Rio Tinto Stock Valuation Report: DDM, PE, RRR & Market Announcement

This report provides a comprehensive stock valuation analysis of Rio Tinto Plc, a metals and mining company, using various financial models. It begins by introducing the company's background, segments, and main competitors. The analysis includes calculations of stock beta, cost of equity, and stock prices using the 1-stage and 2-stage Dividend Discount Models (DDM), Price-to-Earnings (PE) method, and Required Rate of Return (RRR) method. The report also assesses the impact of a management structure announcement on the company's Holding Period Return (HPR), concluding that the announcement had a positive effect, consistent with the semi-strong form theory. The PE method is deemed most appropriate due to the smaller gap between intrinsic and stock prices. Desklib offers this and other solved assignments to aid students in their studies.

Answer 1.
Rio Tinto Plc that was incorporated on 30th March, 1962 deals with the metals and
mining sector and is focussed on processing and mining of mineral resources. The company
has 4 segments – minerals and energy, diamonds and copper, aluminium and iron ore. The
company’s main strategy is to concentrate on 4 Ps – performance, portfolio, partners and
people. Main competitors of the company are BHP Billiton and Altura Mining Limited.
Answer 2
a. Stock beta – the calculated beta of the company is 0.269. Generally beta signifies the
systematic risk and volatility of a stock. Beta lower than 1 represents that the
company’s stock is less volatile as compared to the market. Therefore, the beta of the
company that is 0.269 indicates that the company’s stock is 73.10% less volatile as
compared to the market.
b. Cost of equity of the company is 4.06%.
c. The stock price is 58.93 as per the 1-stage DDM model and the price of the stock as
per the 2-stage DDM model is also 58.93. As per 1-stage DDM model the intrinsic
value of the share is 156.074 whereas the intrinsic value of shares as per 2-stage DDM
model is 388.90. However, under both the method the share is underpriced. From the
company’s aspect the 2-stage DDM model is most appropriate as the intrinsic value
of shares as per this model is more as compared to 1-stage DDM model and the
dividend paid by the company are fluctuating. From the investor’s aspect the share of
the company shall be purchased now as the shares are under priced.
d. The stock price is 58.93 as per the PE method and the intrinsic value as per this
method is 69.927. Hence, as per PE method the share of the company is underpriced.

e. As per RRR method the market premium is 6% and the RRR is 0.4387. It indicates
that the stocks are underpriced.
f. Among all the above mentioned method the PE method seems more appropriate for
the company as the gap between the intrinsic price and stock price as per this method
is lowest.
g. Follow the excel sheet for calculations and formulas
Answer 3
Effect of announcement
a. The date considered for analysing the impact of announcement is 06-22-2017. On the
given date the company announced significant changes in their management structure.
It can be observed from the graph that till 06-22-2017 the holding period return of the
company was downward moving. However, the HPR started rising from that date
after the announcement made by the company. From the return rate of -0.8281 it
reached to return rate of 0.0116 on 07-11-2017. Therefore, the announcement had
positive impact on the HPR of company.
b. Follow the excel sheet for HPR movement
c. No, the stock did not react quickly and it started rising moderately over the period of
time. The theory that is consistent here is the semi-strong form theory.

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