As part of the 2019 Budget, the Commonwealth Government of Australia has announced its intention to privatise part of its information technology services. Currently these services are run as a separate agency wholly-owned by the Commonwealth Government called “Information Technology Australia”. However, the government would like to create a public company out of these operations by selling 100% of its stake to the members of the public and therefore listing the business on the Australian Securities Exchange. The Budget papers have suggested an indicative value of around A$2 billion for the business.ϯ
You are an equity analyst employed to advise the Commonwealth Government. You have been asked to prepare a report detailing a possible share price for the business using the constant dividend growth model.
1. Select one (or more) proxy company (or companies) that can be used to determine a possible beta for Information Technology Australia. Explain why this is necessary and justify your choice/s.
2. Using data from your proxy company (companies) calculate its (their) beta(s). Using suitable academic literature, justify your data choices with respect to time horizon, measurement interval, measurement of returns, and market index.
3. Determine the appropriate beta for Information Technology Australia assuming the company has an expected market debt to equity ratio of 0.67. Clearly explain how you have determined your beta.
4. Calculate the required return on equity for Information Technology Australia using the Capital Asset Pricing Model (CAPM). Justify the data choices you have made in undertaking this calculation.
5. Assuming the Information Technology Australia expects to pay a dividend of $0.50 next year and that the dividend is expected to grow at 4% pa forever, what would be an appropriate price for the government to sell Information Technology Australia shares? With reference to appropriate academic literature, justify your recommendation.
ϯThis is a fictitious event and business created expressly for use in this assignment
1. Conforming with instructions (e.g. word length, font, other instructions)
2. Presentation, communication & style (written)
3. Clarity of expression (incl. accuracy, spelling, grammar, punctuation)
5. Use of literature/ Knowledge of theory
6. Data/information gathering/processing
9. Problem solving
Formatting and Presentation:
1. The assignment should be no more than 10 pages, with 1.5 line spacing and size 12 Times New Roman or Arial Font. Please number the pages of your report. Marks will be reduced by 10% for each page you exceed the page limit. Hence your mark will be reduced to zero if the assignment exceeds 20 pages. Brevity and conciseness are key ingredients of a highly successful report. You will be penalised for inappropriate formatting.
2. Make sure you use proper referencing in your assignment. All assignments must include a list of references in academic form using the APA method.
3. Pay particular attention to presentation. A component of your mark will be based on presentation. Avoid overdoing formatting, and ensure that the assignment is very clear, logical and professional. Pay attention to grammar. Clear and logical presentation is a major challenge in assignment preparation. Preparing a concise assignment is another major challenge. Every part of the assignment should somehow add to the end result – determining an appropriate share price - otherwise it is superfluous and distracting.
4. The report must be submitted as a PDF document.
Page limit for assignment – 10 pages
What’s included in the 10-page limit?
- Assignment body
What’s excluded from the 10-page limit?
- Executive summary
- Title page
- Table of contents
- Reference List