Beta Analysis of Downer Edi Limited: Corporate Financial Management

This report provides a comprehensive financial analysis of Downer Edi Limited, focusing on beta calculation and interpretation across two distinct periods (June 2014 to February 2016, and February 2016 to October 2017). The analysis includes calculating stock and market returns, along with relevant statistical measures such as mean, standard deviation, variance, and correlation coefficient. The report highlights the significant difference in beta values between the two periods, attributing it to variations in market and stock movements and the potential impact of market phases. It also offers insights into Downer Edi's business operations, its role in infrastructure projects, and the implications of its beta values for risk assessment.

CORPORATE FINANCIAL MANAGEMENT
STUDENT ID:
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Question 1
The company selected in accordance with the surname first alphabet is Downer Edi Limited.
a) The relevant table for Period 1 is presented below.
The relevant table for Period 2 is presented below.

b) The relevant returns for stock, market and the corresponding returns have been computed
in the attached excel sheet for the two periods.
c) The relevant information for Period 1 is indicated as follows.
The relevant information for Period 2 is indicated as follows.
d) The beta for period 1 has come out as 1.28 while the corresponding beta for period 2 is
0.41.

e) The value of beta in the first period implies that when the All Ordinaries Index tends to
change by 1%, the corresponding change in the stock price of Downer Edi is 1.28% in the
same direction. Hence, if the market increases, the stock price of Downer Edi would also be
expected to increase. Further, considering the beta is greater than 1, hence the stock seems
aggressive with potential higher risk (Damodaran, 2015).
The value of beta in the second period implies that when the All Ordinaries Index tends to
change by 1%, the corresponding change in the stock price of Downer Edi is 0.41% in the
same direction. Hence, if the market increases, the stock price of Downer Edi would also be
expected to increase. Further, considering the beta is lower than 1, hence the stock seems
defensive with potential lower risk (Petty et. al., 2015).
f) Downer Edi is an integrated service provider with regards to building, designing and
operating of various infrastructure projects and facilities. The operations of the companies are
primarily concentrated in Australia and New Zealand with limited presence elsewhere. The
company is part of ASX 100 and has more than 56000 employees. The company was founded
in 1933 and has multiple divisions which have been listed below (Yahoo Finance, 2018).
 Rail/Bus
 Transport
 Mining
 Utilities
 Spotless
 Engineering & Construction
 Maintenance
The company over the years has been associated with various key infrastructure projects in
the region.
g) It is apparent that the value of beta is quite different in the two sub periods. This might be
related to the difference in the movements of the market index and the stock price in the two
periods. The All Ordinaries index is a weighted average index of several stocks and hence the
movement of this is dependent on a host of other stocks which may or may not respond to
various factors in the similar manner as Downer Edi. Therefore, beta when measured using
short term data can be quite volatile. Further, there may be phases in the market which may
also impact the beta (Parrino & Kidwell, 2014).

In period 2, it is noteworthy that the returns of the market and stock are quite divergent which
is not the case in period 1. As a result, in period 2, the extent of covariance between stock and
market returns is lesser in period 2 than in period 1 which is primarily responsible for the beta
value in the two periods being so different.

References
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia
Yahoo Finance (2018) Downer Edi Limited, Retrieved from
https://au.finance.yahoo.com/quote/DOW.AX/history/