Select two publicly listed companies which are in the same industry (preferably two competitors) and listed on either the London Stock Exchange or the New York Stock Exchange, with at least five years available data.
You have been hired as a consultant by the shareholders of both companies to advise them on equity performance. i.e. strengths, shortcomings and opportunities for growth over the short-term and long-term.
Osiris and Fame (from the University’s Library web page) are good sources of data as are companies’ Annual Reports and Financial Statements, stock exchange websites and other publicly available databases.
(i) Choose one Absolute Valuation Model and one Relative Valuation Model to value both companies, justifying the selection of the models chosen.
As can be seen in the content of the module:
The Absolute Valuation Models are:
· Present valuation models:
- Dividend Discount Models
- Free Cash Flow to Equity
- Free Cash Flow to Firm
- Residual Income
· Asset Based Models
The Relative Valuation Models are:
· Price Ratios:
- Price to Earnings Ratios
- Price to Book Value Ratios
- Price to Cash Flow Ratios
· Enterprise Value Multiples
(ii) Provide a brief introduction to global, local economy and industry performance over the last five years.
(iii) Compare the performance of the two companies with each other and the overall performance of the local economy and the industry.
(iv) Evaluate trends in the company’s financial position and stock price over the last five years;
from a shareholder’s point of view, such financial analysis will help predict future earnings, dividends and the firm’s stock price.
(v) Summarise the key findings of the equity analysis in a format and structure suitable for presentation to the shareholders.
(vi) Compare your valuations with the current market stock price and analyse any over-pricing and under-pricing of the stock price.
Any essay style answer and the written report will be assessed on content, writing style and originality.
Marks will be awarded for:
· Clarity of argument and analysis
· Knowledge and interpretation of equity valuation and their calculations.
· Justifications of implied equity valuation to support the analysis and the recommendations
· Evidence of applying relevant equity valuation theories.
Marks will also be awarded for:
· Use of English, clarity and suitability of presentation.
· Professional presentation.
· Structure; that is use of paragraphs, headings and sub-headings to convey the analysis in a clear manner.
· Bibliography and references.
Assessed intended learning outcomes
On successful completion of this assessment, you will be able to:
Knowledge and Understanding
1. Assess the critical features of Statement of Financial position that are crucial to the valuation of equity
2. Measure the effect of economic, financial and accounting variables on equity prices
3. Evaluate the consequences of operational and financial decision on equity prices
4. Judge the significance and role of capital structure on firm valuation
5. Prepare a report on the valuation of firm equity both within regional and international context
Practical, Professional or Subject Specific Skills
6. Lead by Example – have high levels of awareness, emotional and social intelligence, empathy and compassion, and able to identify mental well-being in others. Works collaboratively enabling empowerment and delegation. Acts with humility and authenticity is credible, confident and resilient.
7. Judgement and Challenge - Takes personal accountability aligned to clear values. Demonstrates flexibility and willingness to challenge when making decisions and solving problems. Instils confidence demonstrating honesty, integrity, openness, and trust.
8. Courage & Curiosity - Is confident and brave, willing to innovate, seeks new ideas and looks for contingencies. Manages complexity and ambiguity, comfortable in uncertainty, and is pragmatic.
9. Valuing Difference - Engaging with all – is ethical and demonstrates inclusivity, recognising diversity, championing, and enabling cultural inclusion. Empowers and motivates to inspire and support others.
10. Professional - Reflects on own performance, demonstrates professional standards in relation behaviour and ongoing development. Advocates the use of good practice within and outside the organisation
Transferable Skills and other Attributes
11. Apply Information technology in equity valuation and the calculation of risk in equity trading.
12. Devise and execute complex equity trading strategies under a range of different circumstances.
13. Evaluate and judge the impact on equity valuation and balance sheet under different scenarios.
14. Work both individually and collectively to solve a given problem
15. Locate, summarise and synthesise a range of information from electronic data sources relevant to firm finances and firm balance sheets.