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The objective of this task is to demonstrate the effect of releasing accounting information concerning profits on the valuation (i.e. share price) of an Australian-listed company. The project has three educational objectives. First, it demonstrates to students that, in some cases, accounting related information has an impact on investor behaviour via the share prices (or returns, which are changes in share price). Second, it shows how we have to control for the effects of other factors when trying to assess causal relationships. In this case, movements in the market must be controlled for in order to see the real effect of a company profit announcement on the share price of the company. The third objective is to encourage initiative, inquisitiveness and the development of basic financial statement analysis skills as students investigate company-specific factors behind the economic performance being announced by the company.
This is an individual task that is designed to build your research, analysis and business report writing skills. In particular this project will require you to use online databases to search and obtain announcements by companies, share price histories for companies, market wide information, and company financial statements or annual reports. You will also utilise the key business desk top analysis tool, “Excel”, to manipulate the data you obtain to calculate, analyse and produce graphical representations of the key information. You will be required to refer to the course textbook, giving particular emphasis on the contents of Chapter 18 Financial Statement Analysis, to evaluate and put into context the factors behind the profit results announced by the company.
Step by step instructions are as follows:
- Find a PROFIT announcement occurring after 1 June 2014 and before 01 January 2015.
The following are NOT accounting profit announcements:
-Take-overs or take-over defences
-Share issues/splits or bonus issues
-Capital raising either debt or equity
- Daily fund updates O Net asset value announcements
- Analysts’ comments.
Suggested sources for profit announcement: – Factiva newspaper database, accessed via Bond website: Library/Student Resources/Library & Online Resources/ Electronic Resources/Business & Commerce/Factiva. Search Australian Financial Press using key words to find relevant profit articles. (Note: this database can be tricky and you are advised to seek a librarian’s assistance).
- Australian Stock Exchange site, www.asx.com.au
- Current financial press, e.g., the Financial Review or The Australian.
- You can also find additional data on your chosen company’s website.
- Select two competitors. (My competitors are FLIGHT CENTRE LTD And HELLOWORLD LTD)
Conduct a web search if you are unsure about the competitors for your company. You could go to the ASX website (as above) and look at the various industry sectors and/or find the competitors for a company. Alternatively use www.tradingroom.com.au to look up your company and then click on “DETAILS” button on the left menu bar and click on the Industry Group to display the list of competitors for your company. Bloomberg and Aspect Find Analysis (which can be found in the library electronic resources) are also helpful.
- Gather the following data series for each day:
- Closing Share Price for your company (MY COMPANY IS CORPORATE TRAVEL)
- Closing Share Price for selected competitors
- All Ordinaries Market Index (All Ords).
Collect the above data series for a period of three weeks both sides of the announcement and download to Excel worksheet files. Historical share prices can be accessed from https://www.tradingroom.com.au. Note: You should have a total of AT LEAST SIX WEEKS of data.
- Calculate the returns for each company and the market (All Ords Index) as per the formula below. Note that the returns are transformed into percentages.
RetDay1 = [(P1-P0)/P0]*100 and Mar RetDay1 = [(M1-M0)/M0]*100 . (If a dividend has been paid during your analysis period, use this formula instead: [(P1-P0 + D1)/P0]*100).
Graph your results.
- Calculate the cumulative residuals for each company (see Sample Spreadsheet Set Up, following): subtract the return on the market index from each company’s returns daily – the difference is the “residual”. Progressively add each day’s residuals together to determine the cumulative residuals for the six week-period under analysis.
This shows each company’s stock market performance after the general stock market movements are removed.
Thus the residuals and cumulative residuals should be calculated as follows:
Cum ResDay 1 = RetDay1 – Mar RetDay1 Cum ResDay 2 = RetDay2 – Mar RetDay2 + Cum ResDay 1 Cum ResDay3 = RetDay3 – Mar RetDay3 + Cum ResDay2
Graph your results.
If the changes you see in your company’s returns are random then the cumulative residuals should end up at about zero. If the information disclosure has an effect, the cumulative residuals should be positive or negative depending on whether the information was good news or bad news.
- Refer to your profit announcement. Consider the factors to which management attributes the pleasing/displeasing results (for example, have they announced that sales have improved/worsened, expenses reduced/increased, have they become more efficient/deficient in their operations because of technology or equipment etc?) Obtain a copy of your main company’s annual report or latest financial statements (these are readily available from DatAnalysis, Bloomberg, ASX, and company websites). Use this to make insightful comments on how the results were achieved; include key ratios and what they imply for the company, to illustrate your point of view.
- Write a business report that presents the following:
- a) An executive summary (prior to the main report). An executive summary provides a statement of the objectives, the key findings, recommendations, and a summary of the key reasons for that recommendation. It does not introduce someone to the background of the report. It gives the key facts and should motivate the reader to read more of the report.
- b) The objective of the report.
- c) An overview of the company, its competitors and its major industry.
- d) The announcement, its date and manner of release.
- e) The expected impact of the announcement on the share price (up or down, good news/ bad news) – you must justify your expectation. Be sure to put what YOU THOUGHT should happen and not a rationalisation of what did happen.
- f) Your graphs should appear within the body of the report with appropriate scales and labels.
- g) A discussion of the stock market results. (Note: you should incorporate your competitors’ stock market results to compare and contrast the stock market performance of your main company.)
- h) An analysis, including key ratios, of the important factors behind your main company’s results.
- i) Conclusion.
- j) References. APA style is preferred.