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BAFI1042 Investment Company Valuation Assignment (30%)

Semester 1 2017

Company: Primary Health Care Limited (PRY)

Website: www.primaryhealthcare.com.au

Submission Date: Monday 01. 05. 2017, 5:00pm (Beginning of Week 9)

[Group Composition for Group Assignment: strictly 3 students per group within

the same tutorial]

For this assignment you are required to use publicly available information to analyse a

publicly listed company and prepare a report which provides an assessment of the

company’s current position and future prospects, and which incorporates the use of a

range of valuation models to arrive at an estimate of the company’s share price. To

provide structure the assignment should include the points listed below:

The final submission of the assignment should include the following:

Part 1: Conduct Financial Performance and Analyse Current Issues (10%)

In this section, students are expected to provide:

• An evaluation of the company’s brief recent history and financial performance

over time and also include peer group analysis.

• Conduct ROE for the company following the DuPont ROE approach and

include peer group comparison.

• An analysis of the current issues facing the company, the industry it operates

in, and explain the impact of the issues on the company’s future earning.

Part 2: Estimate Valuation Models (15%)

The second part/section of the assignment should contain the estimation of the value

of the company’s share using:

Dividend discount/valuation model (DDM)

Free cash flow to equity model (FCFE)

You are expected to use the Capital Asset Pricing Model (CAPM) – discussed in topic

3 – to estimate the required rate of return or discount rate needed for each model. For

CAPM estimation, you are required to calculate the following:

1. Beta: You cannot pick a beta value estimated elsewhere (e.g.,

Bloomberg) and use it in your report. Follow topic 3 lecture notes and

relevant chapter (chapter 3) of the prescribed textbook to estimate the

beta of the company and attach details of your work as an appendix.

Also adjust the raw beta using appropriate methodology (refer to topic

3 lecture notes).

2

2. Risk-Free Rate: Use 10 years Govt. Bond Yield as a proxy for the

risk-free rate. Indicate any advantages or disadvantages if there are

any.

3. Market Risk Premium: The estimation of the expected market risk

premium is crucial. You must carefully explain what you do and any

assumption you make while estimating market risk premium.

• Risk Premium Estimation

To estimate the risk premium, first, you have to estimate the expected

market return (ASX200 is your market portfolio). Then, subtract the

RFR from the expected market return and arrive at your market risk

premium.

Once you estimate these three figures (1-3) you will be able to estimate the

required rate of return or discount rate following CAPM that can be used in

valuation models.

Important points to be covered in Part 2:

• Explain any assumptions made in implementing the models.

• Where appropriate, explain how you arrived at the variables

you are using. E.g., it is not enough to say you are assuming a 2

percent growth rate. You would be expected to provide

justification/motivation of how you arrive at 2 per cent growth

rate.

Part 3: Evaluate/Discuss the value/price of the company (5%)

Comment on your valuations from part 2, including a discussion of possible

explanations of why your valuations differ from the current/recent share price. If

appropriate, discuss why some of the above models may be unsuitable for valuing the

company.

Maximum word limit for the Company Valuation Assignment is 6,000 words

excluding executive summary and appendices.

Note:

Every single member of the syndicate is expected to do a part of implementing the

valuation models. That is to say, there should not be the situation where a member

only does the history and financial performance of the company without any input in

the actual implementation of valuation model.

The focus of this assignment is on the valuation, specifically generating the inputs

into the valuation process and applying valuation models to these inputs to arrive at a

range of share price estimates. The requirements outlined above have been designed

to aid this process. For the discounted cash flow valuation models the primary

requirement is to produce the appropriate expected return measures and discount rates

to use in the models.

3

It is important that forecasts of expected returns reflect the impact of the factors

identified as current issues facing by the company. A common mistake is to identify a

range of issues which will impact on the company’s future earnings or cash flows, but

then produce a set of return forecasts which are simply extrapolations of historical

returns, ignoring the impact of the factors identified as current issues. The

development of return estimates requires judgement; it is not simply a statistical or

mathematical forecasting exercise.

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