CASE STUDY ON MARKET EFFICIENCY PDF

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CASE STUDY ON MARKETEFFICIENCY2201AFE Corporate FinanceCourse Convenor: Dr John Fan Assessment Piece 3: Case Study Due Date: 27/01/1. GIVE A BRIEF DESCRIPTION OF THE COMPANY’S BUSINESS, STRATEGY AND ITS COMPETITORS (1M)In this report, we will look at one company, being Amcor Ltd (AMC) which is curre...

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CASE STUDY ON MARKET EFFICIENCY 2201AFE Corporate Finance

Course Convenor: Dr John Fan Assessment Piece 3: Case Study Due Date: 27/01/2018

Leslie Brown S5020241 Mgcini Dube S5060436 Liam Roche S2915758 Ocean Moses-Taurima

1. GIVE A BRIEF DESCRIPTION OF THE COMPANY’S BUSINESS, STRATEGY AND ITS COMPETITORS (1M)

In this report, we will look at one company, being Amcor Ltd (AMC.AX) which is currently trading on the S&P/ASX 200. The data and information gathered will be over a three-year period, being 2014/15 – 2016/17, starting this period trading at $9.07 and finishing at $15.91 (adj. closing prices). Amcor Ltd is a packaging company that have various segments including Amcor flexibles and Amcor Rigid Plastics which are responsible for producing most of the containers you see, such as food and beverage, personal care, spirits and beer. Amcor Ltd is a global brand with major manufacturing in Europe, Middle East and Africa having over 200 sites in 43 countries, over 35,000 employees and USD 9.1bn in sales, Amcor Ltd is a leader in the materials sector. Amcor Ltd also have a joint venture with a large cap packaging company Discma AG (DIscma) that are responsible for the packaging for processed foods, fish, meat and dairy around the globe. The direct competitors for Amcor Ltd are Georgia-Pacific and LLC Silgan Holdings Inc, both manufacture packaging for the wholesale food and beverage industry, also the paper industry. However, each company have found their own niche market for their target audience, therefore allowing a healthy competition between these global manufacturing superpowers. Prior technical analysis trends for Amcor Ltd show ‘bullish trends’ short and long term, while staying ‘neutral’ in the mid-term. 2. ESTIMATE THE STOCK BETA, THE COST OF EQUITY, AND THE INTRINSIC VALUE (7M) A) STOCK BETA:

Weekly ASX200 and Amcor (AMC) stock prices and returns retrieved from Yahoo Finance (Appendix A) Slope=0.74027= Systematic Risk ( β A ) (Appendix C) Amcor’s stock beta (β) is below the market β of 1, meaning that it is (theoretically) less volatile than the market. B) ESTIMATE THE COST OF EQUIT Y , U SING THE CAPM RETURN . ASSUME THE MARKET RISK P REMIUM, RM-RF=6%, AND USE THE CURRENT 10-YEAR GOVERNMENT BOND YIE LD FOR THE RISK-FREE RATE.

Formula: E ( R A ) =Rf +(β A ( E ( R M ) −Rf ) ) 10 Year Australian Bond Yield= Rf =2.6% Beta= β A = 0.74027 Market Risk Premium= E ( R M )−R f = 6% E ( R A) =0.026+ (0.74027 × 0.06 ) = 0.0704 or 7.04% https://tradingeconomics.com/australia/government-bond-yield C) ESTIMATE THE INTRI NSIC VALUES USING 1-STAGE MODELS (THE CONSTANT DIVIDE ND GROWTH MODEL), AND THE 2-STAGE N ON-CON STANT DIVIDEND GROWTH MODEL. PLEASE U SE THE 10-YEAR TREASURY BOND RATE AS THE DIVIDEND GROWTH RATE IN THE EQUILIBRIUM STAGE. WOULD YOU RECOMMEN D TO BUY OR SELL THE SHARES IN JUN E 2017?

Market Price (30/06/2017) = $15.91 (adj. close) 2017 Annual 2.6%

D 0=$ 0.5455 (Appendix B*)

Geometric Mean (GM) Growth=12.88%(Appendix B) E ( R A ) =7.04 %

(Constant growth) Rf =

 1-Stage constant dividend growth: 2.6% P0 =

D 0 (1+g ) = R−g R−g D1

P0 =

0.5455 ( 1+0.026 ) =$ 12.61 ( 0.0704 −0.026 )

Intrinsic value of $12.61 compared with the market price of $15.91 shows that the current market price is overvalued.  2-Stage non-constant dividend growth: 12.88% growth for 3years; g = 2.6% there after P0 =

D2 D1 D t +P t + +…+ 2 t (1+R) (1+R) (1+R)

Dt 0.5455 (1+0.1288 )3∗(1+0.026) = Pt = =18.13 R−g (0.0704−0.026)

P0 =

0.5455(1+0.1288) 0.5455( 1+ 0.1288) ² 0.5455 (1+ 0.1288 )³+ 18.13 + + (1+0.0704) (1+0.0704)2 (1+0.0704 )³

= $16.60

2-Stage intrinsic value of $16.60 compared with the market price of $15.91 shows that the current market price is undervalued.  Conservative 2-Stage non-constant dividend growth: 4.51% (2016) growth for 3 years; g = 2.6% there after P0 =

D2 D1 D +P + +…+ t tt 2 (1+R) (1+R) (1+R)

Pt =

Dt 0.5455 (1+0.0451 )3∗(1+0.026) =14.39 = R−g (0.0704−0.026)

P0 =

0.5455(1+0.0451) 0.5455(1+0.0451 ) ² 0.5455 (1+ 0.0451)³+ 14.39 + + (1+0.0704) (1+0.0704)2 (1+0.0704)³

= $13.29

Conservative 2-Stage intrinsic value of $13.29 compared with the market price of $15.91 shows that the current market price is overvalued. By using sensitivity analysis on future growth rates via 1-stage and 2-stage dividend growth models we can assess that the current market price of AMC is overvalued. Although when using 12.88% (GM) intrinsic value exceeds market price, it is unlikely that AMC will achieve this level of growth as the observed 5 years of dividend growth have seen 3 prior years of supernormal growth followed by the 2 most recent years of more mature stage growth. Using then a more conservative 2-stage model with 2016 dividend yield (4.51%) we can see the intrinsic value is well below that of the market price. This is reflected in the 1-stage model also and thus it is our recommendation that AMC not be included as part of QLD Titanium Equity Management portfolio, and any shares held at June 2017 should be sold. 3. ANNOUNCEMENT EFFECT ON STOCK PRICES (2M)

A) THE ANNOUN CE MENT CAN BE A NEW PROD UCT, A SCANDAL , AN EARNINGS ANNOUNCEMEN T, A CHANGE IN STR ATEGY, ETC. WHAT IS YOUR EXPECTATION OF THE MARK ET REACTION TO THE AN NOUNCEMEN T, GOOD OR BAD NEWS?

Amcor Ltd have made many purchases/sales over the company’s history, which has resulted in a direct boost or slight decrease in share price due to the hype surrounding the takeover, joint venture or sale of a company or product. However, the major news through the 2015 to 2017 trading period was on January 22, 2015, with the announcement that then Chief Executive Officer (CEO) Ken MacKenzie would be stepping down after 10 years with the company. The announcement made shareholders and the industry nervous in the future direction and new CEO appointment. It was announced on April 17, 2015 that Ron Delia, Amcor’s Chief Financial Officer would take over as CEO, effective immediately. This is overall good news for the company for a new perspective and freshness moving forward but immediate effects will be viewed as bad news by shareholders and associated company’s due to knowing Mr. Mackenzie and his vision over a long period of time. Our expectation for the market reaction is a contraction in the stock price in the preceding weeks leading up to Ken Mackenzie announcement. Followed by a recovery, then further contraction upon the announcement of the new CEO appointment and a subsequent recovery proceeding the event. B) PLEASE DOWNLOAD THE DAILY STOCK PRICES FROM ONE MONTH BEFORE TO ONE MON TH AFTER THE AN NOUNCEMEN T DATE , AND COMPUTE THE CUMULATI VE HOLDI NG PERIOD R ETURNS (=(1+R 1 )(1+R 2 )..1) AND PLOT THEM IN A GRAPH.

The daily stock prices from 21/12/2014 (one month prior to CEO announcement) to 15/05/2015 (one month following the announcement of new CEO) have been used to calculate the cumulative holding period returns (HPR) for AMC stock (appendix D ). Plotted below are the HPR for the period.

Announcement Effect 0.15

0.1

HPR

0.05

0 14 014 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 015 0 /2 9/2 4/2 7/2 2/2 5/2 0/2 6/2 9/2 3/2 8/2 1/2 6/2 9/2 4/2 1/2 4/2 9/2 2/2 7/2 2/2 5/2 0/2 7/2 0/2 5/2 0/2 3/2 8/2 1/2 6/2 1/2 4/2 2 /2 2/2 1/ 1/ 1/1 1/1 1/2 1/2 1/2 2/ 2/ 2/1 2/1 2/1 2/2 3/ 3/ 3/ 3/1 3/1 3/2 3/2 3/3 4/ 4/1 4/1 4/2 4/2 4/2 5/ 5/ 5/1 5/1 1 12 -0.05

-0.1

Ken Mackenzie Announcement Dates preceding and following announcements

C) DISCUSS THE FOLLOWING ASPECTS: DOES THE STOCK PRICE R EACT QUICKLY OR SLOWLY TO THE NEWS AN NOUNCEMEN T? HOW DOES IT RE LATE TO THE THEORY WE LEARNED IN CLASS?

The historical data shows a definite correlation between the decrease in share price and the pending announcement of Mr. Mackenzie’s retirement as the Amcor share price plunged 9.2% over the preceding 3 weeks from January 4 th to his announcement on January 22 nd (Appendix A). This decrease in price in the

lead up to the announcement of Mr. Mackenzie stepping down shows a semi-strong form of efficient market hypothesis (EMH) as the stock adjusts quickly to the new public event information. There also is data to positively suggest the appointment of Mr. Delia on the 17 th April had a distinct effect on the Amcor share price as the sharp drop over 3 weeks after the appointment was 9.6% (Appendix A). On both occasions, there was a strong recovery after the initial shock due to Amcor’s strong branding and corporate governance in place, assuring shareholders and associated companies there will be no long-term effects from this announcement. This showing a strong reaction to each announcement due to the almost immediate recovery in share price.

APP ENDIX A

Date

ASX 200 VS AMCOR

Price ASX200

Price Amcor

R ASX200

R Amcor

25/06/2017

5721.5

15.910761

0.00097974

-0.022905416

18/06/2017

5715.9

16.283747

-0.010062365

0.014678863

11/06/2017

5774

16.048178

0.016943217

0.025721562

4/06/2017

5677.8

15.645745

-0.01905639

-0.007472057

28/05/2017

5788.1

15.763531

0.006328547

0.039482245

21/05/2017

5751.7

15.164791

0.004242814

0.029999934

14/05/2017

5727.4

14.723099

-0.018759959

-0.017681678

7/05/2017

5836.9

14.988114

5.13662E-05

0

30/04/2017

5836.6

14.988114

-0.014770176

-0.028007604

23/04/2017

5924.1

15.419991

0.011957431

0.020129846

16/04/2017

5854.1

15.115714

-0.006078168

0.001300337

9/04/2017

5889.9

15.096084

0.004673757

0.007203708

2/04/2017

5862.5

14.988114

-0.000409197

0.013944197

26/03/2017

5864.9

14.781991

0.01936211

0.009383406

19/03/2017

5753.5

14.644575

-0.007948841

0.028965535

12/03/2017

5799.6

14.232328

0.004155412

0.010452891

5/03/2017

5775.6

14.085098

0.008028484

0.011988732

26/02/2017

5729.6

13.918236

-0.001637899

0.017255185

19/02/2017

5739

13.682148

-0.011505702

-0.03861802

12/02/2017

5805.8

14.23175

0.014893491

0.014433044

5/02/2017

5720.6

14.029265

0.017610644

0.026817216

29/01/2017

5621.6

13.662865

-0.016170791

-0.020732536

22/01/2017

5714

13.952128

0.010469017

-0.01698365

15/01/2017

5654.8

14.19318

-0.011588732

-0.014725615

8/01/2017

5721.1

14.405307

-0.005994162

-0.007968109

1/01/2017

5755.6

14.521012

0.015849535

0.007357918

25/12/2016

5665.8

14.414948

0.006734289

-0.00796289

18/12/2016

5627.9

14.530654

0.01717002

0.028668981

11/12/2016

5532.9

14.125685

-0.004981512

0.013840822

4/12/2016

5560.6

13.932843

0.021418093

0.017605586

27/11/2016

5444

13.691791

-0.011583537

-0.052069341

20/11/2016

5507.8

14.443874

0.027689649

0.049754617

13/11/2016

5359.4

13.759286

-0.002104063

0.003516135

6/11/2016

5370.7

13.711076

0.036654647

-0.015916852

30/10/2016

5180.8

13.932843

-0.019493547

-0.013651869

23/10/2016

5283.8

14.125685

-0.026978253

-0.018096593

16/10/2016

5430.3

14.386023

-0.000680934

-0.047254095

9/10/2016

5434

15.099538

-0.006108919

0.010974768

2/10/2016

5467.4

14.935623

0.005794809

0.022442271

25/09/2016

5435.9

14.607791

0.000846961

0.003311153

18/09/2016

5431.3

14.559582

0.025411974

-0.013071819

11/09/2016

5296.7

14.752423

-0.007959994

-0.004837047

4/09/2016

5339.2

14.824128

-0.00625365

-0.011995052

28/08/2016

5372.8

15.004103

-0.025872576

-0.032967001

21/08/2016

5515.5

15.515606

-0.002026561

0.05950838

14/08/2016

5526.7

14.644156

-0.000759317

0.011118456

7/08/2016

5530.9

14.483126

0.00609379

0.009907509

31/07/2016

5497.4

14.341042

-0.011667818

0.007989316

24/07/2016

5562.3

14.227375

0.01165829

-0.018300651

17/07/2016

5498.2

14.492599

0.012634466

-0.020486544

10/07/2016

5429.6

14.795712

0.038065213

0.034437092

3/07/2016

5230.5

14.303153

-0.003068673

0.013422766

26/06/2016

5246.6

14.113708

0.026089317

0.03760457

19/06/2016

5113.2

13.602203

-0.009588006

0.00913565

12/06/2016

5162.7

13.479063

-0.028215921

-0.018620852

5/06/2016

5312.6

13.734817

-0.001184419

-0.09713569

29/05/2016

5318.9

15.212493

-0.016093528

-0.020134135

22/05/2016

5405.9

15.525077

0.010203147

0.012353257

15/05/2016

5351.3

15.335632

0.004184613

-0.006138873

8/05/2016

5329

15.430357

0.006991686

0.017489132

1/05/2016

5292

15.165132

0.00757774

0.039610495

24/04/2016

5252.2

14.587321

0.003017396

0.017845288

17/04/2016

5236.4

14.33157

0.015298091

0.025067779

10/04/2016

5157.5

13.981095

0.044535786

0.011651826

3/04/2016

4937.6

13.820066

-0.012361444

0.030367207

27/03/2016

4999.4

13.412758

-0.016679181

-0.020069182

20/03/2016

5084.2

13.687454

-0.019081226

0.016889524

13/03/2016

5183.1

13.460119

0.003232463

0.009232975

6/03/2016

5166.4

13.336979

0.015009804

0.010768104

28/02/2016

5090

13.194895

0.043032787

0.012738735

21/02/2016

4880

13.028923

-0.014698717

0.00863308

14/02/2016

4952.8

12.917406

0.039346947

0.136549535

7/02/2016

4765.3

11.365458

-0.042381814

-0.024720892

31/01/2016

4976.2

11.653544

-0.005853522

-0.05714298

24/01/2016

5005.5

12.359821

0.018205858

0.02702716

17/01/2016

4916

12.034561

0.004741701

0.028594078

10/01/2016

4892.8

11.70001

-0.019636131

-0.033026178

3/01/2016

4990.8

12.099614

-0.057610624

-0.031249912

27/12/2015

5295.9

12.489923

0.016955949

0.009008995

20/12/2015

5207.6

12.378406

0.019758337

-0.0029939

13/12/2015

5106.7

12.415577

0.015349477

0.017516951

6/12/2015

5029.5

12.201838

-0.023701393

-0.015003674

29/11/2015

5151.6

12.387699

-0.009802791

-0.030545447

22/11/2015

5202.6

12.778009

-0.010178649

-0.003623151

15/11/2015

5256.1

12.824474

0.040544078

0.04545456

8/11/2015

5051.3

12.266888

-0.031390258

-0.03012491

1/11/2015

5215

12.647905

-0.004657003

-0.002930451

25/10/2015

5239.4

12.685078

-0.020965729

0.002939064

18/10/2015

5351.6

12.647905

0.015830815

0.042911754

11/10/2015

5268.2

12.127493

-0.002178154

-0.019534062

4/10/2015

5279.7

12.369112

0.045071298

-0.002996384

27/09/2015

5052

12.406286

0.001963448

0.035686621

20/09/2015

5042.1

11.978803

-0.024833169

-0.013016873

13/09/2015

5170.5

12.136786

0.01960125

0.01317772

6/09/2015

5071.1

11.978931

0.0060...