The Market Valuation and Research

Question: Discuss about the market valuation and Research. Answer: Rio Tinto Share Valuation: Depicting the price in which share is purchased in July 2012 and stating the holding period return if shares are sold in November 2016: Particulars Value Purchase price of Rio Tinto in July 2012 $53.20 Income ($0.6851 + $1.85 + $2.23 + $2.98 + $2.11) = $9.86 Capital Gain ($57.75 $53.20) = $4.55 Holding period return after November 2016 (Income + Capital Gain) / Beginning investment Holding period return ($9.86 + $4.55) / $53.20 Holding period return 27.08% Calculating the Expected return on Rio Tinto shares over the period: Particulars Value Government yield (Rf) 2.50% ASX200 expected return (Rm) 10% Rio Tintos beta () 1.3 Expected return Rf + (Rm-Rf) Expected return 2.50% + 1.3 * (10% - 2.50%) Expected return 2.50% + 1.3 * 7.50% Expected return 2.50% + 0.975 Expected return 12.25% Depicting the reason behind change in Rio Tintos dividend policy and providing relevant theoretical knowledge of how change has influenced its share price: The major reason behind the change in dividend policy of Rio Tinto was due to the decline in net profits achieved by the company during 2015 fiscal year. In addition, the overall change in dividend policy of the company negatively reflected in its share price. Moreover, the overall share price of the company mainly fell around 2.65% within two days after the announcement of change in dividend policy. Travlos, Trigeorgis and Vafeas (2015) mentioned that change in expected dividend of the company mainly increases disappointment among investors, which initiates mass sell orders. Furthermore, the Rio Tinto had to change the overall dividend policy due to the overall decline in iron ore prices in the commodity market. On the other hand, Frantisek and Pavel (2015) criticises that dividend policy mainly reduces its friction if the overall performance of the company is not up to the mark of investors. Moreover, Rio Tinto has mainly adopted relevant dividend policy method, as it might help in depicting the overall valuation of the company. In addition, the adoption of relevant theory mainly helps the company to change its overall dividends according to the overall profits generated on the fiscal year. Deshmukh, Goel and Howe (2013) mentioned that due to the impact of relevant dividend theory model investors are mainly able to derive the overall fundamental evaluation of the company. Furthermore, some companies for reducing the overall divined paid to their investors mainly use irrelevant dividend theory. Thus, the overall change in share price of Rio Tinto mainly depicts the impact of relevant divined policy, which is affected by companys overall dividend growth. Providing relevant advice to Donald for investing in Rio Tintos shares: Required rate of return 20% Dividend $ 2.9680 Growth rate 1st to 3rd year 3% Growth rate 4th and 8th year 8% Particulars Formula Amount D1 $ 2.9680 * 103 $ 3.0570 D2 $ 3.0570 * 103 $ 3.1488 D3 $ 3.1488 * 103 $ 3.2432 D4 $ 3.2432 * 108 $ 3.5027 D5 $ 3.5027 * 108 $ 3.7829 D6 $ 3.7829 * 108 $ 4.0855 D7 $ 4.0855 * 108 $ 4.4124 D8 $ 4.4124 * 108 $ 4.7653 P8 (D*(1+g))/ (R - g) (4.7653*(1+8%))/(20%-8%) $ 23.8267 Particulars Amount Discounting value Present value D1 $ 3.0570 0.833333333 $ 2.55 D2 $ 3.1488 0.694444444 $ 2.19 D3 $ 3.2432 0.578703704 $ 1.88 D4 $ 3.5027 0.482253086 $ 1.69 D5 $ 3.7829 0.401877572 $ 1.52 D6 $ 4.0855 0.334897977 $ 1.37 D7 $ 4.4124 0.279081647 $ 1.23 D8 $ 4.7653 0.232568039 $ 1.11 P8 $ 23.8267 0.232568039 $ 5.54 Total Value $ 19.07 Current Share price $ 59.55 Loss $ 40.48 After the evaluation of the overall table a loss in value of shares is mainly identified, which could hamper the overall return of Donald. The finial and interim dividend of Rio Tinto for the year 2015, $2.968 is mainly used, as valuation on single interim dividend was not appropriate. In addition, current share price of Rio Tinto is mainly at 59.55 as of December 19, 2016. Investment in Rio Tinto could mainly increase loss of Donald by $40.48 per share, thus it is advised not to invest in the company. Andriosopoulos and Lasfer (2015) mentioned that dividend discount model mainly depicts the fundamental share price value of the company, which might differ from market valuation. Furthermore, seeing the drastic loss in valuation after 8 years it is not advisable for Donald to invest in Rio Tinto as it might reduce the overall investment capital. However, the high-expected return on such investment has mainly degraded the overall future valuation of the company. In addition, the actual expected return of the company is mainly at 12.25%, which could appreciate the overall share price of the company. Depicting Rio Tintos share price at the end of three years: Required rate of return 20% Dividend $ 2.9680 Growth rate 1st to 3rd year 3% Particulars Formula Amount D1 $ 2.9680 * 103 $ 3.0570 D2 $ 3.0570 * 103 $ 3.1488 D3 $ 3.1488 * 103 $ 3.2432 P3 (D*(1+g))/ (R - g) (3.2432 *(1+3%))/(20%-3%) $ 29.1889 Particulars Amount Discounting value Present value D1 $ 3.0570 0.833333333 $ 2.55 D2 $ 3.1488 0.694444444 $ 2.19 D3 $ 3.2432 0.578703704 $ 1.88 P3 $ 19.6501 0.578703704 $ 16.89 Total Value $ 23.50 Current Share price $ 59.55 Loss $ 36.05 From the evaluation of above tables, share price of Rio Tinto after three years could effectively be identified. This evaluation mainly depicts the loss in overall valuation of share price due to a steady increase of 3% in dividends each year. Moreover, the low dividend growth is accompanied with higher expected return, which is mainly degrading the overall future return from the company. In addition, according to the dividend discount model overall growth in dividend is not adequate, which could help in improving future prices of Rio Tinto. Gleason, Bruce and Li (2013) mentioned that low dividend growth and high expected return of investors mainly degrade the overall fundamental share price valuation of the company. Reference and Bibliography: Andriosopoulos, D. and Lasfer, M., 2015. The market valuation of share repurchases in Europe.Journal of Banking Finance,55, pp.327-339. Asx.com.au. (2017). [online] Available at: https://www.asx.com.au/asx/share-price-research/company/RIO/statistics/shares [Accessed 27 Jan. 2017]. Blum, A., 2016.Equity valuation in China: the case of Baidu(Doctoral dissertation). Cumming, D. and Hou, W., 2014. Valuation of restricted shares by conflicting shareholders in the Split Share Structure Reform.The European Journal of Finance,20(7-9), pp.778-802. Deshmukh, S., Goel, A.M. and Howe, K.M., 2013. CEO overconfidence and dividend policy.Journal of Financial Intermediation,22(3), pp.440-463. Finance.yahoo.com. (2016).Rio Tinto Surprised the Markets with Dividend Policy Change. [online] Available at: https://finance.yahoo.com/news/rio-tinto-surprised-markets-dividend-163038052.html [Accessed 27 Jan. 2017] Frantiek, S. and Pavel, D., 2015. The position of management of czech joint-stock companies on dividend policy.E+ M Ekonomie a Management, volume 2015, issue: 2. Gleason, C.A., Bruce Johnson, W. and Li, H., 2013. Valuation model use and the price target performance of sell?side equity analysts.Contemporary Accounting Research,30(1), pp.80-115. Travlos, N.G., Trigeorgis, L. and Vafeas, N., 2015. Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus. Vijitha, P. and Nimalathasan, B., 2014. 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