Question 1- Investment appraisal report
VALUING A FTSE-100 COMPANY
You are expected to produce an investment recommendation report about a FTSE-100 Company pf their choice. In this report students expose their investment case about the selected company, supported in their valuation analysis.
The investment recommendation can be to
BUY (If the valuation is higher than market price) or
SELL (if the valuation is lower than market price) or
HOLD
the selected FTSE-100 company.
The consistency and quality of the investment case and the supporting valuation exercise, both properly explained, are the topics to be evaluated. The investment report is self- contained, i.e.
there are no additional elements to be evaluated.
REQUIRED:
Prepare an investment recommendation report for a FTSE-100 company of your choice.
Guide lines:
Valuation exercise should be carried out for the most recent financial year end.
March 2020, Closing Market price must be used for the investment decision making exercise.
Investment recommendation report must satisfy a minimum of 1000- word count.
In order to address this topic student must exercise financial modelling skills and valuation techniques.
Quality, consistency of the assumptions in the model, and investment story is what is assessed.
The best approach is to start with Cash flow statement and arrive at free cash flows.
(For the range of period 2015 -2020)
Use the appropriate discount rate to calculate the Enterprise value of the company.
Compare the Equity value per share against the March 2020 market closing price to decide on your investment decision; that is whether to BUY or SELL
As part of your valuation exercise you are also expected to carry out a detail comparable valuation analysis. o Find the right comparable companies
Look up the company you are trying to value on any finance data base so you can get a detailed description and industry classification of the business.
Search databases such as Bloomberg /Yahoo Finance / Investing.com for companies that operate in the same industry and that have similar characteristics. The closer the match, the better!
The analyst will run a screen based on criteria that include:
□ Industry classification ❖ Geography
Size (revenue, assets, employees)
Growth rate
Margins and profitability
Gather financial information for those similar companies.
Calculate the comparable ratios, such as P/E ratio. You may also want to use other ratios such as EV/Revenue, EV/Gross Profit, EV/EBITDA, P/NAV, or P/B.
Use the multiples from the comparable companies to value the company in question.
For example, if the average P/E ratio of the group of comparable companies is 12.5 times, then the analyst will multiply the earnings of the company they are trying to value by 12.5 times to arrive at their equity value.
Additional supporting Notes:
❖ Assumptions must be supported by valid arguments.
❖ A sample report structure:
Introduction
Data description and methodology
FCF
Multiple analysis
Key assumptions
Empirical analysis
Conclusion
(30 Marks)
PART B
You should answer all the questions (1, 2 & 3)
Question 1 Distributions of Returns Analysis –
Required: Using suitable Statistical software / Microsoft Excel- Data Analysis Tool pack, carry out the following return analysis on FTSE 100 index.
Open to Open return analysis
High to low return analysis
Compute the daily return of the FTSE100 market index, by using:
Compute full descriptive statistics: mean, standard deviation, skewness, kurtosis and histogram.
A separate excel file submission is required
(20 Marks) Question 2
Global shares in flux
Big shifts in stock markets, where shares in companies are bought and sold, can affect the value of pensions or individual savings accounts. The FTSE, Dow Jones Industrial Average and the
Nikkei all saw huge falls as the number of Covid-19 cases grew in the first months of the crisis.
The major Asian and US stock markets have recovered following the announcement of the first vaccine in November, but the FTSE is still in negative territory. The FTSE dropped 14.3% in 2020, its worst performance since 2008
The only major economy to grow in 2020 was China. It registered a growth of 2.3%.
The IMF is, however, predicting global growth of 5.2% in 2021. That will be driven primarily by countries such as India and China, forecast to grow by 8.8% and 8.2% respectively.
Recovery in big, services-reliant, economies that have been hit hard by the outbreak, such as the UK or Italy, is expected to be slow.
Source- BBC BUSINESS NEWS-
Required:
Research and report on the extent to which the performance of stock markets around the world have become integrated.
For this report students are expected to consider data from 1st January 2016 until 31st January 2021with extra marks awarded for good geographical coverage and any quantitative analysis provided
(minimum 1000 words). (20 Marks)
Question 3 – International Financial Reporting Standard
IFRS 9 Financial Instruments
IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.
IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.
Source: IFRS
Required:
Write an explanation report on the impact of IFRS -9 Financial instruments on Financial reporting statements. Your report should consider the following points- ➢ Recognition
De-recognition
Embedded derivatives
Hedge Accounting
Ethical issues
(minimum 1000 words). (20 Marks)
(PART B -TOTAL 60 MARKS)
———————- (Total 90 Marks) ——————
Assessment Criteria
Fail (0 – 29%)
The work lacks a basic knowledge, application and evaluation of purpose. Only some of the requirements of the task are met; there are significant gaps in knowledge, application and evaluation of technical language. Some points may be made effectively but the main points are unclear. The work is very poorly structured and presented. The work fails to demonstrate good problem-solving skills and relevant knowledge.
Pass (30 – 49%)
The work demonstrates limited knowledge, application and evaluation of purpose. Only some of the requirements of the task are met; there are some gaps in knowledge, application and evaluation of technical language. Some points may be made effectively, but others are unclear. The work is adequately structured and presented. The work demonstrates basic problem-solving skills and the relevant knowledge.
Lower Second Class (50 – 59%)
The work demonstrates reasonable knowledge, application and evaluation of purpose. The requirements of the task are met; there are gaps in knowledge, application and evaluation of the technical language. Points made effectively, but others are unclear. The work is reasonably structured and presented. The work demonstrates reasonable problem solving skills and relevant knowledge of knowledge.
Upper Second Class (60 – 69%)
The work demonstrates good knowledge, application and evaluation of purpose. The requirements of the task are met; there is a minor gap in knowledge, application and evaluation of the technical language. Points made effectively and are clear. The work is well structured and presented. The work demonstrates good problem solving skills and sound knowledge.
First Class (70 – 100%)
The work demonstrates excellent knowledge, application and evaluation of purpose.Excellent information base, exploring and analysing the requirements of the task. Points made effectively and are clear. The work is well structured and presented. The work demonstrates excellent problem-solving skills and excellent knowledge and practice of technical language. Excellent management of learning resources complemented by self-direction.
Type of assignment: Academic paper writing
Type of assignment: Coursework
Subject: Finance
Pages/words: 7/3500
Number of sources: 10
Academic level: Bachelor
Paper format: Harvard
Line spacing: Single
Language style: UK English
