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Group assignment
(Version 1)

Group assignment instructions
The objective of the group assignment is to promote deep thinking on a selected range of topics and to develop your practical quantitative modelling skills. The assessment is a group assignment and should be performed in your allocated groups (usually between 4 and 6 people). Seeking assistance from anyone outside your group or providing assistance to any other group constitutes academic misconduct and will be taken seriously by the university (however, you are allowed to provide assistance to the other members of your own group). If there is any significant similarity between the reports submitted by two or more groups for a particular question, then those group leaders will score zero for that question in the assignment. The mark for the rest of the group will be unaffected. Further action may be taken by the university against any specific group members who have obtained or provided assistance The assignment includes 6 questions (each with sub-parts). Your group must attempt one question for each person in the group (minimum 4 and maximum 6). Four of the questions are compulsory and must be attempted by all groups. The remaining two questions are optional and will be attempted by groups with more than 4 people (or individuals in a group of 4 who would like to lead 2 questions). Each member of your group should take the role of leader for 1 or 2 questions. It is expected that the leader will do a considerable amount of the work for a particular question. You are also urged to adopt a consultative leadership style and to include the content and views of other group members. You should avoid adopting an ‘autocratic’ leadership style. The question leader will have final editing rights for that question. I urge you to start work on your assigned questions immediately after the material is covered in class and to make sure it is completed no later than 1 week after that class to avoid lastminute rushes before submission (which are often of low quality). One member of your group should submit a list of leaders by email to me identifying the names of the members of your group and which question they will be attempting by the due date listed in the subject outline to andrew.hingston@spjain.org (please CC the email to your other group members). If you swap questions, then you can re-submit your list of leaders to me at a later date. The answer to each question in your assignment should be less than 1,500 words. The title page, appendices and list of references are not included in this word limit. However, tables in the body of your answer are included in the word count. If you have a large table of numbers to insert then you may insert it as an image so that the numbers are not included in the word count. As such, the word count is simply the number calculated by MS Word when selecting the main body of your answer. You should note that appendices will not be marked. They should only be used for detailed information that supports your answer but is not central to it. Your answer should use the document template provided on the subject website under ‘Assessments … Group Assignment’. You should include the details requested on the title page in the template provided including the leader’s names and details and the details of the other members of the group. The leader should also make sure that the checkbox next to each of the declarations has been checked (you can click on them with your mouse). After you have entered your details, please make sure that you name your file using the format indicated under the Declaration on page 1 of the template. Your filename should look something like this: ClassCode-Q#-YourGroupNumber-YourStudentID.docx Fonts: You should use only Arial or Helvetica fonts. © Snowballing Ideas Pty Ltd

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If your question asks you to submit a spreadsheet then you will need to embed the spreadsheet as an object at the end of your Microsoft Word document. Instructions for how to do this are included at the end of the Microsoft Word template provided on the subject website. You should submit the question(s) for which you are the leader on the subject website (under ‘Assessments … Group Assignment’). A separate link will be provided for each question. Only one Microsoft Word file should be submitted per question and it should only include the answer to that question. You will be assessed based on three criteria: 1. Leadership results (50%): Your mark on the question for which you are the leader. If you lead on two questions then it will be based on the highest mark for the two questions for which you are the leader. Quantitative questions will be graded on your level of skill when selecting and explaining the variables selected and your ability to correctly apply the models and principles covered in this subject. Qualitative questions will be graded based on both the depth and specificity of your answer. 2. Group results (50%): The average mark received by your group across all questions submitted. However, if a fail mark is awarded to any individual question (below 50%), then it will be excluded from the group average.

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Group assignment questions
You are reminded that providing assistance to anyone outside your group or receiving assistance from anyone outside your group for this assessment represents academic misconduct.

1. Valuing stocks (optional)
Choose a stock listed on the Australian Stock Exchange. Please include the following table at the start of your answer adding your answers and assumptions from the various parts of your answer:
A A B B C D E Company name: ASX stock code: Dividend in 1 year (D1): Dividend in 2 years (D2): Perpetual growth rate (g): Implied stock price (P0): Stock price at r=12%, g+1%:

a) Identify the name and ASX three letter stock code of the company that you have selected. Briefly explain the main product or services that the company offers and the industry in which it operates using your own words. b) Identify the forecasted dividends for this stock for the next 2 years based on analyst expectations (you may use the www.ft.com or any other website). Clearly identify the source of your information. c) What do you expect the average future perpetual growth rate of this stock’s dividends to be based on your expectations for the company, the industry in which it operates, the Australian and world economy? You should clearly explain your reasoning. Your answer should also be based on what you think and not based on analyst expectations. d) Calculate the implied stock price today using the multi-stage dividend growth model and your assumptions from parts b) and c) above. Use a required return on equity of 10% per year. You should assume annual dividend payments to simplify your analysis and assume that the next dividend will occur in exactly one year. Also, please apply only one perpetual growth rate to your dividends and apply that growth rate to the period after the second yearly dividend (ie D1, D2, D2(1+g) …). Show your calculations using Microsoft Equation Editor if necessary. e) Conduct a sensitivity analysis using Excel’s TABLE function to see the effects on changing the required return on equity and the perpetual growth rate on dividends to your implied stock price. Use 1% increments for changes in required return and 0.5% increments in the perpetual growth rate. Which combinations of required return and dividend growth rate give prices that are the closest to the current price of the stock? Please also report your implied valuation for a required return of 12% and your perpetual growth rate +1% in the table above. f) Describe what you believe are the main strengths and weaknesses of the multi-stage dividend growth model for calculating the fundamental value of a stock.

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2. Capital budgeting* (compulsory)
Provide a summary of your analysis of the Hansson case that you performed in class. a) Provide a table of the main revenue, expense, investment and tax cash flows for Hansson’s decision about whether or not to expand capacity. You can copy and paste this from your Excel spreadsheet. b) Calculate the Net Present Value based on your cash flows and a required rate of return of 9.3787% for the project. c) Discuss some of the strengths and weaknesses of the revenue, expense and investment cash flow assumptions provided in the case (be specific).

3. Risk and return (optional)
You should select 5 stocks listed on the Australian Stock Exchange (ASX) and download the last 5 years of weekly price data from the Yahoo Finance website. Each stock should operate in a different industry. You should also download the ASX200 index for the same period. You should be very careful to make sure that the dates for all your stocks line up correctly in Excel (missing data can cause dates to become out of sync!). Please complete a summary table with the following information at the start of your answer:
Stock Return Std dev ??? ??? ??? ??? ??? Average Portfolio ASX200

a) Calculate and compare the annualised price returns of the individual stocks, the average of the stocks, a portfolio containing equal weights in each stock and the ASX200 index. Enter the returns into the above table. b) Calculate and compare the annualised standard deviation of price returns for the individual stocks, the average of the stocks, a portfolio containing equal weights in each stock and the ASX200 index. Enter the standard deviations in the above table. c) Calculate a correlation matrix of the price returns between the 5 stocks, the portfolio and the ASX200 index (a 7 x 7 matrix). You can do this using the Data Analysis add-in for Excel. Copy and paste this matrix into your report. Discuss the more interesting features of your correlation matrix numbers. d) Clearly identify both the sources and benefits of diversification using your answers from parts a) to c) above.

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4. Capital structure* (compulsory)
This question is based on the Marriott case study covered in class. Please include the following table at the start of your answer adding your answers and assumptions from the various parts of your answer:
A B B B B B C C D D E Current D/V using market values: Risk-free return (rf): Equity beta: Expected return on market (rm): Market risk premium (rm - rf): Levered cost of equity (re) at current D/V: Cost of debt (rd): Corporate tax rate (t): Unlevered cost of equity (re) at D/V = 0% Corporate tax rate (t): Average cost of capital (r*):

a) Identify Marriott Corporation’s current level of leverage (D/V) using market values. b) Calculate Marriott Corporation’s cost of equity using CAPM at the current D/V. You should briefly explain why you used the particular values that you did for the risk-free rate, equity beta and the market risk premium. c) Calculate Marriott Corporation’s cost of debt and corporate tax rates. Briefly explain your methodology. d) Calculate Marriott Corporation’s unlevered cost of equity (D/V = 0). e) Calculate Marriott Corporation’s average cost of capital assuming that it is operating in the United States (corporate taxes with no dividend imputation). f) Identify how a manager at Marriott Corporation might use the average cost of capital figure.

5. Working capital* (compulsory)
a) Briefly describe the steps that you took to prepare for the Working Capital Simulation. b) Discuss how you applied the principles of the financial planning topic to the Working Capital Simulation (please be specific). c) What was the outcome of your first run through in the simulation? What do you think contributed to your success or failure? (Please note that you will not be penalized here for going bankrupt nor will you receive extra marks for going well! Also, you should avoid an event-by-event description of the simulation. Instead, you should identify the main causes of success or failure focusing on methodology rather than specific events or decisions). d) What specific steps did you take in your second run through of the simulation to improve the outcome? (Again, you should focus on the methodology employed rather than the specific events or decisions). e) Describe what you believe you can apply from the Working Capital Situation in a future management position in which you must manage the finances of a medium sized organization with 100 employees? © Snowballing Ideas Pty Ltd

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6. Literature review* (compulsory)
Conduct a literature review on one of the two topics listed below based on your group number. A literature review involves identifying up to 5 academic journal articles on the topic and providing a brief summary of the findings of that journal article using your own words (not simply copying and pasting from the abstract please!). Higher marks will be awarded for journal articles published within the last 20 years and for those journals with a PII ranking in the top 30 as ranked by the following website: http://www.journal-ranking.com/ranking/listCommonRanking.html (choose ‘Business Finance’)

Odd numbered groups (1, 3, 5 …)
Recent innovations (last 20 years) in either academic research or business practice in capital budgeting. This may include innovations in how to apply the Net Present Value technique or complementary techniques (such as Economic Value Added or Real Options). It may also include innovations in how to address the problems with measuring ‘soft’ benefits and costs of projects (benefits and costs that are difficult to quantify).

Even numbered groups (2, 4, 6 …)
Recent innovations (last 20 years) in calculating the ‘market risk premium’ for CAPM (the difference between the expected return on the market and the risk-free rate). This could focus on the size of the market risk premium itself or how it varies across different countries, over time or different market conditions.

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