Financial Analysis of a UK Listed Company - Strengths, Shortcomings and Opportunities for Growth

Important Points to Keep in Mind

You have to select a UK listed company. You have been hired as a consultant by its shareholders to advise them on the firm’s strengths, shortcomings and opportunities for growth over the short and long-term. This exercise involves:

(i) comparing the firm’s performance with that of other companies in the same industry and

(ii) evaluating trends in the company’s financial position analysis over some time period. From a shareholder’s point of view, such financial analysis will help predict future earnings, dividends and the firm’s stock price. 

Some important points:

1. Annual data should be for no more than the last 5 years – or less if 5 years is not available. Osiris is a good source of data but the Annual Report has more detail and more explanation so you will probably need to use both sources. 

2. Monthly data should be for the previous 61 months

3. Items below represent a guide, you may wish to add further analysis.

4.Presentation is very important, it is not easy to construct tables that show enough but not too much data, or a single table for the company overview?

You are required to download monthly share price data for your company for the most recent 60 months. In addition, upload the monthly time series data for the returns on the FTSE-100 index. Note that all calculations in this part of the assignment should be based on monthly return data.

You are strongly advised to be sure that the company you select has shown an increase in its share price over the period you are considering.

The assignment has three sections:

Analyse the share price behaviour of the company for the last 60 months (5 years) in terms of: 

(i)The expected monthly returns.

(ii)The standard deviation of the monthly returns.

(iii)The correlation of the monthly returns with the returns on the FTSE-100 index.

(iv)Construct a portfolio made of your share and the FTSE-100 index in varying proportions and do the following two requirements:

1- Plot the results from your calculations in problem (i) above in an expected return to risk space.

2- Consider which of the efficient portfolio sets you would recommend for an investor who wishes to earn an additional return that, at worst, compensates for a given increase in risk undertaken.

(i) Estimate the systematic risk measured in terms of the beta coefficient obtained using monthly return data for the last 5 years (60 months) when the FTSE-100 Index is chosen as the benchmark stock market index. Assume that the only reason why returns on securities co-vary is because of their common response to market changes.

(ii) Calculate the monthly average cost of equity capital for the firm using the standard Capital Asset Pricing Model (CAPM). Evaluate the significance of your result for an investor. 

(iii) Calculate the price-to-earnings ratio in the current and recent years and comment on the significance of this figure in relation to the risk of the investment. 

Provide brief concluding remarks on the future performance of the company from the standpoint of current and prospective shareholders. Also give your advice to the current shareholders to buy more shares or sell their current shares.