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200488 Corporate Financial Management Assignment - Western Sydney University, Australia

Task - Collect the data from "Yahoo Finance" and answer the following questions:-

Name of the company: Domino's Pizza Enterprises Limited Code: DMP

a) Collect the market price index (All Ordinaries), Share price for a company and display the data for two sub-periods (Period 1: February 2014 to February 2016; Period 2: October 2016 to October 2018) separately in two separate tables.

b) Calculate the return of share prices (r_j) and market return (r_m) (from market price index). Display the calculated returns along with the risk free rate of return (given in a separate excel file) in a table for two sub periods. Calculate and tabulate, (r_j - R_F) and (r_m - R_F).

Answer to part a) and b):

Period 1: February 2014 to February 2016

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Period 2: October 2016 to October 2018

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c) Calculate the mean, standard deviation, variance and correlation coefficient for (r_j - R_F) and (r_m - R_F) separately (for two sub-period in a table-see next page) and comment on the result.

Answer to part c): The mean, standard deviation and variance for Domino's Pizza Enterprises Limited in the period 1 is 5.3097%, .0999 and .0100 respectively. This shows that the company has given its shareholder a monthly return of 5.309% on average in the period above the risk-free rate and difference of a particular month from mean value can be upto 10%. The standard deviation tells that the volatility in company risk premium in period 1 is .0999.

The mean, standard deviation and variance for All Ordinaries in period 1 is -0.6493%, 0.0399 and 0.0016, respectively. This shows that All ordinaries have given investors in the markets a monthly return of -0.6493% in average above the risk-free rate in the period and difference of a particular month from mean value can be upto .16%. The standard deviation tells us that the volatility in market risk premium in period 1 is .0399.

The correlation coefficient is .6318 in period 1, and this shows that there is a strong relationship between the monthly premium which is given by the company to its investors and the market risk premium in that premium in period 1.

The mean, standard deviation and variance for Domino's Pizza Enterprises Limited in period 2 is -10.8224%, 0.0812 and 0.0035 respectively. This shows that the company has given its shareholder a monthly negative return of -10.8224% in average in the period above the risk-free rate and difference of a particular month from mean value can be upto .35%. The standard deviation tells that the volatility in company risk premium in period 1 is .0812.

The mean, standard deviation and variance for All Ordinaries in period 2 is -9.9710%, 0.0591 and 0.0066, respectively. This shows that All ordinaries have given investors in the markets a monthly negative return of -9.9710% in average above the risk-free rate in the period and difference of a particular month from mean value can be upto .66%. The standard deviation tells us that the volatility in market risk premium in period 1 is .0591.

The correlation coefficient is .3340 in period 1. This shows that there is a relationship between the monthly premium which is given by the company to its investors and the market risk premium in that premium in period 2, but the relationship is weaker than in period 1.

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d) Estimate beta (βj) for your selected company for the two sub-periods.

Answer to part d):

Calculation of estimated beta for period 1=

= Covariance of range of monthly return of Domino's Pizza Enterprises Limited in the period 1and monthly return of All ordinaries in period 1) / Variance of monthly return of All ordinaries in period 1

= 0.0023 / 0.001

= 1.5912

Calculation of estimated beta for period 2=

= Covariance of range of monthly return of Domino's Pizza Enterprises Limited in the period 2 and monthly return of All ordinaries in period 2) / Variance of monthly return of All ordinaries in period 2

= 0.0002 / 0.0006

=.4407

e) Explain the value of beta that you have calculated.

Answer to part e): The value of the beta in period 1 and period 2 are 1.512 and .4407 respectively. This means that when there is decrease or increase in the price in the market in period 1, then the share price of Domino's Pizza Enterprises Limited will also decrease or increase by 1.512 times of the decrease or increase percentage in period 1.

Similarly, when there is decrease or increase in the price in the market in period 2, then the share price of Domino's Pizza Enterprises Limited will also decrease or increase by .4407 times of the decrease or increase percentage in period 2.

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f) Provide a brief description of the company.

Answer to part f): Domino's Pizza Enterprises Limited is the largest pizza chain in the Australian market. It also has the largest pizza franchise in the world, and through this franchise model, it operates in different countries like Germany, Denmark, France and many other countries like these. It became an Australian public limited company in 2005.

g) Why the estimated value of beta is different for two sub-periods?

Answer to part g): The estimated value of beta is different for period 1 and period 2 is different due to difference in the level of relationship of the company return and market return in the two stated periods. The relationship between the company return and market return is stronger in period 1 than period 2 as already seen in the correlation coefficient calculation of the two variables risk premium in period 1 and 2. This stronger relationship resulted in higher beta in period 1 than in period 2 in which the increase or decrease in company return happened in the same pattern as in the market return but in a higher rate.

The relationship between the company return and market return is weaker in period 2 than period 1 as already seen in the correlation coefficient calculation of the two variables risk premium in period 1 and 2. This comparatively weaker relationship resulted in lower beta in period 2 compared to period 1 in which the company return changed in the same pattern as the market return but in a lower rate.

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