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Question:
To demonstrate in-depth of understanding of share valuation techniques, it is expected that you extend your research beyond the prescribed textbook when making comparisons about share valuation techniques. 
Answer:
 

PARTICULARS

PRICE OF SHARES

GROWTH

COST OF EQUITY Computed by using the CAPM model

RISK FREE RATE OF RETURN

BETA

MARKET RATE

INFORMATION TECHNOLOGY

 

 

 

 

 

 

ADACEL TECHNOLOGIES LIMITED

0.05

-0.37%

7%

2.77%

1.25

6.5%

ANIMOCA BRANDS CORPORATION LIMITED

0.55

0.17%

11%

2.77%

2.25

6.5%

Altium

22.28

1.67%

7%

2.77%

1.1

6.5%

 

 

 

 

 

 

 

ENERGY

 

 

 

 

 

 

AUSTRALIS OIL & GAS LIMITED

0.39

-20.00%

9%

2.77%

1.3

7.7%

AUS ASIA MINERALS LIMITED

0.01

1.00%

6%

2.77%

0.68

7.7%

WORLEYPARSONS LIMITED

17.44

1.99%

11%

2.77%

1.71

7.7%

APAC COAL LIMITED

2.43

0.83%

10%

2.77%

1.4

7.7%

 

 

 

 

 

 

 

FINANACIALS

 

 

 

 

 

 

Westpac

29.58

-0.87%

8%

2.77%

1.01

8.2%

National Austtralian Bank

28.4

-0.63%

9%

2.77%

1.18

8.2%

SUNCORP GROUP LIMITED

13.93

-0.29%

8%

2.77%

0.89

8.2%

 
Computation of the market price of Shares by using Dividend Discount Model 

This dividend discount model has been used to compute the future share price of companies

Dividend Discount Model

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 technologies

 

 

 

 

 

 

 

 

 

COMPUTERSHARE LIMITED

2105.8

2%

45.48528

98%

2.1%

7%

46.45

5.3%

873.2

WISETECH GLOBAL

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

 

 

 

 

 

 

 

 

 

BHP Billiton

64.29

2%

1.41438

98%

2.2%

9%

1.44

7.0%

20.8

CALTEX AUSTRALIA LIMITED

24.35

2%

0.36525

99%

1.5%

6%

0.37

4.6%

8.0

WORLEYPARSONS LIMITED

520

3%

15.6

97%

2.9%

11%

16.05

8.2%

195.7

APAC COAL LIMITED

-235

0%

 

100%

0.0%

10%

0.00

9.6%

 

 

 

 

 

 

 

 

 

 

 

FINANACIALS

 

 

 

 

 

 

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

9928

6%

595.68

94%

5.6%

8%

629.28

2.6%

24070.5

National Austtralian Bank

4975

4%

199

96%

3.8%

9%

206.64

5.3%

3871.6

SUNCORP GROUP LIMITED

1075

5%

56.2225

95%

5.0%

8%

59.01

2.6%

2229.9

 (ASX. 2018).

Computation of the Price earnings Ratio

Computation of the PE Ratio

 

MPS

EPS

PE ratio (MPS/EPS)

Information technologies

 

 

 

COMPUTERSHARE LIMITED

17.57

0.57

30.82

WISETECH GLOBAL

13.25

0.57

23.25

Altium

22.28

0.35

63.66

 

 

 

 

ENERGY

 

 

 

BHP Billiton

50.3

 

 

CALTEX AUSTRALIA LIMITED

30.5

1.4

21.79

WORLEYPARSONS LIMITED

17.44

1.3

13.42

APAC COAL LIMITED

2.43

0

#DIV/0!

 

 

 

 

FINANACIALS

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

70.94

2.2

32.25

National Australian Bank

28.4

1.5

18.93

SUNCORP GROUP LIMITED

13.93

0.57

24.44

(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

 

 

 

 

 

 

 

ADACEL TECHNOLOGIES LIMITED

0.09

873.19

7%

1.25

16.8

8

3

ANIMOCA BRANDS CORPORATION LIMITED

0.96

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

0.01

8.04

6%

0.68

11.2

1

8

AUS ASIA MINERALS LIMITED

13.42

195.67

11%

1.71

15.4

7

4

WORLEYPARSONS LIMITED

 

 

10%

1.4

14.6

9

2

APAC COAL LIMITED

 

 

 

 

 

 

 

FINANACIALS

 

 

 

 

 

 

 

Westpac

13.45

24070.55

8%

1.01

12.2

3

9

National Australian Bank

18.93

3871.58

9%

1.18

12.9

4

7

SUNCORP GROUP LIMITED

24.44

2229.93

8%

0.89

11.7

2

10

(Shiller, 2015).

Notes –

Beta Information- (Yahoo finance, 2018)

Market Risk factor analysis- (Yahoo finance, 2018)

Risk free rate of return-(Bloomberg, 2018)

Which investment of the ten would you select

After evaluating risk, return, growth rate and dividend payment, it could be inferred that if investors invest their capital In Australian Oil and Gas Company then they will have good amount of return (Beatson, & Chen, 2018). This investment option will give higher return and less risk (Please see the attached excel file (Shiller, 2015).

Why the investment option selected 

There are several reasons of selecting this investment option such as risk, return and future market price of Australian Oil and Gas Company. Furthermore, the cost of capital of company is also very low i.e. 6% which shows positive outlook for the increased return on capital employed (Diba, & Grossman, 2018)

Research and summaries some interesting facts about Warren Buffet

It is considered that Warren Buffet is the biggest investors who endeavoured towards investing capital in several stocks on the basis of several factors such as profitability, return on capital employed, risk associated with the investment and market outlook. He before investing capital in particular stocks analysis several factors which helps him to identify whether the stock will give good amount of return on investment or not.  He has been the biggest investors and has been appointed as CEO of Bershire Hathway (Barbu, D’Amico, & De Blasis, 2017).

He takes investment decisions on the basis of several factors such as profitability, return on capital employed, and risk associated with the investment and market outlook (Christofi, 2017).

There are several notes which Warren Buffet has considered before investing capital in different companies (Shiller, & Beltratti, 2015).

In case of Information technology (Warren buffet)

INFORMATION TECHNOLOGY

ADACEL TECHNOLOGIES LIMITED

ANIMOCA BRANDS CORPORATION LIMITED

Altium

He analysis that the profitability of the Adacel Technologies Limited has been showing average  12% net profit on sales since last five years.  The share price of company is also stable and growth rate is also reflecting the positive outlook for the investment purpose (Campbell, & Shiller, 2018). 

In case of Animoca Brands Corporation Limited, company has been showing the good amount of increment in the share price which reflects that company has growth with the drastic rate since last five years. Investors should invest their capital in long run (Rapach, & Wohar, 2015). 

In relation to Altium Company, Warren Buffet has shown that return on capital employed of the company has increased due to its low amount of cost of capital. Investors will easily create value if they will invest their capital in this company. 10 years (Timmermann, 2016).

In Energy sector Company

ENERGY

AUSTRALIS OIL & GAS LIMITED

AUS ASIA MINERALS LIMITED

WORLEYPARSONS LIMITED

APAC COAL LIMITED

It is analyzed that in case of Australian Oil and Gas Limited, the share price of company has increased by 10% since last five years. It has increased the net profit by average 20% since last five years (Hatemi, & El-Khatib, 2018). The beta value of company is also higher which might be negative indicator for the investors (Giglio, & Kelly, 2017).

The net profit margin of AUS Asia Mineral Limited has increased by average 15% since last three years and beta value of company has also been stable. As per the Warren Buffet, value of the company will be lower as compared to last five year data which reflects the negative business value (Agosto, & Moretto, 2015). 

The value of WORLEYPARSONS LIMITED has been gone down and shown negative outlook for the investment purpose. The Warren Buffet has revealed that in near future the value of the company will increase with the drastic rate (Otrok, Ravikumar, & Whiteman, 2012).

APAC COAL LIMITED will have higher financial leverage and provide less return on investment. As per the view of Warren buffet Company is not desirable Company for the investment purpose (Lazzati., & Menichini, 2015).

In case of the financial sectors, there are several companies have been selected.

FINANACIALS

Westpac

National Australian Bank

SUNCORP GROUP LIMITED

As per the views of Warren Buffet the profitability of the Westpac has increased by 12% since last five years. The price of the company is $ 29.055 which reflects the variation in the share price of the company (Bao, & Feng, 2017). 

National Australian Bank is having $ 28 share price which have increased by 18% since last two years (McMillan, 2018). The higher profitability and increased return on investment has shown positive outlook for the investment purpose as per the views of the Warren Buffet (Zuzik, et al. 2018).

In context with the Sun Corp, Warren Buffet has maintained lower profitability and increased return on investment. The invested capital for the long run will be value creation in this company as per the views of the Warren Buffet (Yahoo finance, 2018).

Compare Warren Buffet’s approach to share valuation and the share valuation methodology

It is observed that as per the views of the Warren Buffet the share price of the company and its business outlook in future is based on the several factors such as profitability, return on capital employed, risk associated with the investment and market outlook. If these factors are positive then it will help investors to create value on the investment. There is other factor which needs to be considered by the investors before investing capital (McMillan, 2018).

In terms of the Return on equity

Investors needs to analysis whether the company has higher return on capital employed and higher return on equity (Montani, Perrini, Gervasio, & Pulcini, 2017).

Financial leverage of company

The high level of financial leverage in particular company may be risky factors for the investment purpose (Yahoo finance, 2018).

Profitability of the business

The profitability of the business is the major factors for the increasing growth of the business (Fama, 2017).

Nature of the organization and legal compliance

Legal compliance, nature of business and less complexity reflects that company has low level of business outlooks (Levine, & Zervos, 2017).

Share valuation Methodology

Warren Buffet follows main two-column Valuation Methodology to identify the market value and intrinsic value of company (Lee, & Heo, 2016).

These all models are used to evaluate the share price of company (Tsai, 2018).

  • Relative Valuation method
    In this method, PE ratio is calculated on the basis of MPS and EPS of the company. After that, it is used to give ranking to the particular stocks. (Andersson, et al. 2018).
  • Dividend Discount Model

The cost of equity, offered dividend, return on investment are used to compute the share price of company (Chan, et al. 2018).

  • Discounted Cash Flow Model

This model is ideally used when the company has been offering zero amount of dividend to its shareholders (Yahoo finance, 2018).

After evaluating these factors, it could be inferred that investors should all these factors before investing capital in particular company. It helps them to analysis all the negative and positive factors of the selected stocks for the investment purpose (Andalib, Tavakolan, & Gatmiri, 2018).

Conclusion 

After evaluating the methods or theories given by Warren Buffet and the methods available to identify the share price, it could be inferred that Investors needs to evaluated all the factors  such as profitability, return on capital employed, risk associated with the investment and market outlook before investing in particular company.

References

Agosto, A., & Moretto, E. (2015). Variance matters (in stochastic dividend discount models). Annals of Finance, 11(2), 283-295.

Andalib, M. S., Tavakolan, M., & Gatmiri, B. (2018). Modeling managerial behavior in real options valuation for project-based environments. International Journal of Project Management, 36(4), 600-611.

Andersson, H., Hultkrantz, L., Lindberg, G., & Nilsson, J. E. (2018). Economic Analysis and Investment Priorities in Sweden’s Transport Sector. Journal of Benefit-Cost Analysis, 1-27.

ASX. (2018, may 09). ASX. Retrieved from ASX LIMITED: https://www.asx.com.au/prices/company-information.htm

Bao, G., & Feng, G. (2017). Testing the Dividend Discount Model in Housing Markets: the Role of Risk. The Journal of Real Estate Finance and Economics, 1-25.

Barbu, V. S., D’Amico, G., & De Blasis, R. (2017). Novel advancements in the Markov chain stock model: analysis and inference. Annals of Finance, 13(2), 125-152.

Beatson, S. A., & Chen, J. (2018). Foreign investment, corporate governance and performance in the Chinese listed a share companies. Journal of Chinese Economic and Business Studies, 16(1), 59-93.

Bloomberg, 2018, Treasury Government bonds rates, retrieved on 12th May, 2018, from https://www.google.co.in/search?q=Bloomberg+govermentn+bond+rate&oq=Bloomberg+govermentn+bond+rate&aqs=chrome..69i57j0l5.5915j0j9&sourceid=chrome&ie=UTF-8

Campbell, J. Y., & Shiller, R. J. (2018). Stock prices, earnings, and expected dividends. The Journal of Finance, 43(3), 661-676.

Chan, K. F., Powell, J. G., Shi, J., & Smith, T. (2018). Dividend persistence and dividend behaviour. Accounting & Finance, 58(1), 127-147.

Christofi, A. (2017). Stock Valuation and the Implied Growth Rate.

Diba, B. T., & Grossman, H. I. (2018). Explosive rational bubbles in stock prices?. The American Economic Review, 78(3), 520-530.

Fama, E. F. (2017). Finance at the University of Chicago. Journal of Political Economy, 125(6), 1790-1799.

Giglio, S., & Kelly, B. (2017). Excess volatility: Beyond discount rates. The Quarterly Journal of Economics, 133(1), 71-127.

Hatemi-J, A., & El-Khatib, Y. (2018). The Dividend Discount Model with Multiple Growth Rates of Any Order for Stock Evaluation. arXiv preprint arXiv:1802.08987.

Lazzati, N., & Menichini, A. A. (2015). A dynamic approach to the dividend discount model. Review of Pacific Basin Financial Markets and Policies, 18(03), 1550018.

Lee, C. Y., & Heo, H. (2016). Estimating willingness to pay for renewable energy in South Korea using the contingent valuation method. Energy Policy, 94, 150-156.

McMillan, D. G. (2018). Where Does Returns and Cash-Flow Predictability Occur? Evidence from Stock Prices, Earnings, Dividends and Cointegration. In Predicting Stock Returns (pp. 9-26). Palgrave Pivot, Cham.

Montani, D., Perrini, F., Gervasio, D., & Pulcini, A. (2017). The Importance of “Contextualisation” in Small and Medium-Sized Firms Valuation: Evidences from an Italian Case Study. International Journal of Business and Management, 13(1), 70.

Otrok, C., Ravikumar, B., & Whiteman, C. H. (2012). Habit formation: a resolution of the equity premium puzzle?. Journal of Monetary Economics, 49(6), 1261-1288.

Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/

Rapach, D. E., & Wohar, M. E. (2015). Valuation ratios and long?horizon stock price predictability. Journal of Applied Econometrics, 20(3), 327-344.

Shiller, R. J. (2015). Do stock prices move too much to be justified by subsequent changes in dividends?.

Shiller, R. J., & Beltratti, A. E. (2015). Stock prices and bond yields: Can their comovements be explained in terms of present value models?. Journal of Monetary Economics, 30(1), 25-46.

Timmermann, A. (2016). Excess volatility and predictability of stock prices in autoregressive dividend models with learning. The Review of Economic Studies, 63(4), 523-557.

Yahoo finance, 2018, Altium, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, APAC COAL LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, BHP Billiton, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, CALTEX AUSTRALIA LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, COMMON WEALTH BANK OF AUSTRALIA, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, COMPUTERSHARE LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, National Australian Bank, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, SUNCORP GROUP LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, WISETECH GLOBAL, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, WORLEYPARSONS LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Zuzik, J., Mixtaj, L., Weiss, E., Weiss, R., & Laskovský, V. (2018). Quality of business valuation methods in Slovakian mining industry.

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