Case study 1 (Valuation of stocks): (5 + 5 = 10 marks)

You are an analyst employed by Vanguard Wealth, a wealth management firm operating in Sydney’s financial district. You have been approached by Mr George Fero who recently inherited $10 million dollars from his late aunt’ estate.  Mr Fero is considering putting all his money in stocks of one of these two Australian mining companies, his friends have told him that these two companies are good investments. Being a first time player on the market, he does not want to invest in more than one company. He thus want expert advice on which of the two to invest in.

The following is information that is publicly available which is from the 2017 annual reports of Fortescue Metals Group Ltd (FMG) and OZMinerals Ltd (OZL).

Information extracted from annul reports

Description FMG OZL
Total assets (book value) ($m) 19 115 2 826
Total liabilities (book value) ($m) 9 381 310
Number of shares (millions) 3 111 299
Market capitalisation ($m) 16 239 2 739
Net income ($m) 2 093 231
Dividends paid ($m) 755 42

Source: Yahoo finance, and annual reports of FMG Ltd and OZL Ltd

Requirements:

(1)          Perform the following calculations:

a) market value of equity-to-book value of equity ratio

b) return on equity (ROE)

c) dividends per share

d) sustainable growth rate per annum

e) intrinsic value per share assuming a required rate of return of 14%

(2)          Which stock will you recommend for Mr George Fero to invest in. Justify your decision. You may consider any publicly available information.

 

 Case Study 2 (Capital Budgeting): (5 marks)

Oil Search is considering a major investment in a new oil field in Western Australia. According to initial estimates, the investment outlay would be $2 500 000 and the project would generate incremental cash flows of $500 000 per year for nine years. The required rate of return by the investors is 7%.

(a)          Calculate the Net Present Value (NPV) (2 marks)

(b)          Calculate the Accounting Rate of Return (1 mark)

(c)           Calculate the Internal Rate of Return (IRR) (1 mark)

(d)          Should this project be accepted? (1 mark)

Case study 3 (Risk and return): 15 marks

Collect the monthly prices of stocks of FMG Ltd and monthly prices of S&P/ASX 200 (^AXJO) over the period 1 April 2013 to 31 March 2018. Using the price data, perform the following calculations and suggest on the suitability of investing in stocks of FMG Ltd.

  1. Monthly returns from stocks of FMG Ltd
  2. Yearly returns from stocks of FMG Ltd
  3. Average yearly returns over the five years from stocks of FMG Ltd
  4. Monthly returns from ^AXJO
  5. Yearly returns from ^AXJO
  6. Average yearly returns over the five years from ^AXJO
  7. Total risk associated to investment in FMG Ltd (perform one calculation using 60 monthly returns)
  8. Total risk associated to investment in ^AXJO (perform one calculation using 60 monthly returns)
  9. Systematic risk of stocks of FMG Ltd (perform one calculation using 60 monthly returns)
  10. Unsystematic risk of stocks of FMG Ltd (perform one calculation using 60 monthly returns). On the basis of the above calculations do you think FMG Ltd is a good investment?
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