (reverse engineering with the residual earnings model)
For this section, use the book value per share calculated in section 3. You will also have to research some relevant business news articles on your company.
Calculate your company’s residual earnings for the next two years consistent with the forecasts. Estimate the implied long-term growth rate in residual earnings, and estimate and plot the future earnings growth path, similar to Figure 7.5 in the textbook. You should include at least five years of earnings and earnings growth rates after the final analyst forecast. You will most likely have to make some assumptions regarding future dividend payout ratios. These assumptions should be reasonable and adequately described in this section.
Combining the results of your analysis with any source of relevant company information in the business news media, discuss whether you think the implied growth rates you estimated seem too high or too low, and then make a buy, sell, or hold recommendation on the company’s shares. Hint: Examples of sources you might try are The Australian Financial Review, Yahoo Finance, Reuters or Bloomberg.
Conclusions
Summarise and discuss the results of your analysis from the previous three sections. Compare and contrast the results from each of these sections and explain any differences. Considering all of the analysis your group has carried out, what would be your final recommendation (buy, sell, or hold) and why?
References
List all of the references used in your report. You must cite your references at the relevant location in the text. Do not include uncited references. It is not necessary to cite the textbook, and students are instructed not to include the textbook as a reference.
Marking guide:
This assignment is worth 20% of the total mark for this subject. The total marks for the assignment will be 100. Assignments will be marked on the basis of accuracy of calculations and data import (30%), evidence of understanding of relevant theoretical and methodological concepts (30%), relevance and thoroughness of research (20%), and validity and reasonableness of assumptions and research conclusions (10%). In addition, up to 10% of the total marks may be deducted for poor presentation and readability including poor layout, formatting, grammar, spelling, and referencing.