Foundations in Finance

You currently work as a team at a major investment bank and have been tasked by the
Investment Management Division (IMD) to analyse a stock that will be incorporated into a
portfolio with other assets from the same market. You will need to prepare a professional
business report that will be submitted to the Investment Management Division (IMD) that
answers the questions proposed in this investment brief as well as a final recommendation.
Analysis [55 marks]

1. Select a publicly listed company that is a constituent of the S&P/ASX300 index (Australia),
   S&P500 Index (US) or CSI300 Index (China) that has at least 10 consecutive years of
   dividend history from 2010-2019. The selected company cannot be one which is listed
   on the last page of the Assignment instructions. Describe the company that you have
   chosen, so that the IMD has a comprehensive understanding of its operations and risks.
2. Present a table of a current “stock quote” with the following characteristics: (1) Current
   Price (2) 52 Week Range (3) Market Cap (4) Beta (5) P/E Ratio (6) EPS (7) Earnings Date
   (8) Forward Dividend and Yield, (9) Ex-Dividend Date, and (10) 1 year Target Estimate for
   your chosen company. Define and interpret each characteristic.
3. Select an appropriate government-issued bond. The choice must be suitably justified to
   be used as a risk-free rate proxy. Graph the bond rate over the time period 2010-2019.
   How have interest rates changed over this period? Why do you think this has occurred?
   Do you think interest rates will go up or down in the future? Discuss with references to
   appropriate academic literature.
   FINC5001 Foundations in Finance Semester 2, 2021
4. Calculate the required rate of return on equity for your chosen company using the Capital
   Asset Pricing Model (CAPM), with the stock’s beta value (from part 2) and the rate
   identified as a proxy for the risk-free rate (from part 3). Assume that an appropriate
   return on the market is 8% p.a. over the same period.
5. Calculate and compare the annual growth rates for dividends from 2010-2019. Calculate
   the arithmetic and geometric average annual growth rate of dividends over this period.
   Identify any year(s) that are anomalous. Discuss why this might have occurred.
6. Using the Discounted Cash Flow (DCF) models you have learnt in FINC5001, determine
   the intrinsic value of your chosen company using an appropriate required rate of return
   (from part 4) and (a) growth rate(s) (from part 5). Justify your choices and assumptions
   you have made in undertaking this calculation. Discuss the implications of your chosen
   model(s). (If you make deviations from the choices in part (4) and/or part (5), clearly
   justify why you made these changes and why these new values are sensible for this
   analysis).
7. Draw a timeline of your company’s future dividends to support the discussion above.
8. Along with the company analysed above, you will also need to select another two publicly
   listed companies that belong to the same stock market index. These companies need to
   be listed since 1st January 2010 on this market. Describe these two companies that you
   have chosen, so that the IMD has a comprehensive understanding of their operations and
   risks. Explain why you believe these two companies are good potential candidates to
   combine into a portfolio.
9. Calculate the monthly rate of return for the period from 1st January 2010-31
   st December
10. Calculate the expected returns and standard deviations of the monthly rate of
    return. Annualise the expected returns and standard deviations of returns. Present the
    expected returns and standard deviations of the monthly and annualised rates of return
    for your chosen three stocks.
11. Present the variance-covariance and correlation matrix of these three stocks over the
    same analysis period (as in part 9). Interpret and compare the calculated values.
    FINC5001 Foundations in Finance Semester 2, 2021
12. Calculate the annual expected rate of return and expected standard deviation for the
    following portfolio constructs:
13. Draw a graph of the portfolios (from part 11) as well as Stocks A, B, and C (from part 9)
    into a risk-return space. Overlay an efficient frontier shape on this graph. Explain which
    of the(se) asset(s) amongst the choices available is/are efficient/inefficient.
14. Calculate the Sharpe ratio for the 20 portfolios (from part 11) using the rate identified as
    a proxy for the risk-free rate (from part 3). Select the portfolio that has the highest Sharpe
    ratio and label this as Portfolio T. Explain what properties Portfolio T should have.
    Portfolio Stock A Stock B Stock C
    1 1/3 1/3 1/3
    2 1/4 3/4 0
    3 1/2 1/2 0
    4 3/4 1/4 0
    5 0 1/4 3/4
    6 0 1/2 1/2
    7 0 3/4 1/4
    8 1/4 0 3/4
    9 1/2 0 1/2
    10 3/4 0 1/4
    11 1/3 1/6 1/2
    12 1/3 1/2 1/6
    13 1/6 1/3 1/2
    14 1/2 1/3 1/6
    15 1/2 1/6 1/3
    16 1/6 1/2 1/3
    17 1/8 1/8 3/4
    18 1/8 3/4 1/8
    19 3/4 1/8 1/8
    20 3/4 1/12 1/6
    FINC5001 Foundations in Finance Semester 2, 2021
15. Calculate the annual expected rate of return and expected standard deviation for the
    following portfolio constructs between Portfolio T and the risk-free asset:
    New Portfolio Portfolio T (%) Risk-free Asset (%)
    1 100 0
    2 90 10
    3 80 20
    4 70 30
    5 60 40
    6 50 50
    7 40 60
    8 30 70
    9 20 80
    10 10 90
    11 0 100
    12 -10 110
    13 -20 120
    14 -30 130
    15 -40 140
    16 -50 150
    17 -60 160
    18 -70 170
    19 -80 180
    20 -90 190
    21 -100 200
16. Draw a graph of the portfolios (from part 14) into a risk-return space.
17. Combine the diagrams (from parts 12 and 15) onto the same graph. Identify the
    portfolio(s) that is/are efficient/inefficient among your choices. Explain whether you
    would choose any of the individual assets (Stocks A, B, or C) over these portfolios.
    FINC5001 Foundations in Finance Semester 2, 2021
    Recommendation [30 marks]
18. Using the DCF analyses performed in parts 1-7, make a detailed recommendation for your
    initial chosen company as to whether to buy, sell or hold this stock. Along with your
    valuation model, you should use any relevant information about your chosen company,
    competitors, its industry, and the economic outlook to justify your recommendation.
    Detail the limitations of your analysis and assumptions as well as provide suggestions on
    how to improve the accuracy of your valuation. A well-justified recommendation properly
    connects outside information on how it relates to your valuation model via dividends,
    cash flows, growth rates, discount rates, and other financial factors.
19. Using the portfolio construction analyses performed in parts 8-16, discuss how the riskreturn trade-offs change as you combine your chosen stock (from part 1) with the two
    other stocks (from part 8) into a portfolio. Explain what would happen if more stocks
    from the same market were added into this portfolio. Choose a portfolio (from part 16)
    that you would recommend to the IMD. Justify under what conditions and the risk-return
    characteristics that need to be satisfied for your portfolio recommendation to the IMD to
    be sensible.
20. Discuss which portfolio(s) (from part 16) would be preferred if the IMD wanted to market
    any of these constructed portfolios to risk-averse investors with these different risk
    preferences:
    (1) conservative (most risk-averse);
    (2) balanced; and
    (3) aggressive (least risk-averse);
    assuming that the balanced investors prefer to hold a portfolio of 50% in Portfolio T and
    50% in the risk-free asset.
21. Provide a final, cohesive recommendation that combines stock valuation and portfolio
    theory together. Compare and contrast the differences between the financial theories
    incorporated in your analyses (from parts 17-19) which you have learnt in FINC5001.
    Present a conclusion to the IMD on how they would/would not be able to make excess
    returns from your analyses and recommendations above.
    Presentation and overall style of the report [5 marks]
    Peer evaluation [10 marks]
    FINC5001 Foundations in Finance Semester 2, 2021
    • List and date all your data sources. Depending on the day and time with which you collect
    the data, this will be different. For each set of data used in the report, present a screenshot
    of this data in the Appendix.
    • Justifications in the report should be made with references to appropriate academic
    literature.
    • The Excel workbook needs to be properly formatted and appropriately labelled such that
    the instructors can read, interpret your calculations, and replicate all results presented in
    the report without assistance.
    Assessment Criteria:
22. Conforming with instructions (e.g. word length, font, other instructions)
23. Presentation, communication & style (written)
24. Clarity of expression (incl. accuracy, spelling, grammar, punctuation)
25. Referencing
26. Use of literature/knowledge of theory
27. Data/information gathering/processing
28. Conclusions
29. Analysis
30. Problem solving
31. Reflection/evaluation
    FINC5001 Foundations in Finance Semester 2, 2021
    Formatting and Presentation:
32. The maximum number of pages allowed is 20 pages with 1.5 line spacing and size 12 Arial
    or Calibri Font. It should have normal-sized (2.54cm) margins on all sides. Please number
    the pages of your report. Marks will be reduced by 5% for each page you exceed the page
    limit. Hence, your mark will be reduced to zero if the report exceeds 40 pages. You will be
    penalised for inappropriate formatting.
33. Text presented in tables and graphs do not need to follow this formatting requirement.
    However, these will still need to be professionally presented in the report.
34. Ensure you use proper academic referencing in supporting the ideas and discussion within
    your report. All reports must include a list of references in academic form using the APA
    7
    th method. Further information on the APA referencing style can be found here:
    https://libguides.library.usyd.edu.au/citation/apa7. You will be penalised if you forget to
    reference your sources or use inappropriate referencing.
35. Pay particular attention to presentation. A component of your mark will be based on
    presentation. Avoid overdoing formatting and ensure that the report is very clear, logical,
    and professional. Pay attention to grammar. Clear and logical presentation is a major
    challenge in report preparation.
36. Preparing a concise report poses a major challenge. Brevity and conciseness are key
    ingredients of a highly successful report. Every part of the report should somehow add to
    the end result; otherwise, it is superfluous and distracting.
37. Use headings in the report to separate key ideas. Using paragraphs will also assist with
    structuring ideas.
38. The report must be submitted as a PDF document. You must submit the report
    electronically via the Turnitin link on Canvas. Excel spreadsheets with all your calculations
    must be submitted as a .xlsx workbook. You must submit two files electronically via the
    link on Canvas.
    The page limit for the report is 20 pages.
    What is included in the 20 page limit?
    • Report body
    • Tables
    • Diagrams
    What is excluded from the 20 page limit?
    • Title page
    • Table of contents
    • Executive summary
    • Reference list
    • Appendices (For each set of data used in the report, present a screenshot of this data in
    the Appendix)
    FINC5001 Foundations in Finance Semester 2, 2021
    Marking Guide:
    Company A selection, description, and financial data /5 marks
    Risk-free rate /5 marks
    CAPM calculation /2 marks
    Growth rates /3 marks
    Stock valuation /6 marks
    Company B and C selection and description /4 marks
    Rates of return calculations (expected returns, standard deviations, covariances, correlations) /10 marks
    3-stock portfolio construction /10 marks
    Combined portfolio construction /10 marks
    Final recommendation /30 marks
    Presentation and style of report /5 marks
    Peer evaluation /10 marks
    Penalties
    Incorrect dating of data sources up to -10 marks
    Incomplete screenshots of data sets in Appendix up to -10 marks
    Inappropriate use of literature up to -10 marks
    Incorrect referencing up to -10 marks
    Failure to comply with formatting requirements up to -10 marks
    Poorly presented report, tables, graphs up to -10 marks
    Incorrect selection of companies -50 marks
    Failure to submit Excel file with calculations -50 marks
    Failure to complete peer evaluation (individual deduction) -50 marks
    Each page over the 20 page limit -5 marks per page
    TOTAL MARKS /100 marks
    FINC5001 Foundations in Finance Semester 2, 2021
    List of Prohibited US-listed Stocks (for part 1):
39. 3M (MMM)
40. American Express (AXP)
41. Amgen (AMGN)
42. Apple Inc. (AAPL)
43. AT&T Inc (T)
44. Bank of America (BAC)
45. Boeing (BA)
46. Caterpillar Inc. (CAT)
47. Chevron Corporation (CVX)
48. Cisco Systems (CSCO)
49. The Coca-Cola Company (KO)
50. Colgate-Palmolive (CL)
51. Costco (COST)
52. Dow Inc. (DOW)
53. Estee Lauder (EL)
54. Exxon Mobil Corp (XOM)
55. Goldman Sachs (GS)
56. The Home Depot (HD)
57. Honeywell (HON)
58. IBM (IBM)
59. Intel (INTC)
60. Johnson & Johnson (JNJ)
61. JPMorgan Chase (JPM)
62. McDonald’s (MCD)
63. Merck & Co. (MRK)
64. Microsoft (MSFT)
65. Nike, Inc. (NKE)
66. PepsiCo (PEP)
67. PPG Industries (PPG)
68. Procter & Gamble (PG)
69. Salesforce (CRM)
70. Starbucks (SBUX)
71. Target Corp (TGT)
72. The Travelers Companies (TRV)
73. UnitedHealth Group (UNH)
74. Verizon Communications (VZ)
75. Visa Inc. (V)
76. Walgreens Boots Alliance (WBA)
77. Walmart (WMT)
78. The Walt Disney Company (DIS)
    List of Prohibited Australian-listed Stocks (for part 1):
79. Commonwealth Bank of Australia (CBA)
80. Domino’s Pizza Enterprises Ltd (DMP)
81. Telstra Corporation Ltd (TLS)
82. Wesfarmers Ltd (WES)
83. Woolworths Group Ltd (WOW)