ACF5130 Financial statement analysis and business valuation
Capital Market Analysis: Tutorial Questions
Question 1
On January 24, 2023, Hindenburg, a US financial firm, released a report targeting Adani companies that it said was the result of a long investigation. Hindenburg Research accused Adani a “brazen stock manipulation and accounting fraud scheme” that has driven up the price of the listed Adani companies and inflated the net worth of its billionaire chairman, Mr Gautam Adani. Hindenburg pointed to the large debt held by Adani companies that put the entire group on a difficult financial situation. The graph below (from Yahoo! Finance) shows the share prices of Adani Enterprises Ltd, the main Adani company and the Nifty 50 Index of the National Stock Exchange for the period 2 Jan 2023 – 20 February 2023.
Is the market’s response rational?
Question 2
Redder Bus Ltd. is a new bus company, recently listed on the Utopia Stock Exchange. It has a fleet of 5 buses, all of which are leased. The leases are currently classified as operating leases in the books of the company. Redder Bus Ltd. prepares its financial statements in accordance with IFRS. Following the introduction of the new IFRS standard on leases (IFRS 16), Redder Bus Ltd adopted the new standard and reported its first set of financial results under the new standard in its annual report for the year ended 30 June 2020. Under the new standard, Redder Bus Ltd. will have to bring its fleet of buses on to its balance sheet and record the associated lease liability.
REQUIRED:
Ignoring income taxes, explain how this change of accounting policy is likely to affect the value of Redder Bus Ltd. How would an efficient capital market respond to the change of accounting policy?
Question 3
Microsoft reported its second quarter financial results on 30th January 2024. The company reported earnings per share of USD 2.93 and revenue of USD 62.02 billion. The prevailing analyst estimates were respectively USD 2.78 and USD 61.12 billion. Below is an excerpt from a report on CNBC:
“Microsoft shares moved as much as 2% lower in extended trading Tuesday after the software maker issued fiscal second-quarter results that outdid analysts’ estimates and a light quarterly revenue outlook…Microsoft called for fiscal third-quarter revenue between $60 billion and $61 billion, or $60.50 billion at the middle of the range. Analysts polled by LSEG had expected $60.93 billion. But the company sees lower-than-expected cost of revenue and operating expenses during the quarter, based on consensus among analysts polled by StreetAccount…
The company’s Intelligent Cloud segment produced $25.88 billion in revenue, up 20% and above the $25.29 billion consensus among analysts surveyed by StreetAccount. The grouping contains Azure cloud infrastructure, SQL Server, Windows Server, Nuance, GitHub and enterprise services.
Within that segment, revenue from Azure and other cloud services grew 30%. Analysts polled by CNBC had expected 27.7% growth, and the StreetAccount consensus was 27.5%.... Three months ago Microsoft’s top cloud competitor, Amazon, indicated that customers’ efforts to reduce spending were slowing down. On Tuesday Nadella suggested that Microsoft has started seeing a similar shift.
“That period of massive, I’ll call it, optimization only, and no new workload start — that, I think, has ended at this point,” Nadella said.
The closing stock price of Microsoft on 30 Jan 2024 was $408.59. After the earnings announcement, the stock price fell, before closing at $397.58 at the close of trading on 31 Jan 2024. The NASDAQ index changed from 17,476.71 on 30 Jan 2024 to 17,137.24 on 31 Jan 2024. Microsoft has a beta of 0.90.
Question 3
Required:
Calculate the abnormal return of Microsoft on 31 Jan 2024.
Is the fall in the share price of Microsoft following the earnings announcement consistent with your expectations? Explain.
Question 4
Refer to the excel file “Stocks and Market Index.xlsx”
For your assigned company, chart its price movement with that of the market
Compare the performance of your assigned company with that of the Market Index.
Question 5
Refer to the excel file “Stocks and Market Index.xlsx” Calculate the risk-adjusted return for your assigned company The 10-year government bond rate in India is currently 7.09%.
Question 6
What is the difference between market-adjusted return and abnormal return?
Question 7
In 2020, Nikola, a manufacturer of electric trucks, experienced a dramatic rise in its stock price due to positive company announcements and optimistic media coverage. However, later that year, Hindenburg Research, a short-selling firm, published a report accusing Nikola of making false claims about its technology and capabilities. This resulted in a significant plunge in Nikola's stock price.
Question:
Who had more information about Nikola's true state in 2020: investors or Nikola management? Explain your answer.
How did this information asymmetry impact different stakeholders (investors, Nikola management)?
Question 8
Refer to the excel file “Spreads and Volumes.xlsx”.
Calculate the average spread and trading volume over the period and interpret these results.