Group Assignment (Company Valuation Assignment)
Company: TRAPHACO JOINT-STOCK CO (Ticker on HCMC stock exchange: TRA)
Submission Date: Week 10, 26 April 2013
[Syndicate (Group) Assignment – minimum 3/maximum 5 students per syndicate]
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 should include:
1. An evaluation of the company’s brief recent history and financial performance, over time and, where appropriate, relative to their peer group, including the DuPont ROE approach. An analysis of the current issues facing the company, the industry it operates in, and estimate the impact of the issues on the company’s future earning.
The first section explains the impact of the business environment on the inputs (variables) needed in the valuation models to be estimated. You do not maximise your marks if you cut and paste material without any analysis.
2. Estimation of the value of the company’s shares using:
* Dividend valuation model (DDM):
You are expected to use the CAPM to estimate the discount rate needed in the DDM. * Also, you are expected to estimate the beta needed. You cannot pick a beta value estimated elsewhere (e.g., Bloomberg) and use it in your report. Attach details of your work as an appendix. * Adjust your raw beta using appropriate methodology
* It is important to explain the data utilised in estimating the beta. * Also explain the proxies you use for the risk-free rate and the market portfolio. Indicate any advantages or disadvantages if there are any. * The estimation of the expected market risk premium is crucial. You must carefully explain what you do and any assumption you make.
Risk Premium Estimation. Two approaches you could use to estimate the Equity Risk Premium: * Assume that expected return on the market portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio. Subtract the RFR from the expected return estimated and arrive at your equity risk premium. Don’t forget to multiply this by the beta value.
* Implied equity premium. This assumes that the overall market is correctly priced.
The valuation model suggests value equals:
Value = Expected Dividends Next Period/ (Required Return on Equity - Expected Growth Rate)
This is the present value of dividends growing at a constant rate. We can obtain three of the four inputs in this model can be obtained externally: * the current level of the market (value) of the index,
* the expected dividends next period, and
* the expected growth rate in earnings and dividends in the long term.
The only “unknown” is then the required return on equity; when we solve for it, we arrive at an implied expected return on stocks. Subtracting out the risk-free rate will yield an implied equity risk premium (see Damodaran Website for more)
* Free Cash Flow to Equity model
* Price/Earnings Ratio model
* Price/Book Value Ratio model
Important points to be covered:
* 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 for the 2 per cent growth rate. * Provide an indication of the sensitivity of your valuations to changes in the assumptions.
Comment on your valuations from part 2, including a...
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