Task:

Learning Outcomes

1) Analyse financial information and evaluate financial performance of a business.

2) Apply time value of money to the valuation of a variety of cash flows, securities and projects leading to sound investment and financing decisions.

3) Analyse risk and return associated with investments.

4) Apply various capital budgeting techniques to investment decision making. Apply various capital budgeting methods in investment decision making within a business

5) Analyse the cost of capital and explore its link to the capital structure of an organisation.

6) Analyse working capital and payout policies and their impact on the liquidity position of a business. 

You need to answer the following questions:

(a) Using five latest annual reports up to 31 December 2019 perform a comparative financial statement analysis of the two allocated companies. You are expected to calculate the Profitability and Investment ratios.

(b) Using information from the latest five annual Balance Sheets, examine the capital structure of the two companies and comment on how the capital structure has changed over the 5 years. 

(c) Provide a well reasoned argument why there could be differences in the capital structures of the two companies and yet they belong to the same sector. Support this with academic literature. 

(d) For the period 30 April 2019 to 31 May 2020, collect daily closing stock prices of the two companies you allocated. Using this data and any other relevant data determine,

(i) the cost of equity of the two companies. 

(ii) determine the cost of capital of other sources of capital of the companies, making reference to the lastest annual report. 

(e) Determine the weighted average cost of capital (WACC) of the two companies using the latest capital structure and the costs of capital determined above. 

(f) Peform a valuation of the two companies’shares using the Constant Growth Dividend Discount Valuation model.

(g) Discuss the appropriateness of using this model to value the two companies’ shares. If not suitable, could you propose an alternative method and explain how it would be executed.

(h) On the basis of the valuations you have done, other calculations you have performed prior to that, and any other quantitative and qualitative information which includes dividend policy, make a recommenadtion as to which one of the two companies’ shares would you invest your money if you made an unexpected Lotto win of $15 million. 

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