Assessing Models Using Revealed Preference: A Discussion

Discuss About The Assessing Models Using Revealed Preference?

Prime Media is a media corporation that owns regional television network covering region southern and northern New South Wales, Victoria, Australia capital territory, Western Australia and Gold area of Southeastern Queensland. Company was established in year 1986 after which television license was acquired in Western Australia. It is one of the leading television networks in the broadcast market that has evolved by making considerable investments in local news programming (Primemedia.com.au 2018). It also helps in assisting and supporting community endeavors by providing valuable airtime sponsorship. Revenues are sourced by Prime limited from television advertising airtime and they have the most influential advertising opportunity in regional Australia.  Free to air commercial television license is owned by Prime limited in regional Western Australia and Mildura where nine entertainment programming is broadcasted. Some other services are iShopTv and data casting television service that are owned by Prime Media limited (Primemedia.com.au 2018).

The group has reported the name of substantial shareholders according to section 671B of the Corporation Act, 2001. Largest registered shareholder holding 21.22% of ordinary shares is HSBC Custody Nominees Australia Limited and all the substantial shareholders have more than 5% of shareholdings. Substantial shareholders having shareholding higher than 5% of shareholding includes Perpetual limited having 14.14% shareholdings, Network investment holdings having shareholding of 11.38%, Ash blue Holding Pty limited having 11.38% of shareholdings, North Aston Pty limited having 11.38% of shareholdings  and IOOF holdings limited having 8.216% of shareholdings (Primemedia.com.au 2018).

The governance of prime media incorporates members of board of directors that consists of majority of independent directors and non-executive directors.  Non-executive directors of Prime Media group are Ian R. Neal, Peter J.Macourt and Cass O’Connor and Alexander A. Hamill is non-executive director who retired on 30^th September 2016. John K Hartigan is the non-executive chairman and Ian C. Audsley is the chief executive officer of Prime Media group limited. Some of the directors have relevant interest in the ordinary shares of company and they include Ian C. Audsley holding 621756 ordinary shares, Ian R. Neal holding 40000 shares and Cass O’Connor holding 75000 shares (Primemedia.com.au 2018). From the analysis of annual report of prime Media, it has been ascertained that surname of any substantial shareholders is not same as that of board members, Chairman and CEO of organization and this depicts that there is no presence of owner in governance of firms. Furthermore, no shareholders having more than 5% of share capital are involved in governance of firm.

		$0.000	$0.000	$0.000	$0.000	Trend
Particulars`		2014	2015	2016	2017	2014	2015	2016	2017
Net Profit after Tax (NPAT)	A	31188	35621	-93578	36244	-100.0%	-114.2%	300.0%	-116.2%
Total Assets (TA)	B	317673	304484	172032	155532	100.0%	95.8%	54.2%	49.0%
Ordinary Equity (OE)	C	162240	173876	62231	67206	100.0%	107.2%	38.4%	41.4%
Total Liabilities	D	155433	130608	109801	88326	100.0%	84.0%	70.6%	56.8%
Return on Assets (ROA)	E= A/B	9.82%	11.70%	-54.40%	23.30%	-100.0%	-119.16%	554.06%	-237.36%
Return on Equity (ROE)	F=A/C	19.22%	20.49%	-150.37%	53.93%	-100.0%	-106.57%	782.24%	-280.54%
Debt Ratio	G=D/B	0.489	0.429	0.638	0.568	100.0%	87.67%	130.45%	116.07%

		$0.000	$0.000	$0.000	$0.000	Trend
Particulars`		2014	2015	2016	2017	2014	2015	2016	2017
EBIT	A	46586	50772	-81305	51688	-100.00%	-108.99%	174.53%	-110.95%
Total Assets	B	317673	304484	172032	155532	100.00%	95.85%	54.15%	48.96%
Net Profit after Tax	C	31188	35621	-93578	36244	-100.00%	-114.21%	300.04%	-116.21%
Owner's Equity	D	162240	173876	62231	67206	100.00%	107.17%	38.36%	41.42%
Return on Equity	E=(A/B)x(C/A)x (B/D)	19.22%	20.49%	-150.37200%	53.929709%	-100.00%	-106.57%	782.24%	-280.54%

Calculation of Performance Ratios

Variable TA/OE indicates total assets divided by ordinary equity and the relationship between return on assets and return on equity is considerably impacted by this particular variable. An increase in amount of total assets will cause ROA on to decrease if the profit is remaining constant. However, an increase in profits will cause ROA to increase if the magnitude of increase in profits is more than increase in total assets amount. Return on equity on other hand, will increase when there is increase in amount of profits reported along with increase in total equity (Brotherson et al. 2015). However, magnitude of increase in profits should be more than that of total equity reported.

From the computation of ROA and ROE, it can be inferred from the figures that ROE is more than ROA throughout the year of analysis. ROE is significantly higher than ROA for two consecutive years that is 2014 and 2015 because the amount of ordinary assets increased and total assets amount decreased (Gotze et al. 2015). For financial year 2016, value of ordinary equity has reduced drastically compared to total assets that had led to lower value of ROE as against ROA. Value of ROE in the current financial year is more than that of ROA.

The above graph depicts the monthly share price of Prime media group limited for the period of two years that is 2015 to 2017. It can be inferred from the graph that the share price is not highly volatile. However, they are more or less fluctuating than the value of ordinaries index. In the initial year of analysis that during 2016, share price line was closely correlated with that of ordinaries index line. In the beginning of year 2017, share price of prime media went above the ordinaries index line and it declined below the ordinaries index during the seventh month of year 2017. Therefore, it can be said that prime media share price was not volatile during the analysis period.

The rise in share price above the ordinaries index in the beginning of year 2017 was due to releasing of media report of prime being the leading regional television network having audience share of 30.6% across the areas of operation. This media release was responsible for increase in share price and going on its peak for over two month and thereafter declining and crossing below the ordinaries index line in the beginning of second half year of 2017. Share price started rising in the end of year when it aired number one program and making it most watched hitting at night across its region of broadcasting (Zopounidis et al. 2015). Local communities were impacted by exposing shocking reality of death and life on regional roads and this news had peaked audience viewers and shares of commercial audience. Introduction of important reform bill enhanced the commercial viability of media business that lead to diversity of voices and increased community opinions (Elmassri et al. 2016). Rise in share price during year 2016 was attributable to recording of peak audience resulting from most watched television. In nutshell, many factors are responsible for influencing the share price of prime media group limited is related to its several broadcasting services. Continued growth in advertising revenue and audience is also responsible for influencing the share price of company.

Graph with the Description of Results

Calculated value of beta of prime media group limited is 0.59112.  Computation of required rate of return is done using capital asset price generating model with a market risk premium of 6% and risk free rate of 4%.

Particulars		Amount
Beta of the company	A	0.59112
Risk Free Rate	B	4%
Market Risk Premium	C	6%
Required Rate of Return	D=B+[Ax(C-B)]	5.18%

Required rate of return for prime media group limited stood at 5.18%.  The value of beta of prime group is computed at 0.59112 that is indicative of the fact that value of stock will be less variable compared to market index. It depicts that stock if defensive against the down and ups of entire stock market that is in times of change, stock moves less than the market index (Berk and Van Binsbergen 2016). Whether the company has adopted defensive or conservative investment is depicted by value of beta and it shows that, it has chosen a conservative investment strategy.

Computation of weighted average of capital is done by computing the estimated cost of capital and the table below depicts the WACC.

Particulars	Amount	Weight age	Cost	Return Rate	Tax Rate	WACC
Total Long Term Debt	43540	39.32%	2542	5.84%	30.00%	1.61%
Total Equity	67206	60.68%		5.18%		3.14%
TOTAL	110746	100%				4.75%

For the evaluation of prospective investment, WACC is regarded as appropriate because the risk associated with project is same as risk in which computation is done. Higher weighted average cost of capital is perceived to be associated with higher risks by management when they make any new investments in new products. Therefore, for the expansion of business, higher WAC would be justified. For the riskier investment, investors would be requiring higher returns and for undertaking risky projects, companies will be raising capital and thereby such projects will have higher cost of capital compared to making investment in safer projects (Lane and Rosewall 2015). It can be inferred from the discussion that riskier projects will have higher WACC attached with it compared to safer projects that will have lower WACC attached with it.

Debt ratio of prime media group limited for the two consecutive years that is 2016 and 2017 is computed at 0.638 and 0.568 respectively. This fall in debt ratio in the current year is attributable to decline in total amount of liabilities reported on the balance sheet. Yes, it can be seen from the analysis of annual report of company that effort was taken to improve the gearing ratio, as there was repayment of its borrowings in year 2017. Hence, it can be inferred that company is working towards maintenance of optimum capital structure. Yes, director’s report presented in the annual report provides with a discussing about the capital structure. Secured bank loan facility decreased from $ 73402000 in year 2016 to $ 53540000 in year 2017. Moreover, there was reduction in debt facility limit to $ 80 million. The capital structure of firm appears to be stable in recent years due to their efforts for improving their gearing ratio (Titman et al. 2017).

Significant Factors Influencing the Share Price of Prime Media Group Limited

Final dividend that is paid to shareholders is based on the core net profit after tax. Dividend payments are not entitled to long-term incentives. Recognition of dividend revenue is done when the right to receive payments is established by group. The group can adjust dividend payments to shareholders when the required adjustment is to be done to the capital structure (McNeil et al. 2015).

The analysis of inclusion of stocks of Prime Media group limited is done by evaluating the financial report of recent years in respect to several areas such as its dividend payment, profitability ratio and cost of capital. It has been ascertained that leverage of company has improved in the recent year due to reduction in overall liabilities attributable to company. Moreover, return on assets and return on equity has also witnessed increasing figures indicating that group has been efficiently utilizing their assets and total equity capital. However, year 2016 witnessed negative profits that have influenced their efficiency and profitability position. It was a temporary disruption resulting from some generation of loss in that particular year. Furthermore, required rate of return computed for company is higher than weighted cost of capital. Value of beta is indicative of the fact that company has followed conservative investment strategy (Fitri et al. 2015). It indicates that the stock of Prime media group will help in reducing risk exposure to market if the investors include it in a portfolio of high beta value stocks. Furthermore, prime media has its operation in media industry and it has muted reactions to market shocks. The volatility of company is less relative to broad movements in market along with consistent beta value (Chittenden and Derregia 2015). Investors seeking investment in this stock by incorporating it into their investment portfolio would be benefitted due to lower risks during the times of economic decline. Performance of company has been more or less consistent throughout the year compared to market performance. Therefore, from the analysis of all the factors mentioned above, it is recommended to investors to make investment in stocks of Prime media group limited and expanding his or her portfolio in positive aspects.

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