Share valuation and analysis Fairfax Media Limited

Question: Describe the Share valuation and analysis of Fairfax Media Limited? Answer: The contemporary global market has experienced a list of factors influence the stock market. Therefore, before evaluating the share price of the Fairfax Media Limited, it is essential to understand the market wide influences that affecting the value of firm. In this context, it is noted that social instability can led to the market to go down; at the same time as an organization ascertaining an innovative source of renewable energy can led stock market performances to rise. It is also the fact that various economic aspects influence the stock market that each financier should be aware of prior to getting engaged in market investing. Since, the study emphasized on valuation of stock of Fairfax Media Limited, the Australian economic scenarios were considered here. Australian Inflation rate: Figure: Historical inflation rate Source: [https://www.rateinflation.com/inflation-rate/australia-historical-inflation-rate?start-year=2005end-year=2015] Inflation rate of the economy has significant influence on the share price of the companies operating in that market. Various studies have been conducted in order to establish a relationship between stock return and the inflation rate. It has been observed that the expected rate of inflation may have a positive or negative correlation with the share price. If the rate of inflation increases it will lead to increase in the revenue, expenditure and the discount rate will also change (Nori Mousa et al., 2012). The regional factors and the time period must be considered while assessing the impact of inflation on stock price. If the monetary policy of the government has significant ability to hedge, inflation will have a positive relationship with the stock prices. Over the past few years, the inflation rate of Australia has been found estimated to be stable. In last 12 months, the stock price of Fairfax Media Ltd has encountered both ups and downs and the stock price has been increased b y 30.30% (Markets.ft.com, 2015). Interest rate in Australia: Figure: Interest rate in Australia Source: [https://australianpolitics.com/topics/rba/interest-rates-since-1990] Change in the interest rate leads to a significant change in the investment and spending behaviour of the business firms, investors and consumers. Consequently the stock market is also affected. When the rate of rate interest is increased, the borrowing rate of the business organization increases and they may not consider expansion activities. Additionally, with increase in the risk free rate of interest, the expenditure of the consumers declines and they tend to invest in government bonds. As the expansion activity of an organization ceases and the cash outflow increases due to increase in the rate of interest, the net cash flow declines flowed by a decrease in the price of the share. The interest rate of Australia has not been increased over the past few years and it implies that it has a positive impact on the stock market leading to increase in share price. Australian government policy: Government policy of Australia plays a significant role in determining the stock market performance. It has been observed that the government of Australia has been performing effectively for ensuring growth of the nation. The Reserve Bank of Australia is responsible for determining the monetary policy of the nation. For the last few years, it has been focusing on maintain stable prices along with achievement of full employment. The major aim of the government policies is to ensure economic prosperity through welfare of the Australian people. The Reserve Bank of Australia has set a target of consumer of price inflation of 2 to 3% which will be beneficial for the economy as it will contribute in preserving the value of money. Additionally, it will significantly encourage strong as well as sustainable growth of the economy for long period of time. These polices have a positive impact on the stock market of Australia (Rba.gov.au, 2015). Two stage dividend discount model: There are various methods for valuation of the stocks such as dividend discount model, capital asset pricing model, free-cash flow model, earnings capitalization model and the net tangible asset backing model (Basse, 2009). In this paper, dividend discount model will be considered. The growth rate has been assumed. Here, D0 = 0.04 Gs = 14.87% for next five years; Gl = 10% thereafter; Required rate of return = 11.05% Time Year 0 Year 1 Year 2 Year 3 4 5 Dividend 0.05 0.05 0.06 0.07 0.08 Terminal Value 8.38 Total Cash Flow 0.05 0.05 0.06 0.07 8.46 Present Value 0.04 0.04 0.04 0.05 5.01 Intrinsic Value 5.18 The intrinsic value of the share has been found to be 5.18 AUD. The present stock price of Fairfax Media Ltd is 0.85 AUD. Hence, it can be stated that the investor must buy the stock as the share is undervalued (Fabozzi and Markowitz, 2011). Sensitivity analysis: gL Intrinsic Value Current 5.18 8.0% 1.90 8.5% 2.24 9.0% 2.74 9.5% 3.57 10.0% 5.18 10.5% 9.74 11.0% 105.38 11.5% -11.52 12.0% -5.36 12.5% -3.45 gS gL 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 8.0% 1.45 1.48 1.51 1.55 1.58 1.61 1.65 8.5% 1.70 1.74 1.78 1.82 1.86 1.90 1.94 9.0% 2.08 2.13 2.17 2.22 2.27 2.32 2.37 9.5% 2.70 2.76 2.83 2.89 2.95 3.02 3.09 10.0% 3.92 4.01 4.10 4.19 4.28 4.38 4.48 10.5% 7.34 7.51 7.68 7.86 8.04 8.22 8.40 11.0% 79.25 81.09 82.97 84.87 86.82 88.80 90.82 11.5% -8.64 -8.84 -9.05 -9.26 -9.47 -9.69 -9.91 12.0% -4.01 -4.11 -4.20 -4.30 -4.40 -4.51 -4.61 12.5% -2.58 -2.64 -2.70 -2.77 -2.83 -2.90 -2.96 Sensitivity analysis has been carried by considering different growth rate. First of all, the growth rate beyond five years has been varied from 8% to 12.5% when the growth rate of first five years is constant. It has been found that from 11.5% and more, the intrinsic value of the firm will be negative and hence, the investor must sell it as the stock price is overvalued. When the growth rate is 8 to 11%, the investor must buy as the stock is undervalued. The second table demonstrates the change in the intrinsic value when both growth rate changes. It has been observed that the change in growth rate of first five years will not have significant impact on the investors decision (Pinto, 2010). References Australianpolitics.com, (2015).Interest Rates Since 1990: Reserve Bank of Australia Cash Rate | AustralianPolitics.com. [online] Available at: https://australianpolitics.com/topics/rba/interest-rates-since-1990 [Accessed 19 Jan. 2015]. Basse, T. (2009). Dividend Policy and Inflation In Australia: Results From Cointegration Tests.IJBM, 4(6). Fabozzi, F. and Markowitz, H. (2011).The theory and practice of investment management. Hoboken, N.J.: John Wiley Sons. Markets.ft.com, (2015).Fairfax Media Ltd, FXJ:ASX summary - FT.com. [online] Available at: https://markets.ft.com/research/Markets/Tearsheets/Summary?s=FXJ:ASX [Accessed 19 Jan. 2015]. Nori Mousa, S., Al safi, W., Hasoneh, A. and Abo-orabi, M. (2012). THE RELATIONSHIP BETWEEN INFLATION AND STOCK PRICES.International Journal of Research and Reviews in Applied Sciences, 10(1), pp.46-52. Pinto, J. (2010).Equity asset valuation. Hoboken, N.J.: Wiley. Rateinflation.com, (2015).Australia Historical Inflation Rate - 2005 to 2015. [online] Available at: https://www.rateinflation.com/inflation-rate/australia-historical-inflation-rate?start-year=2005end-year=2015 [Accessed 19 Jan. 2015]. Rba.gov.au, (2015).RBA: Monetary Policy. [online] Available at: https://www.rba.gov.au/monetary-policy/ [Accessed 19 Jan. 2015].