Evaluation of Public Investment Decisions

Question: Discuss about the Evaluation of Public Investment Decisions. Answer: Introduction: The present report incorporates analysis of two mining companies Newcrest Mining Limited and Orica Limited to evaluate investment returns and growth in share valuation for proposed investment of AUD 120 million. The analysis has been considered for the current financial period that is financial year 2015- 16 based on the financial performance and financial position of the both the companies together with the current market structure. As per the current data and financial returns of the companies, it has been noted that the required rate of return of Newcrest Mining Limited is 1.13 where as required rate of return of Orica Limited is 10.13. Besides, the value of ordinary share of Newcrest Mining Limited is $0.14 per share and $0.04 per share for Orica Limited. Accordingly, it can be said that the price of Newcrest Minings share is higher whereas the required rate of return is lower while the value of share of Orica Limited is lower. Considering the current market structure, volatility or risk in case of Newcrest Mining (-0.18) is lower than that of Orica Limited (1.02) while earnings per share of Newcrest Mining (0.57) is lower than that of Orica Limited (0.92). On the contrary, price earnings ratio of Newcrest Mining (39.67) is higher than that of Orica limited (19.58) hence it can be said that the Orica Limited is undervalued in the current years. Considering the monthly holding period return of the both the com panies Orica Limited is efficient to derive higher return (58.64%) compared to that of Newcrest Mining (54.82%) which indicates investment in Orica Limited is efficient in generating higher return on investment. As per the analysis on companys return, Orica Limited reflects better performance in terms of EPS, HPR and expected rate of return. Additionally, Orica Limited reflects stable and higher growth in dividend yield that is 7.50% while lower PE ratio indicating better performance in coming years. Considering the valuation of shares of both the companies, it can be said that the dividend rate in Orica Limited is higher whereas the growth rate is also higher. Further, the holding period of the companys shares and investment is 58.64, which is greater than the Newcrest Limited hence; Orica is efficient in holding the investment value. Hence, the investor is recommended to invest AUD $120 million in the ordinary shares of Orica Limited which is expected to generate high as well as steady returns over ten years period. NEWCREST MINING LIMITED ORICA LIMITED Require rate of return (CAPM model) Required rate of return E(R)= RFR + ?stock (R market- RFR) where, RFR = risk free rate of return 2.48 2.48 ?stock =stock's beta -0.18 1.02 R market= expected market return 9.98 9.98 E(R) = 2.48+ (-0.18) (9.98- 2.48) = 1.13 2.48+ (1.02) (9.98- 2.48) = 10.13 Ordinary share valuation (Constant dividend growth model) P = D/ (k- g) Where, D = dividend payout ratio 0.15 0.43 k = required rate of return 1.13 10.13 g = expected growth rate 6.25% 7.50% Share price (P) $ 0.15/ (1.13-6.25%) = 0.14 0.43/ (10.13-7.5%) = 0.04 Monthly holding period return (%) For the period 01 July 2015 to 30 June 2016 01 October 2015 to 30 September 2016 Monthly holding period return (%) {Income + (Value of end period- initial value)}/Initial value Purchase of assets at the beginning of the period ($ millions) 197 211.3 Sale of assets at the end of period ($ millions) 89 87.4 Monthly holding period return (%) (197-89)/197 * 100 (211.3- 87.4)/ 211.3 * 100 = 54.82 = 58.64 Bibliography Arrow, K. J., Lind, R. C. (2014). Uncertainty and the evaluation of public investment decisions.Journal of Natural Resources Policy Research,6(1), 29-44. Asx.com.au. (2017). Australian Securities Exchange - ASX. Retrieved 21 March 2017, from https://www.asx.com.au Newcrest.com.au. (2017). Newcrest Mining Limited.. Retrieved 17 March 2017, from https://www.newcrest.com.au Orica - Clever Resourceful Solutions. (2017). Orica.com. Retrieved 18 March 2017, from https://www.orica.com