1.Using equity valuation methods taught in Week 6 and described in Chapter 10 calculate the value of each selected ordinary share investment in terms of your required rate of return.
To answer the question, you will need to calculate the value of the companies selected, and to do that you need to demonstrate that you have learnt something about equity valuation. In your analysis, consider valuing the shares using the ordinary share discounted dividend model and then the comparable approach to valuing ordinary shares. Consider the principles that will determine the value of a company in your report.
2.Rank the ten investments in order of desirability. Explain why you have ranked them in this way.
3.Which investment of the ten would you select? Why?
Requires you to consider the approach Warren Buffet uses to do a share valuation
According to Warren Buffet, "Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.
With the increasing ramified economic changes, investors are the person who invests their capital in company with a view to create value on the investment.
There are several factors which need to be considered by investors before investing capital in particular stocks such as return, risk and opportunities available in market. All companies have been selected from different business sectors such as information technology, energy sector and financial market sectors. After that, in the end, Warren buffet valuation methods have been compared with other valuation methods (Andalib, Tavakolan, & Gatmiri, (2018).
All the companies have been selected from the information technologies business sector, energy sector and financial market sector. In the end, comparisons between the Warrant buffet valuation theory and dividend discount model and PE ratio has been done (Zuzik, et al. 2018).
In this part, 10 companies from the different industry sectors have been selected (Guerrini, Vigolo, Romano, and Testa, 2018).
Capital assets pricing model and Discount valuation method have been used to identify the value of the stocks in market (Yahoo finance, 2018).
Formula to compute return on equity CAPM
RF+ (RM-RF) B
- The RF stands for the risk free rate of return,
- RM stands for Risk of the market
- B= Beta of the Company
Computation of the Cost of equity of company by using the CAPM method |
||||||
PARTICULARS |
PRICE OF SHARES |
GROWTH |
COST OF EQUITY Computed by using the CAPM model |
RISK FREE RATE OF RETURN |
BETA |
MARKET RATE |
INFORMATION TECHNOLOGY |
|
|
|
|
|
|
ADSLOT LTD |
0.025 |
-0.40% |
7% |
2.77% |
1.25 |
6.5% |
ASSEMBLEBAY LIMITED |
0.0.19 |
0.20% |
11% |
2.77% |
2.25 |
6.5% |
Altium |
22.28 |
1.10% |
7% |
2.77% |
1.1 |
6.5% |
|
|
|
|
|
|
|
ENERGY |
|
|
|
|
|
|
AUSTRALIS OIL & GAS LIMITED |
0.39 |
10.00% |
9% |
2.77% |
1.3 |
7.7% |
ALGAE.TEC LIMITED |
0.028 |
1.50% |
6% |
2.77% |
0.68 |
7.7% |
ADX ENERGY LTD |
0.011 |
1.50% |
11% |
2.77% |
1.71 |
7.7% |
ADAVALE RESOURCES LIMITED |
2.43 |
0.53% |
10% |
2.77% |
1.4 |
7.7% |
|
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
|
|
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
27.98 |
25.00% |
8% |
2.77% |
1.01 |
8.2% |
AUSTRALIAN FINANCE GROUP LTD |
22.4 |
-26.00% |
9% |
2.77% |
1.18 |
8.2% |
AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS |
25.2 |
-30.00% |
8% |
2.77% |
0.89 |
8.2% |
(Yahoo finance, 2018).
This method is used to compute the share price of Companies by using the growth, last year price and retained earnings (Beatson, & Chen, 2018).
Price of the company |
D1/ Ke-G |
D1 |
Dividend payment |
Ke= |
Cost of the equity |
G= |
Growth rate |
Particular |
Net income( $ in million |
Dividend pay-out ratio |
Dividend payment |
Retention ratio |
Growth rate |
KE |
D1 (In million) |
KE-G |
Share price of Company |
INFORMATION TECHNOLOGY |
|
|
|
|
|
|
|
|
|
ADSLOT LTD |
2105.8 |
2% |
45.48528 |
98% |
2.1% |
7% |
46.45 |
5.3% |
873.2 |
ASSEMBLEBAY LIMITED |
1537 |
0% |
2.6129 |
100% |
0.2% |
11% |
2.62 |
11.0% |
23.8 |
Altium |
63.31 |
2% |
1.2662 |
98% |
2.0% |
7% |
1.29 |
4.9% |
26.3 |
|
|
|
|
|
|
|
|
|
|
ENERGY |
|
|
|
|
|
|
|
|
|
AUSTRALIS OIL & GAS LIMITED |
64.29 |
2% |
1.41438 |
98% |
2.2% |
9% |
1.44 |
7.0% |
20.8 |
ALGAE.TEC LIMITED |
24.35 |
2% |
0.36525 |
99% |
1.5% |
6% |
0.37 |
4.6% |
8.0 |
ADX ENERGY LTD |
520 |
3% |
15.6 |
97% |
2.9% |
11% |
16.05 |
8.2% |
195.7 |
ADAVALE RESOURCES LIMITED |
-235 |
0% |
|
100% |
0.0% |
10% |
0.00 |
9.6% |
|
|
|
|
|
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
|
|
|
|
|
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
9928 |
6% |
595.68 |
94% |
5.6% |
8% |
629.28 |
2.6% |
24070.5 |
AUSTRALIAN FINANCE GROUP LTD |
4975 |
4% |
199 |
96% |
3.8% |
9% |
206.64 |
5.3% |
3871.6 |
AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS |
1075 |
5% |
56.2225 |
95% |
5.0% |
8% |
59.01 |
2.6% |
2229.9 |
(ASX. 2018).
Computation of the PE Ratio |
|||
PARTICULARS |
MPS |
EPS |
PE ratio (MPS/EPS) |
INFORMATION TECHNOLOGY |
|
|
|
ADSLOT LTD |
0.025 |
0.57 |
0.04 |
ASSEMBLEBAY LIMITED |
0.0.19 |
0.25 |
0.65 |
Altium |
22.28 |
0.35 |
63.66 |
|
|
|
|
ENERGY |
|
|
|
AUSTRALIS OIL & GAS LIMITED |
0.39 |
|
|
ALGAE.TEC LIMITED |
0.028 |
1.4 |
0.02 |
ADX ENERGY LTD |
0.011 |
1.3 |
0.01 |
ADAVALE RESOURCES LIMITED |
2.43 |
0 |
0.00 |
|
|
|
|
FINANACIALS |
|
|
|
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
27.98 |
2.2 |
12.72 |
AUSTRALIAN FINANCE GROUP LTD |
22.4 |
1.5 |
14.93 |
AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS |
25.2 |
0.57 |
44.21 |
(Yahoo finance, 2018).
Rank the ten investments in order of desirability |
|||||||
PARTICULARS |
PE ratio |
Market Price of the shares |
KE |
Beta |
CO-EFFICIENT OF VARIANCE |
RANK (IN TERMS OF BETA/ COST OF EQUITY) |
RANK (IN TERMS OF BETA/ COST OF EQUITY) |
INFORMATION TECHNOLOGY |
|
|
|
|
|
|
|
ADSLOT LTD |
0.04 |
873.19 |
7% |
1.25 |
16.8 |
8 |
3 |
ASSEMBLEBAY LIMITED |
0.65 |
23.81 |
11% |
2.25 |
20.2 |
10 |
1 |
Altium |
63.66 |
26.28 |
7% |
1.1 |
16.0 |
5 |
6 |
|
|
|
|
|
|
|
|
ENERGY |
|
20.75 |
9% |
1.3 |
14.3 |
6 |
5 |
AUSTRALIS OIL & GAS LIMITED |
0.02 |
8.04 |
6% |
0.68 |
11.2 |
3 |
8 |
ALGAE.TEC LIMITED |
0.01 |
195.67 |
11% |
1.71 |
15.4 |
7 |
4 |
ADX ENERGY LTD |
|
|
10% |
1.4 |
14.6 |
9 |
2 |
ADAVALE RESOURCES LIMITED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANACIALS |
12.72 |
24070.55 |
8% |
1.01 |
12.2 |
2 |
9 |
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
14.93 |
3871.58 |
9% |
1.18 |
12.9 |
4 |
7 |
AUSTRALIAN FINANCE GROUP LTD |
44.21 |
2229.93 |
8% |
0.89 |
11.7 |
1 |
10 |
The best investment option which would be made to have higher return and less risk in the investment option is Adavale Resources Limited. This investment option will give higher return and will be accompanied with the less risk (Please see the attached excel file) (Chan, et al. 2018).
PARTICULARS |
MARKET RATE -RISK FREE RATE |
Dividend payment |
DI/KE-G |
CO-EFFICIENT OF VARIANCE |
RANK |
RANK |
|
|
|
|
|
IN TERMS OF BETA/ COST OF EQUITY |
IN TERMS OF HIGHER KE |
INFORMATION TECHNOLOGY |
|
|
|
|
|
|
ADSLOT LTD |
3.7% |
2.16% |
29.462% |
16.8180 |
5 |
6 |
ASSEMBLEBAY LIMITED |
3.7% |
0.17% |
1.323% |
20.1568 |
10 |
2 |
Altium |
3.7% |
0% |
-1.100% |
16.0047 |
8 |
3 |
|
|
|
|
|
|
|
ENERGY |
|
|
|
|
|
|
AUSTRALIS OIL & GAS LIMITED |
4.9% |
0.00% |
-10.000% |
14.2638 |
7 |
4 |
ALGAE.TEC LIMITED |
4.9% |
4.05% |
65.020% |
11.1688 |
3 |
8 |
ADX ENERGY LTD |
4.9% |
1% |
3.718% |
15.3849 |
9 |
1 |
ADAVALE RESOURCES LIMITED |
4.9% |
4.98% |
51.334% |
14.5803 |
1 |
9 |
|
|
|
|
* |
|
|
FINANACIALS |
|
|
|
|
|
|
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
0.0543 |
6.06% |
48.416% |
12.2360 |
4 |
7 |
AUSTRALIAN FINANCE GROUP LTD |
0.0543 |
2.49% |
53.132% |
12.8577 |
6 |
5 |
AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS |
0.0543 |
5.23% |
98.791% |
11.7064 |
2 |
10 |
The main reason for selecting this investment option is based on its less market price and higher PE ratio comparatively to others. The cost of capital of company is 7% which is too lower and will eventually increase the overall return on capital employed at large.
The Warren Buffet is the biggest investors who endeavoured towards creating value on his investment and investment made on the behalf of others. He analyses several factors of the market and invest capital in the positive side of the organization. He evaluates the share price, beta of company, market premium and financial leverage of company before investing capital in the company. He has been appointed as CEO of Bershire Hathway (Lee, & Heo, 2016).
Before investing capital in particular company, He uses profitability, earning per share and estimation of the risk associated with the invested amount. He reveals that a change in price and future outlook of the company does not depend upon only single factors. He analysis risk, Profitability, beta, financial leverage and other associated factors before investing capital. It is evaluated that the intrinsic value estimates the precise figure which could be used to analysis the future value of the stocks in the near future (McMillan, (2018).
There are several notes given as below about the Warren Buffet (Ferreira, & Marques, 2015).
Warren Buffet Investment in Information technologies.
INFORMATION TECHNOLOGY
In information technology busienss industry, Adslot Ltd, Assemblebay Limited and Altium Companies have been taken.
It is analyzed by the Warren Buffet that the share price of ADSLOT LTD is $ .025 which also shows the variation of 12% positive since last two years. The financial leverage and risk of the business on international level is too low. The growth and Beta value of company is moderate. It shows that company will give good value creation on the invested capital (Penman, 2018).
Assemblebay Limited is having $ .019 share price which also shows the variation of 7.5% positive since last two years. However, the employee turnover is low but the return on capital employed is reflecting positive indicator for the investment purpose. The growth and Beta value of company is higher which might give higher risk to the investors (Marella, & Raga, 2014).
In context with the Altium Company, Warren Buffet has shown that company has big loss but due to its intrinsic value it will have good return after 10 years (Hurley, & Johnson, (2014)
In Energy sector, Australian Oil and Gas Limited, Algae tech limited, Adex Energy and Adavale Resources Limited Company have been taken into consideration. It is observed that Australian Oil & Gas Limited has lower share price as compared to other companies in the same industry which will make easy for the investors to buy more stakes in company with less capital. The beta value is also low and company is showing good profitability. AS per the Warren Buffet, investors should invest capital in Australia Oil & Gas Company (Djukic, et al. 2016).
In case of ALGAE.TEC LIMITED, the net profit margin ratio of Company has increased by 22% since last five year. The financial leverage and capital structure is very high. As per the Warren Buffet, Company will grow and offer good amount of return in future if it maintains its financial leverage (Yahoo finance, 2018).
In case of ADX ENERGY LTD, Buffet has reveals that company will be showing stable return and will have lower return throughout the time (Hickman, & Petry, (2011).
In case of ADAVALE RESOURCES LIMITED, there will be less return available to investors as company has low amount of profitability and highly risky business (Penman, 2012).
Companies indulged in Financials Activities
FINANACIALS |
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED |
AUSTRALIAN FINANCE GROUP LTD |
AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS |
As per the Warren Buffet, the share price of AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED is $ 25.002 which also shows the variation of 15% positive since last two years. The beta of company has increased with the changes in market factors. It has been observed that higher profitability and increased turnover have shown that company will create good value in the future (Umoren, & Enang, 2015).
AUSTRALIAN FINANCE GROUP LTD is also having $ 22 which also shows the variation of 11% positive since last two years. The profitability of company is also higher. Investors should invest their capital in this bank for long run (Levine, & Servos, 2017).
In context with the AUSTRALIAN COMMONWEALTH GOVERNMENT LOANS, Warren Buffet has shown that company has low profitability which shows that investors should their money invested in this company for long run if it wants to create value on the investment (Yahoo finance, 2018).
After considering various factors, it is observed that the Warren Buffet, the share price of the company is highly based on the intricacies of the demand and supply factors which are prevailing in the market. There are several factors such as profitability, return on capital employed, financial leverage and market share of company which also affect the investment decision of the investors (Tseng, and Chiang, 2016).
There are several factors which needs to be undertaken as per the views of the Warren Buffet (Holland, 2017).
In terms of the Return on equity
Investors should analysis the return on equity and EPS of the company.
Financial leverage of company
The financial leverage should also be considered such as financial risk and sustainability of the risk. Company should have low financial leverage before investing capital (Yahoo finance, 2018).
Total turnover
The total turnover of Company has increased by 20% since last five years which shows positive indicator for the sustainable growth of the business.
Interest coverage
The interest coverage capacity of company is 24% which shows that company has good earnings before interest and tax to cover its interest payment.
Profitability of the business
The profitability of company is based on the net profit and return on capital employed (Montana, et al. 2017).
Nature of the organization and legal compliance
Nature of the business, legal compliance program of the company will also be undertaken by company before investing company (Levine, & Zervos, 2017).
Warren Buffet uses the two-column Valuation Methodology to identify the market value and intrinsic value of company (Dorminey, Sivakumar, & Vijayakumar, 2018).
These all models are used to evaluate the share price of company (Tsai, 2018).
- Relative valuation
P/E ratio is used to give the ranking to stocks or determining the undervalued and overvalued share (Andersson, et al. 2018).
· Dividend Discount Model
|
· Discounted Cash Flow Model
|
· This model is used to compute the share price of company on the basis of cost of equity, growth and last year dividend (Rossi, & Forte, 2016). · |
· This model is used to compute the value of the shares of the company which does not offer dividend to its shareholders (Yahoo finance, 2018). · |
Therefore, it could be inferred that Warren Buffet method is more appropriate method for the investors if they want to mitigate the possible risk and destruction of their invested capital. The Warren Buffet Method is most suitable method as compared to other method for the investors to create value on the investment (Andalib, Tavakolan, & Gatmiri, 2018).
After analysing all the details and valuation models, it could be inferred that Warren Buffet considers several factors before investing capital in particular stocks. On the other hand, other valuation models consider only two to three factors to identify whether company will grow in long run. Now in the end, it could be inferred that consideration of several factors such as profitability, return on capital employed, financial leverage and market share of company is required by the investors before investing in the particular stocks.
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