WEBVTT
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v Suresh Mallineadi>all good
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v Amelia Gilawaii>Has the session started, I can't hear anything.
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v Jie Li>yes it started
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v Jie Li>perfect
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v Judith Smith>i can hea
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v Yasuharu Yoshida>Yes
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v Amelia Gilawaii>I think, I'm encountering problem. Maybe I will listen to the recording.
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v Maria Getueza>yes madame
v Judith Smith>yes
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v Fatema Mansoo
yep all good
00:38:55.000 --> 00:38:55.900
v Maria Co
ea Escoba
yes
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v Rajat Kuma
yes
00:38:58.000 --> 00:38:58.900
v Yasuharu Yoshida>Yes
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v Jie Li>yes
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v Jie Li>yes
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v Fatema Mansoo
yep
v Maria Co
ea Escoba
yes
00:40:20.000 --> 00:40:20.900
v Azdren Xerxa>yes
00:40:27.000 --> 00:40:27.900
v Suresh Mallineadi>yep
00:48:23.000 --> 00:48:23.900
v Yasuharu Yoshida>All good. it was helpful.
00:48:37.000 --> 00:48:37.900
v Jodie Fields>Thanks have a good night
00:48:40.000 --> 00:48:40.900
v Fatema Mansoo
Is there any word count limit?
00:48:41.000 --> 00:48:41.900
v Dimple Patel>No,
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v Dimple Patel> thank you
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v Jie Li>1000 words
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v Azdren Xerxa>Can we compare and discuss individually, such as payback period, IRR, and Profitability index, even if one project does not have these?
00:49:14.000 --> 00:49:14.900
v Judith Smith>its in the assessment overview
00:49:15.000 --> 00:49:15.900
v Fatema Mansoo
thank you
00:49:31.000 --> 00:49:31.900
v Judith Smith>1000 words plus spreadsheet
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v Jana-Maria Scherme
If the IRR is really really high, should we include it in the analysis?
00:54:48.000 --> 00:54:48.900
v Jana-Maria Scherme
For option 2, if we license someone to produce our plastic packaging shouldn't we have some costs connected to that? I can't find anything about that in the text.
00:56:36.000 --> 00:56:36.900
v Judith Smith>it talks about the negotiations on what the terms would be?
00:59:17.000 --> 00:59:17.900
v Judith Smith>No. all good so far. Thanks again
00:59:33.000 --> 00:59:33.900
v Jie Li>All good. Thanks. Have a great night
00:59:45.000 --> 00:59:45.900
v Na Luo>thank you
00:59:53.000 --> 00:59:53.900
v Fatema Mansoo
Thank you for this session
01:00:08.000 --> 01:00:08.900
v Rajat Kuma
thank you
PowerPoint Presentation
Notes on the video “Applying CAPM”
The CAPM is the major model used to estimate the return that shareholders require (called the required return), which from the firm’s perspective is the cost of equity.
The video refers to the output of using the SML equation as the “required” rather than “expected” return. If the market is in equili
ium these two returns will be the same. When using CAPM to estimate the cost of equity, we usually make this assumption.
The video refers to “market” risk, a synonym for systematic risk.
The video refers to various sources of data for government bond yields and beta. However, the S&P Capital IQ database, a commonly used database in practice, includes all the required data in one place. See Web Links on the unit BB site for further details on this database.
Putting the pieces togethe
An asset’s required return (the minimum expected return needed to induce an average investor to buy the asset) is made up of 2 components:
a risk-free return (rf) to compensate for inflation and time
a risk premium (RPi) for bearing market risk.
The market risk premium (RPM) represents average market risk (beta = 1) so we adjust it for the higher or lower market risk of an asset using the asset’s beta, therefore RPi = bi(RPM).
The CAPM’s SML equation in its various forms.
CAPM inputs for equities: Australian context
Use the cu
ent YTM on Australian government bonds as a proxy for rf
Can source from S&P Capital IQ
Match maturity of the bond to the investment horizon for asset i
KPMG XXXXXXXXXXsurvey finds 88% use 10 year gov’t bonds in equity valuations.
Use the historical market risk premium as a proxy for RPM
Australian studies consistently show the historical RPM to be in the range of 6-8%.
Brailsford et al XXXXXXXXXXfinds RPM = 6.4% over XXXXXXXXXX.
KPMG XXXXXXXXXXfinds nearly 80% use 6%.
Use a beta for asset i as a proxy for bi
Can source beta from S&P Capital IQ.
Brailsford, T., Handley, J.C. & Maheswaran, K. 2012, ‘The historical equity risk premium in Australia: post-GFC and 128 years of data’, Accounting & Finance, 52, pp XXXXXXXXXX.
KPMG 2015, Australian Valuation Practices Survey 2015, KPMG, available at https:
www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/valuation-practices-survey/Documents/valuation-practices-survey-2015.pdf, accessed 14 August 2015.
Example: Telstra and Billabong
f: 2.78%; 11 August 2015 yield on 10 year Australian gov’t bonds1
RPM: 6.4% (Brailsford et al. 2012)
Telstra = 0.50 and bBillabong = 1.20; 11 August 2015 betas1
1 Yield sourced from RBA statistics and betas sourced from Morningstar DatAnalysis database. However, as of 2019, we can access all needed data from the S&P Capital IQ database. See web links for details.
Example: Telstra and Billabong
Assume you have the following return forecasts:
Telstra: 7%
Billabong: 8%
If confident in all estimates and forecasts, is each company’s stock underpriced, underpriced or co
ectly priced?
Telstra is underpriced because forecast (7%) > required return (5.98%)
That is, if your assumptions and the forecasts are co
ect, demand for Telstra stock should drive up the price.
Billabong is overpriced because forecast (8%) < required return (10.46%)
That is, if your assumptions and the forecasts are co
ect, investors will sell Billabong stock, driving down the price.
Required return can also be used as an estimate of cost of equity.