AFIN 102 | S2 2019 | Individual Assignment Instructions
AFIN 102 | Finance 1B | Individual Assignment Instructions
Session 2, 2019
Due date and time: 11:59pm Sunday 20th October, 2019 (Week 10)
Word Limit 1800 words
Case Study
Note: This is a fictitious event and business created exclusively for use in this assignment.
As a new junior analyst for a large brokerage firm, your first task is to analyse the shares of
FuzzyFruit, a beverage manufacturer in Australia.
Your manager recommends determining prices based on both the discounted free cash flow
valuation method and the comparable P/E ratio method.
You are a little concerned about this recommendation because your finance lecturer has told you
these two valuation methods can result in widely differing estimates when applied to real data as
the result is very sensitive to your assumptions. He stressed on several occasions that it is
essential to provide very strong justification for these assumptions. It is also very important to be
self-critical. It would come as no surprise if this turns out to be a major marking criterion for
assignments.
You did some research online and you have discovered the following financial information:
FuzzyFruit
Statement of Profit and Loss
For the year ended 30th June 20XX
Sales
Cost of goods sold
Gross operating profit
Selling, general and administrative
expenses
EBITDA
Depreciation and Amortisation
EBIT
Income taxes
Net Income
Shares outstanding
Earnings per share
2018
$
250,000
125,000
125,000
2017
$
200,000
110,000
90,000
2016
$
150,000
90,000
60,000
50,000
30,000
25,000
75,000
10,500
64,500
19,000
45,500
5,000
$9.10
60,000
8,500
51,500
15,500
36,000
45,000
6,000
39,000
11,100
27,900
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AFIN 102 | S2 2019 | Individual Assignment Instructions
FuzzyFruit
Statement of Financial Position
For the year ended 30th June 20XX
Current Assets
Cash and equivalents
Receivables
Inventories
Other current assets
Total current assets
Non-Current Assets
Property, plant and equipment
Less: Accumulated depreciation
Investments
Other non-current assets
Total non-current assets
Total assets
Current liabilities
Accounts payable
Short-term debt
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Total non-current liabilities
Total liabilities
Shareholders’ equity
Common equity
Retained earnings
Total equity
Total liabilities and equity
2018
$
2017
$
2016
$
20,000
40,000
29,000
23,000
112,000
15,000
32,000
20,000
23,000
90,000
12,500
30,000
18,000
20,000
80,500
145,000
(43,000)
70,000
36,000
208,000
320,000
160,000
(38,000)
50,000
36,000
208,000
298,000
155,000
(32,000)
45,000
30,000
198,000
278,500
41,000
12,000
17,000
70,000
30,000
10,000
15,000
55,000
25,000
8,000
14,000
47,000
100,000
100,000
170,000
100,000
100,000
155,000
100,000
100,000
147,000
40,000
110,000
150,000
320,000
40,000
103,000
143,000
298,000
40,000
91,500
131,500
278,500
Key Financial Information
• 5-year Government bond rate: 3.0%
• Market Risk Premium: 5%
• Beta for FuzzyFruit: 1.5
• Yield on the company’s long-term debt: 6%.
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AFIN 102 | S2 2019 | Individual Assignment Instructions
As you are a new employee, you are unsure where to start. Therefore, your manager has given
you some guidance and a framework to begin with.
Section 1: Executive Summary
The executive summary should state what this report is about, what methods you have used and
your recommendations.
Section 2: Macroeconomic and Industry analysis
FuzzyFruit, a beverage manufacturer in Australia, competes with similar companies that are
currently listed on the Australian Stock Exchange.
Required:
1. Select at least 2 similar companies from the same industry as FuzzyFruit. Justify your choice
carefully.
2. Discuss the following in your own words. Use references where appropriate:
a. Performance of the industry over the past 3 years
b. Short-term (up to 5 years) outlook for the industry, including identification of two (2)
major risk factors and an explanation of how these affect the performance of the
industry
c. Forecast the short-term growth rate for the industry based on the above information
d. Discuss the long-term (beyond 5 years) macroeconomic outlook and use relevant
information to forecast the long-term growth rate for the industry
Section 3: DCF Analysis
Use excel to determine the share value based on the discounted free cash flow method:
1.
Use the historic data from the financial statements above to compute the three-year
average of each of the following ratios:
a) EBIT/sales;
b) tax rate (income tax expense/income before tax);
c) property, plant and equipment/sales;
d) depreciation/property, plant and equipment;
e) net working capital/sales.
2.
Create an empty timeline for the next five years;
3.
Forecast future sales based on the short-term growth rate discussed in section 2, part 2(c)
of this assignment
4.
Use the average ratios computed in part (3.1) to forecast EBIT, property, plant and
equipment, depreciation and net working capital for the next five years;
5.
Forecast the free cash flows for the next five years using Eq. 10.2;
6.
Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-run growth rate
that has been determined in section 2, part 2(d) of this assignment
7.
Determine the enterprise value of the firm as the present value of the free cash flows;
8.
Determine the share price using Eq. 10.4, with reference to the cash, debt and number of
shares outstanding provided in the financial statements in this case.
9.
Provide a summary of these results in your report.
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AFIN 102 | S2 2019 | Individual Assignment Instructions
Section 4: Ratio Analysis
1. Calculate an estimate of the share price for FuzzyFruit based on a comparable P/E ratio,
(multiply the average of the P/E ratios of your comparable companies by the EPS of
FuzzyFruit).
2. Use a similar method to estimate the value of the shares of FuzzyFruit based upon the
following ratios:
a. P/E to Growth
b. Price to Sales
c. Enterprise Value/EBITDA
d. Price/EBITDA
3. Discuss the differences between the share price forecasts you have made in parts 1 and 2
above. Which one do you believe would be a more accurate measure for FuzzyFruit’s share
price? Explain your choice.
Section 5: Discussion
Explain to your manager why the estimates from the two valuation methods differ and which one
you believe is most reliable.
Your explanation should specifically address the following factors:
• the assumptions implicit in the models themselves, and
• the assumptions you made in preparing your analysis.
Submission Requirements:
•
•
•
You must submit both your written report and the Excel file supporting your report to Turnitin.
Your written report should contain the key information from your excel file that you used to
supports your conclusions.
Links for submission will be provided on iLearn
Name your files as follows:
Report:
Excel File:
V1_SID_report
V1_SID_excel
Example: Student Number: 43215678 à Submit as:
Report:
V1_43215678_report
Excel File:
V1_43215678_excel
IMPORTANT: Incorrectly named files will lead to a 10% penalty
•
•
External sources of information must be referenced using APA style.
A word limit of 1800 words applies to the word document only and excludes any tables or
references.
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AFIN 102 | S2 2019 | Individual Assignment Instructions
CONDITIONS:
Late submission
You are responsible for submitting the assignment on time via Turnitin.
There will be a deduction of 10% of the total available marks made from the total awarded mark for each 24 hour
period or part thereof that the submission is late (for example, 25 hours late in submission – 20% penalty).
This penalty does not apply for cases in which an application for special consideration is made and approved. No
submission will be accepted after solutions have been posted.
Plagiarism:
Plagiarism is presenting someone else work as your own and is a serious offence with serious consequences.
Student must be aware of your responsibility of maintaining academic integrity as outlined in the Academic Integrity
Policy, where:
Schedule 1, (10) Students are responsible for:
a. when engaging with an academic exercise, acting in accordance with this policy and the standards set out in
Schedule 2: Definitions of Academic Activities;
b. notifying suspected breaches of academic integrity in accordance with the relevant disciplinary process.
In particular, students must refrain from engaging in unacceptable academic activities outlined below:
PART B: UNACCEPTABLE ACADEMIC ACTIVITIES
Participating in an unacceptable academic activity may amount to an allegation of misconduct or academic
misconduct in accordance with the relevant disciplinary processes.
Failure to act in accordance with commonly held acceptable academic activities will be considered unacceptable.
Unacceptable activities include, but are not limited to, the following academic (including learning and teaching and
research) activities:
Cheating: is any attempt to dishonestly give or obtain assistance from another person, material, or device in an
academic exercise
Contract-cheating: is having another person or entity conceive, research or write material for an assignment and
submitting the work as one’s own, irrespective of whether the other person or entity was paid for the material.
Collusion: is unauthorised collaboration in producing an academic exercise that is designated as an individual task.
Deception: is providing false or misleading information to the University.
Fabrication: is to forge or falsify any information or citation in an academic exercise or report false or misleading
results or conclusions of any research.
Impersonation: is pretending or assuming another person’s identity or using a substitute person for the purposes of
providing an advantage.
Obstruction: is intentionally impeding or interfering with another person’s academic activity.
Plagiarism: is adopting or reproducing the work or ideas of another person, whether intentionally or not, and
presenting this as one’s own without clearly acknowledging the source of the work or ideas.
Sabotage: is acting to prevent or hinder another person from completing an academic exercise to the best of their
abilities including by making information or material unavailable to others or disrupting or interfering with an academic
exercise, experiments, research or other academic activity of any other person.
Self-plagiarism: is unacknowledged use of material you have previously published or submitted.
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
AFIN 102 Individual Assignment Report
Executive Summary
Assigned
Company Name
Sector
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Macroeconomic and Industry Analysis
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
DCF Analysis
1. Key ratio for DCF analysis
2016
2017
2018
Average
EBIT/Sales
Tax Rate
PPE/Sales
Depr’n/PPE
NWC/Sales
Forecast growth for next 5 years
Enter the forecasted growth rate for 2019 – 2023, it should match with your explanation under
Questions 2(b) and (c) from Section 2 of your own assignment.
Forecasted Growth Rate for next 5 years
(2019 – 2023)
Forecasted key financials
2018
2019
2020
2021
2022
2023
Sales
EBIT
PPE
Depreciation
NWC
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Forecasted FCF
2019
2020
2021
2022
2023
EBIT
Tax
Earnings
Add
Depreciation
Changes in
NWC
FCF
Horizon Enterprise Value
Enter the forecasted long-term growth rate beyond 2023, it should match with your explanation
under Question 2(d) from Section 2 of your own assignment.
Long Term Growth Rate
Cost of Capital
Data
Risk-free rate
Beta
Market Risk Premium
CAPM Cost of Capital
Cost of debt
WACC
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Compute the horizon enterprise value (HEV2023) using Eq. 10.6, ensure you included the
calculation steps in this assignment:
Horizon Enterprise Value
(HEV 2023)
Enterprise Value Analysis
2019
2020
2021
2022
2023
HEV 2023
FCF
Determine the enterprise value of the firm as the present value of the free cash flows:
Enterprise Value
(EV0)
Cash available in the
company
Debt outstanding for the
company
No. of shares outstanding
Estimated share price
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Section 4 – Multiple Analysis
1. Companies listed on ASX that is comparable to your allocated company, with explanations and
references:
Estimation of the share price for your allocated company based on a comparable P/E ratio(s):
(Please list the steps required for calculation)
2. Other estimates for your allocated company:
Multiples
Estimated Share Price
(List all steps)
P/E to Growth
Price to Sales Ratio
Enterprise Value/EBITDA
Share Price/EBITDA
3. Discuss your results above
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Section 5: Discussion Question
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AFIN 102 | S2 2019 | Individual Assignment
Student Number:
Reference List
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