Financial Management Assignment: Share Valuation Techniques and Warren Buffet's Approach

This report explores various share valuation techniques, including the dividend growth model and Warren Buffet's intrinsic value approach. It analyzes ten listed Australian companies from different sectors, applying the dividend growth model to calculate their share values. The report then compares these results with Warren Buffet's approach, highlighting the strengths and weaknesses of each method. Finally, it recommends the most suitable valuation approach based on the analysis.

Financial Management
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Executive summary:
The managerial finance assignment will include evaluation of various techniques which helps in
determining the effectiveness with which the business is operating internally and externally. The
process of managerial finance helps in improving the techniques associated with financial
improvement of the company. The report will involve a description about various techniques
available for valuing the shares of company in respect of valuing the business value of company.
The report will thus involve a preparation of equity valuation model in which the shares will be
valued based ion a prescribed and recommended technique.
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Contents
Executive summary:........................................................................................................................2
Introduction:....................................................................................................................................4
Content:............................................................................................................................................5
Task 1:.........................................................................................................................................5
Task 2:.......................................................................................................................................12
Task 3:.......................................................................................................................................13
Conclusion:....................................................................................................................................14
References:....................................................................................................................................15
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Introduction:
The purpose of the report is to enable the users in developing an understanding about the share
valuation techniques applied in various firms in order to analyse the financial viability and
investment decision of the company. In order to prepare this report ten listed companies of
Australia form different sectors will be chosen and a dividend valuation model will be applied in
order to value the shares of company. Further a comparable technique of intrinsic value valuation
method as suggested by Warren Buffet will be used to value the shares of these companies. A
recommendation will be made for adopting a suitable method of valuation.
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Content:
Task 1:
1. Using equity valuation methods, calculate the value of each selected ordinary share
investment in terms of your required rate of return.
The calculation associated with tem companies for obtaining their values are as under:
Dividend Growth model – This models considers the growth rate expected for the dividend and
applying the required rate of return for valuing the shares (Duncan, et. al., 2017). A required rate
of return has been assumed to be 10% in ten of the cases. The formula is presented as under:
Ve = D0 + (1 + g) / Re – g
Carsales.com Limited:
Particulars Amount
Dividend in the current year (D0) 0.402
Growth rate (G) 0.1
(1 + g) 1.1
Required rate of return (Re) 0.12
Value of share 22.11
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Computershare Limited
Particulars Amount
Dividend in the current year (D0) 0.36
Growth rate (G) 0.09
(1 + g) 1.09
Required rate of return (Re) 0.12
Value of share 13.08
Link Admin HLDG
Particulars Amount
Dividend in the current year (D0) 0.08
Growth rate (G) 0.05
(1 + g) 1.05
Required rate of return (Re) 0.12
Value of share 1.2
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Origin Energy
Particulars Amount
Dividend in the current year (D0) 0
Growth rate (G) 0
(1 + g) 1
Required rate of return (Re) 0.12
Value of share 0
Woodside Petroleum
Particulars Amount
Dividend in the current year (D0) 0.98
Growth rate (G) 0.08
(1 + g) 1.08
Required rate of return (Re) 0.12
Value of share 26.46
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Caltex Australia
Particulars Amount
Dividend in the current year (D0) 0.61
Growth rate (G) 0.11
(1 + g) 1.11
Required rate of return (Re) 0.12
Value of share 67.71
ARG Energy Limited
Particulars Amount
Dividend in the current year (D0) 0.91
Growth rate (G) 0.1
(1 + g) 1.1
Required rate of return (Re) 0.12
Value of share 50.05
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ASX Limited
Particulars Amount
Dividend in the current year (D0) 0.998
Growth rate (G) 0.015
(1 + g) 1.015
Required rate of return (Re) 0.12
Value of share 9.65
Commonwealth Bank
Particulars Amount
Dividend in the current year (D0) 4.29
Growth rate (G) 0.02
(1 + g) 1.02
Required rate of return (Re) 0.12
Value of share 43.758
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Insurance Australia
Particulars Amount
Dividend in the current year (D0) 0.33
Growth rate (G) 0.05
(1 + g) 1.05
Required rate of return (Re) 0.12
Value of share 4.95
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2. Rank the ten investments in order of desirability. Explain why you have ranked them in
this way.
Company name Value of share Ranking
Caltex Australia 67.71 1
ARG Energy L:imited 50.05 2
Commonwealth Bank 43.758 3
Woodside Petroleum 26.46 4
Carsales.com Limited 22.11 5
Computershare Limited 13.08 6
ASX Limited 9.65 7
Insurance Australia 4.95 8
Link Admin HLDG 1.2 9
Origin Energy 0 10
3. Which investment of the ten would you select? Why?
By recognizing the value of share and the growth prospects of dividend it can be established that
the shares of Caltex Australia will be purchased and the investment will be made in this company
only. This is because the shareholders will derive the maximum value in this investment only
among the ten shares selected (Damodaran, 2016).
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Task 2:
Research and summaries some interesting facts about Warren Buffet that you can relate to
the companies you have selected from the Financial Review to analyse.
As per the research conducted into Warren Buffet valuation of businesses the intrinsic value of
the company represents the most accurate estimate for investing in the shares of the company
(Damodaran, 2016). As per the model of Warren Buffet the companies having the ability of
paying off their liabilities are preferential based ion the current earnings. His emphasis on
companies having the ability of paying their debts in full. There are two approaches of valuing
the intrinsic value of the shares:
Present value method – The model will utilize the dividend value expected to be paid by the
company in future and considering the same with recognizing the time value of money (Duncan,
et. al., 2017). The total cash inflows in terms of dividends will be analysed and the total value b
ascertained in those terms.
Relative value method – This is the intrinsic value method in which the comparison is
performed for the stock price of the company in relation to the company’s fundamentals. These
fundamentals are determined while making an investment plan for the company.
All of these stocks can be evaluated based ion these intrinsic values however the same will not
be a preferential method for valuing the business due to some reasons explained below:
 The instability of intrinsic value – The intrinsic value is calculated after considering the
fundamentals and these fundamentals will not remain stable and will change based on the
market and industry factors. Therefore there will be instability in intrinsic value (Pinto,
et. al., 2015).
 Estimation is not possible for all asset class – The intrinsic value approach can’t be used
for all assets including stock\k which is a major drawback for the company.
 Market value does not approach intrinsic value fewer times – The prices of the stock may
not appreciate enough in order to equal the intrinsic value calculated.
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Task 3:
Compare Warren Buffet’s approach to share valuation and the share valuation
methodology in Week 6 - Chapter 10 and recommend which approach you prefer with one
reason why.
As the above calculations and analysis reveals that while comparing both the approaches it can
be established that dividends growth n\model will reveal the ability of the company to earn
future benefits and the shareholders wealth will be evaluated in this case. However in case of
Warren Buffet approach there is no precise means of measure for valuing the intrinsic value and
there is an uncertainty regarding its accuracy (Duke, et. al., 2015).
Therefore it shall be recommended to adopt and follow the dividend growth model which will
help in calculating and considering the actual value of the company.
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Conclusion:
The above report concludes that the financial analysis of the companies shall be performed after
considering the appropriate criteria of valuing the shares of company. There are certain methods
and techniques available for valuing the shares and while comparing the dividends growth model
and Warren Buffet approach it can be established that dividend growth model will help in
valuing the shares more appropriately.
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References:
 AGL Limited, (2017). Annual Report 2017. Available at:
http://agl2017.reportonline.com.au/sites/agl2017.reportonline.com.au/files/
full_financial_annual_report.pdf . [Accessed on: 14/05/2018]
 ASX Limited, (2017). Annual Report 2017. Available at:
https://www.asx.com.au/documents/investor-relations/AnnualReport2017.pdf . [Accessed
on: 14/05/2018]
 Caltex Australia Limited, (2017). Annual Report 2017. Available at:
file:///C:/Users/Administrator/Downloads/2017%20Full%20Year%20Results
%20Presentation.pdf . [Accessed on: 14/05/2018]
 Chapman, N. (2015). My Experience with Fundamental Analysis.
 CPU, (2017). Annual Report 2017. Available at:
https://www.computershare.com/News/CPU_Annual_Report_FY2017.pdf. [Accessed on:
14/05/2018]
 Damodaran, A. (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
 Duke, S. B., Nneji, I. D., & Nkamare, S. E. (2015). Impact of dividend policy on share
price valuation in Nigerian Banks. Archives of Business Research, 3(1).
 Duncan, J., Anderson, S. C., Price, S., & Thomas, C. (2017). The Gordon Growth Model:
A Teaching Case. Journal of Business Case Studies (Online), 13(1), 23.
 LINK Group, (2017). Annual Report 2017. Available at:
http://investors.linkgroup.com/FormBuilder/_Resource/_module/YfKsMKLWK0WisyL
m5uTWZA/file/reports/LNK-2017-Annual-Report.pdf . [Accessed on: 14/05/2018]
 Ma, K. C., Pace, R. D., & Stryker, J. (2015). Stock Valuations on Earnings versus Cash
Flow. International Journal of Business, 20(4), 357.
 Pinto, J. E., Robinson, T. R., & Stowe, J. D. (2015). Equity valuation: a survey of
professional practice.
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 Woodside Limited, (2017). Annual Report 2017. Available at:
https://woodsideannouncements.app.woodside/14.02.2018+Annual+Report+2017.pdf .
[Accessed on: 14/05/2018]
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