ACCT6003 Week 6 Weekly Assignment
RIV valuation exercise
In this weekly assignment, you are required to estimate the annual cost of equity using raw market data and the Capital Asset Pricing Model (CAPM) and the intrinsic value of equity using the Residual Income Valuation (RIV) model, for Vista Group Ltd (VGL) as at 31 December 2024. You are required to use the following assumptions:
• VGL’s net earnings is expected to be NZ$20 million at year-end 2025 and then will grow at 4.3% per annum until 2028 which is the last year of the finite forecasting horizon.
• VGL’s terminal growth in residual earnings is expected to be 1.1% post 2028.
• The 2024 cost of equity will remain the same in perpetuity, on average.
• VGL’s market value of debt in 2024 is NZ$78 million.
You are provided with an Excel spreadsheet template that must be used to develop answers to the questions described below. You are required to submit the completed Excel file for marking. Do not submit a Word report or PDF report.
In the Excel spreadsheet, you are required to document all sources of information, using also URL links, that you use in your analysis. Failing to do so will result in penalties. You are also required to document any assumptions that you may need to make as a note to each worksheet.
Required:
1) In the worksheet named ‘Q1. CAPM,, you are required to estimate VGL’s annual cost of equity using the Capital Asset Pricing Model (CAPM). To do that you are required to obtain closing monthly prices for VGL from the ASX, and closing monthly prices from the ASX All-Ordinaries index (AORD), from January 2019 to December 2024. That is, you are required to estimate your own CAPM beta and cost of equity using raw market data prices. You are required to store the raw data in the dedicated worksheets named ‘VGL ASX prices’, ‘AORD prices’ and ‘Risk free rates’. [2 marks]
2) In the worksheet named ‘Q2. CAPM Discussion’, and in less than 100 words, you are required to discuss the degree of influence of the data used in estimation in driving your cost of equity estimates, and how representative are these estimates for VGL given the data used. The question of degree of influence is directly related to concept of statistical leverage. [1 marks]
3) In the worksheet named ‘Q2. RIV’, you are required to develop an RIV valuation model to estimate the intrinsic value of VGL at year-end 2024, using the assumptions provided in the assignment instructions, an estimate of expected net dividend, and the cost of equity that is estimated from Q1. [1.5 marks]
4) In the worksheet ‘Q3. RIV’ under the RIV model, you are required to create a sensitivity analysis table on the estimated intrinsic value that you have calculated in Q3. The sensitivity analysis must vary the inputs of the cost of equity and terminal growth rate to a reasonable range of values. On Canvas, you can find instructions on how to construct such sensitivity tables. Then, in the worksheet ‘Q4. Sensitivity discussion’ and in less than 100 words, you are required to discuss the most important insight that you have learned from this sensitivity analysis and provide an investment recommendation for VGL to be traded on the ASX, assuming that we are at year-end 31 Dec 2024. [1.5 mark]