You are an investor adviser, working to build a foundation of wealth for your clients. One of your wealthiest clients already has a diversified portfolio, which includes managed funds, property, cash/fixed interest and a few direct share investments. They wish to expand their portfolio and are considering which of two companies’ shares to add to their portfolio. (They have an extra $1 million that they wish to invest into company shares.) You are required to do the following: 1. Prepare a brief description of a company called ( FLETCHER BUILDINGS) WWW.FBU.COM, outlining the core activities, the markets they operate within and any factors in the companies’ history which you consider help to present a “picture” of those companies. 2. Calculate the following key ratios for BOTH of your selected companies for the past 4 years (show all workings): i) Return on Assets (EBIT / Total Assets) Return on Owners Equity (Net Profit After Tax / Owners Equity) Gearing Ratio Total Liabilities / Total Assets EBIT x NPAT x TA = NPAT TA EBIT OE OE Be sure that you have “proven” the above equation. ii) Present the above ROA and ROE results in the form of a clear and useful graph for each company. iii) Comment on this graph, pointing out the relationship between ROA and ROE (e.g. which is greater, and the extent of the difference between them) and what may have caused these differences. iv) Explain what phenomenon is being “captured” by the variable TA/OE, and how it is impacting on the relationship between Return on Assets and Return on Owners Equity. Be sure to explain why the ROE is significantly greater than or less than the ROA. 3. i) By use of the Australian Stock Exchange website, www.asx.com.au prepare a graph / chart for movements in the monthly share price over the last 5 years for both of the companies that you are investigating. Plot them against movements in the All Ordinaries Index. ii) Write a report which compares movements in the companies’ share price index to the All Ords Index. For instance, how closely correlated were the two lines with the All Ords Index. Above or below? More or less volatile? iii) From research via the internet or financial/business publications, note any significant announcements which may have influenced the share price of each company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual writeoffs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors, law suits etc. (Restrict the number of announcements to 5 for each company) v) Graph and compare the trends in the accounting profitability ratios (ROA and ROE) in part 2i) above with the behaviour of your companies’ share price movements. How strong is the correlation between these variables? In light of your observations above, what is your conclusion about the relationship between annual accounting profitability results and share prices? To what extent do ROA and ROE results “drive” share price movements? You are an investor adviser, working to build a foundation of wealth for your clients. One of your wealthiest clients already has a diversified portfolio, which includes managed funds, property, cash/fixed interest and a few direct share investments. They wish to expand their portfolio and are considering which of two companies’ shares to add to their portfolio. (They have an extra $1 million that they wish to invest into company shares.) You are required to do the following:
Return on Owners Equity (Net Profit After Tax / Owners Equity) Gearing Ratio Total Liabilities / Total Assets EBIT x NPAT x TA = NPAT TA EBIT OE OE Be sure that you have “proven” the above equation.
Be sure to explain why the ROE is significantly greater than or less than the ROA.
iii) From research via the internet or financial/business publications, note any significant announcements which may have influenced the share price of each company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual writeoffs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors, law suits etc. (Restrict the number of announcements to 5 for each company)
How strong is the correlation between these variables? In light of your observations above, what is your conclusion about the relationship between annual accounting profitability results and share prices? To what extent do ROA and ROE results “drive” share price movements? |
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