FINM7403 Portfolio Management

This project is to be completed and submitted individually. Students must complete tasks in  Parts A and B of this task sheet. A guide for students then follows the project tasks. Lastly, a grading rubric for the project is presented at the end of this document. [7 pages in total]

Part A. As an equity security analyst, your current task is to estimate the fair value of an Australian stock in operation as of January 2024.

.    Stock selection criteria: 1. The stock must be a constituent of the ASX200 index; 2. the firm should operate in high carbon emission industries, such as companies of fossil fuel, mining, steel, aluminum, cement, fertilizer manufacturing, or in the transportation sector.

[Note: You can select one stock that meets the criteria, except for Qantas and BHP.]

.    Approach: You have decided to use a Free Cash Flow to the Firm (FCFF) model and a Multiples-based approach, and then assign a different weight for each model result to   determine the stock’s intrinsic value.

.    Source of data: Capital IQ and additional resources, including the respective company’s website.

For the FCFF approach, you agree with the annual consensus forecasts (e.g., earnings, free cash flows) for the chosen stock over the next three (or four) fiscal years in Capital IQ. Beyond this time, you will derive estimates of long-term growth rates. Use the Capital Asset Pricing Model to estimate the equity cost of capital. Assume a risk-free rate of 4.38% and a market risk premium of 5.99%.

For the Multiples-based approach, you will select a multiple for your stock and its comparable stocks (at least two) and justify your choices of multiples as well as comparables.

Requirement: In your written report to the fund manager, you are expected to incorporate the following:

1.   Describe the valuation process for each method so one can replicate the analysis.

2.   Justify your primary considerations for valuation.

3.   Report your valuation results and provide an investment recommendation (buy, sell, or hold) based on your analysis.

Part B. Several days after handing in the report in Part A, your fund manager requests that you revise the FCFF stock valuation by considering his predicted early introduction of a carbon tax on Scope 1 emissions (priced by per ton of greenhouse gas). The revision involves several key considerations for your FCFF valuation, including a. projections of sales revenue and operating costs, b. capital expenditures (including Research and development expenses), c. taxation, and d. cost of capital.

Requirements: Based on the firm’s environmental performance disclosures, write a response to discuss the above aspects and potential directional impacts on your stock valuation recommendation and support your analysis with evidence and relevant references.