Suppose that the University of Newcastle were to establish a Student Investment Fund.The initial endowment in the fund is $A200 000. Suppose also that the fund is to begin operations as of 1 July 2021.
The following decisions have been made by the interim Fund Management Committee. The initial asset allocation decision of the fund is to invest 60% in equities and 40% in cash and fixed-interest securities.
ACFI2080 Corporate Finance Assignment-Newcastle University Australia
The mandate of the fund is to, with respect to equities, invest only in companies listed on the Australian Securities Exchange.
To achieve a manageable degree of diversification, the fund will invest in up to 10 companies. The amount invested in each of these companies will be determined using standard Mark owitz diversification. See Bodie et al. (2018, Chapter 7) and Peirson et al.(2015. pp. 179 – 190). Note that this task will be completed by students in another course and is not part of your task.
You are to assume that the fund will be a passive fund. Here the term passive fund means that the fund will operate under the assumption that equity markets are sufficiently competitive (or efficient) such that it is not possible to consistently purchase undervalued companies. Funds following these strategies now make up nearly 45 % of all equity investments in the US (see Whyte (2018)). Their existence is driven by the academic
research presented in such textbooks as, for example, Bodie et al (2018, Chapter 11) and Peirson et al (2015, Chapter 16).
Having determined that the fund will be a passive fund and that it will diversify risk by investing in up to 10 companies, the fund management committee also recognises that the University of Newcastle is for taxation purposes a not-for-profit institution. As a not-for- profit institution, it does not pay tax and may access imputation tax credits.
You have been asked to advise the fund on which equities to purchase.
Specifically, you have been asked to limit your analysis to a consideration of the payout policies of the companies.
Specifically, you have been asked whether (1) the fund should invest in companies with high dividend payout ratios or low dividend payout ratios, and (2) whether the fund should invest in companies that pay franked or un franked dividends.
Specifically you have been asked to provide opinion as to which of the following twelve companies the University Newcastle Student Investment Fund should invest in, and explain why or why not shares in these companies should be purchased.
Companies to consider:
1.Insurance Australia Group Ltd (IAG)
2.AMP Ltd (AMP)
3. Xero Ltd (XRO)
4. Telstra Ltd (TLS)
5.The A 2 Milk Company Ltd (A2 M)
6.National Australia Bank Ltd (NAB)
7. Medi bank Private Ltd (MPL)
8. Xero Ltd (XRO)
9. Nanosonics Ltd (NAN)
10.Bingo Industries Ltd (BIN)
11. West pac Banking Corporation Ltd (WBC)
12.Australia and New Zealand Banking Group Ltd (ANZ).
ACFI2080 Corporate Finance Assignment-Newcastle University Australia
For each of these companies, in providing your answer, you should calculate their payout ratios for each of the last 5 financial years (if this data is available for these companies for these years from the Fact Set platform), and state whether any dividends that have been paid were franked or un franked.
All data that is required for this analysis may be obtained from Fact Set financial data and research platform. You may use the Fact set Overview document placed on the Blackboard site, together with the Fact set Equities document that has also been placed on the Blackboard site. To find, for example, the payout ratio for Insurance Australia Group Ltd (IAG) you will
need to enter the code IAG and then use the Company / Security Tab at the top of the page. Go to Overviews at the left of the page and select Snapshot from the drop down menu. Under Price, Financials and Ratios History would will find the Dividend per Share (DPS) and the so-called diluted Earnings per Share (EPS (Dil)) for each of the last 5 years. The payout
ratio is the Dividend per Share divided by the Earnings per Share.
To obtain information as to the extent to which any dividends that have been paid are franked go to Prices at the left of the page and select Corporate Actions from the drop down menu.Then go to the Column Options below the Company / Security Tab at the top of the page
and tick Franked Amount and Franked % and press OK
You need to provide a report to the Fund Management Committee. The report should include a table providing the payout ratios for each of the last 5 years for each of the 12 companies listed above, together with information as to whether any dividends paid by these companies over the last 5 years have been franked or un franked.
Your report should also include an explanation to the Fund Management Committee as to whether (1) the fund should invest in companies with high dividend payout ratios or low dividend payout ratios, and (2) whether the fund should invest in companies that pay franked or un franked dividends.
Following this explanation, you should then apply that explanation to an analysis as to which of these 12 companies should be included in the Student Investment Fund’s equity portfolio.
ACFI2080 Corporate Finance Assignment-Newcastle University Australia
Twelve marks will be allocated to correctly obtaining and clearly presenting the required information with respect to the 12 companies. Seven marks will be allocated to the explanation to the Fund Management Committee as to whether (1) the fund should invest in companies with high dividend payout ratios or low dividend payout ratios, and (2) whether the fund should invest in companies that pay franked or un franked dividends. Not all members of the Committee have strong finance backgrounds. Therefore, this explanation needs to be presented simply and clearly.
Six marks will be allocated to the application of this explanation to the 12 companies for which information has been obtained.
The word limit for the assignment, including tables, graphs and references, is 2000 words. Excluding tables, graphs and references, you should limit your report to 1500 words. Your report must be submitted through Turnitin in Word format.
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