Damodaran, A 2023, PE ratio by section (Global), viewed 10 April 2024, https://pages.stern.nyu.edu/~adamodar/pc/datasets/indname.xls.
Procedure
You will need to address the following points in your assessment.
1. Evaluate this proposed new project by calculating the payback period, net present value (NPV) and internal rate of return (IRR) (Note: use a cut-off period of 2 years to evaluate the payback period). Do you make the same decision (accepting or rejecting the project) when you use these different criteria? Begin the report by briefly explaining the capital budgeting methods. Explain why net present value and internal rate of return criteria are considered superior to the payback period used by some firms.
2. Some estimates are subjective and may be prone to judgment error or uncertainty. For this reason, please conduct a sensitivity analysis of the NPV to the required rate of return falling between the range of 20% to 50% pa (with increments of 10%. For example, 20%, 30%, and so on) for the project. Discuss the implications.
3. Using the most appropriate valuation methods (e.g., choose one of valuation by comparables, free cash flow, dividend models, etc.) introduced in Week 3 of this subject, calculate the theoretical price of the Commonwealth Bank stocks. Explain the method chosen for the calculations and critically discuss the assumptions and validity of your result. Compare the theoretical price with the current market price and explain the reasons behind the differences observed.
Similarly, calculate the current theoretical price of ABC’s bonds and compare it with the current price. Which of these two investments (stocks or bonds) have lost the most in value, and should you decide to sell to arrange the funds – which of these two will you sell and why? Assume Milton company holds sufficient Commonwealth Bank stocks and ABC company bonds that selling either one could finance the above project.
4. Summarise your findings, discuss any limitations of your evaluations and present your recommendations.
Requirements
• The title page, reference list and any appendices are not included in the word count.
• All written assessments should be submitted as Word files (.docx). Word is available from your AIB Office 365 account.
• Follow the requirements detailed in the AIB Style Guide:
• author-date style referencing (which includes in-text citations plus reference list)
• Microsoft Word settings
• This assessment requires you to use a minimum of four (4) credible academic sources in addition to your textbook. You may also use current company, industry, government and media sources to support your statements, but these will NOT count toward the minimum required credible academic sources for your assessment. Most web-based sources are not sufficiently rigorous and credible for use in academic assessments and will NOT count toward the minimum required credible academic sources for your assessment. For further guidance, refer to Scholarly, academic & peer-reviewed journals.
• You must appropriately acknowledge all sources of information in your assessment following the AIB Style Guide. This includes the use of Generative Artificial Intelligence tools, such as ChatGPT. See relevant sections on ‘Academic Integrity’, ‘Generative Artificial Intelligence’ and ‘Referencing’ in the AIB Style Guide.