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Capabilities Statement
Strategic Finance Group: SFG Consulting is comprised of a team of leading finance academics and consultants
with expertise in valuation, risk management and financial modelling. Our objective is to provide innovative
solutions to corporate finance and valuation issues by combining academic rigor with practical implementation.
We seek to be at the forefront of corporate finance practice by:
Creating financial modelling tools to analyse corporate finance questions at an in-depth level, providing
rich information to management to improve decision-making;
We provide advice tailored to our clients’ requirements, not boilerplate solutions. Our objective is to provide
clients with sophisticated analysis and a framework for decision-making, tailored to the issue at hand. Our
combined experience has required us to impart complex financial issues to courts, boards, managers, traders and
students. Our competitive advantage stems from:
Technical expertise: Our advice is at the forefront of commercial practice by implementing the latest
academic research to improve management decision-making. Utilising our advice ensures decisions are
based on current best-practices, thereby maximising shareholder value; and
Independence: A key feature of our advice is our independence. Our reputation is enhanced by preparing
rigorous, objective analysis.
Over the last seven years, we have advised a broad range of clients across a variety of industries. Some of our
clients are listed below:
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Strategic Finance Group: SFG Consulting – Capabilities Statement
2. Our Team
Professor Stephen Gray (Managing Director), PhD (Stanford); BCom (Hons); LLB (Hons)
Stephen graduated from the University of Queensland in 1989 as a university medallist and completed his PhD
at Stanford in 1995. He is the Managing Director of SFG and is actively involved in developing frameworks for
analysing complex business problems, financial modelling, and writing reports to convey complex arguments and
analysis in a way that is accessible to corporate managers, regulators, and legal professionals. He is an active
consultant to industry on issues relating to valuation, cost of capital, corporate financial strategy and the creation
of shareholder value. He has also appeared as an expert in several court proceedings.
Stephen is well known for his work on empirical finance, asset-pricing and corporate finance which has been
published in journals including the Journal of Finance and Journal of Financial Economics. Stephen teaches courses in
financial management, asset valuation, and corporate finance at UQ Business School, and was recently awarded
the Prime Minister’s Award for University Teacher of the Year in Economics and Business.
Jason spent three years as an equity analyst with Credit Suisse First Boston after graduating from the University
of Queensland in 1996 as a university medallist. He has worked for SFG Consulting since 2000, providing
advice on cost of capital, investment valuation and regulatory issues. Some more recent projects include:
Estimation of retail electricity margins in NSW (Independent Pricing and Regulatory Tribunal);
Advice on whether the cost of capital is likely to differ for a listed versus an unlisted infrastructure
fund and across alternative European equity markets (ABN AMRO Rothschild);
He is a lecturer at UQ Business School, specialising in corporate finance and investments. His research has been
published in renowned financial journals including Accounting and Finance, International Review of Finance and
International Journal of Accounting Information Systems.
Jennifer is completing a Bachelor of Commerce/Bachelor of Law at the University of Queensland. She worked
as an accountant in Pitcher Partner’s Tax and Business Advisory Services unit before joining SFG in 2007.
Tristan is currently studying Commerce/Law at the University of Queensland. He has worked as an analyst at a
number of firms including Ernst & Young, Macquarie Bank and JPMorgan.
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SFG Consulting: Capabilities Statement
3. Capabilities
Financial and economic analysis is often used to answer precise questions. What is the value of the firm or
project? What is the regulated price?
Answering these questions requires considerable expertise. While the techniques required form part of finance
and economic courses worldwide, the assumptions and inherent limitations underpinning these techniques are
often not understood. In practice this leads to value or prices being incorrectly estimated and a less than full
understanding of risk exposure.
In general, uncertainty surrounding most financial analysis is understated. For instance, in the typical case,
management is provided only with a ‘base-case’ estimate, or at best, they may receive a couple of extreme
scenarios. But how can management form a decision based on this information alone? What is the likelihood of
each scenario? We propose that much of the financial and statistical information that firms are required to
examine can be clearly presented within a more sophisticated framework.
For example, through detailed financial modelling and simulation techniques, it is possible to quantify a probability
distribution surrounding a firm valuation. This allows management to place a probability on the range of possible
outcomes, increasing transparency about critical decisions.
SFG Consulting provides expert advice on a range of corporate finance and valuation issues, including:
Valuations;
Risk management.
SFG Consulting has substantial experience in providing valuation, financial modelling, and economic analysis to
support legal proceedings. Clients seek our services to either provide advice on identifying relevant issues and
developing case strategy, or to directly act as an expert witness.
Under either role, our advice is based on rigorous and detailed analysis tailored to the needs of each case.
Importantly, all our advice is presented in a clear and concise manner, thereby allowing complex information to
be imparted effectively.
When clients retain SFG Consulting to provide support (rather than act directly as an expert witness) our
approach is to:
Consult with lawyers. During the early stages of a case, SFG Consulting works closely with the legal
team to identify the key financial and economic issues;
Conduct research and analysis. Our expertise can be used to investigate the relative strengths and
weaknesses prepared by expert witnesses on both sides of the case; and
Prepare for trial. Our staff can help legal counsel prepare for trial by developing cross-examination
questions.
Example: In the C7 case, SFG Consulting was jointly retained by PBL, News Corporation, and Telstra to
provide advice on the quantification of damages. Specifically, we prepared reports on the value of dividend
imputation credits and the systematic risk (or beta) of an Australian cable TV business.
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SFG Consulting: Capabilities Statement
SFG Consulting has extensive experience in providing litigation support and producing expert reports. We have:
Produced an expert written report on whether a client’s arbitrage-driven trading strategy caused undue
movements in the ASX index;
Provided expert valuation advice in cases relating to forestry assets, agricultural marketing schemes and
television broadcasting rights;
Provided submissions for regulatory determinations (for example, on the value of franking credits, an
appropriate estimate of the market risk premium and the estimation of beta for regulated entities); and
Example: In the 2005 SA Electricity Distribution Price Determination, we were retained by ETSA Utilities to
analyse and comment on the appropriate equity beta to be used in determining the WACC of an Australian
energy distribution business. Based on our analysis, ESCOSA raised their equity beta estimate from 0.8 to 0.9
leading to the regulated rate of return changing from 6.8% to 7.1%.
Provided litigation support in a case relating to the valuation of land for stamp duty purposes.
Example: In ANTA v Commissioner of Taxes, SFG Consulting was retained by Alcan to review numerous
valuations prepared by alternative experts to determine the value of land for stamp duty purposes. Our advice
focussed on identifying relevant issues and developing case strategy. As part of our advice, we provided Legal
Counsel with a financial model to easily assess the impact of various concessions made by the respondent’s
expert. SFG’s evidence was reviewed and accepted by the Court, resulting in a favourable outcome for Alcan.
3.2 Valuation
Valuation methodologies are frequently used, but seldom understood. However, financial models and valuations
need not be viewed as a black box. Our aim is to improve managerial decision making by providing valuations
that more adequately encompass uncertainty and risk.
Value is most commonly assessed using the discounted cash flow methodology, which forms part of financial
management courses worldwide. The more sophisticated valuation methodology termed ‘real options analysis’ is
considerably more complex to apply, but is gradually being incorporated into corporate decision-making.
However, the inherent assumptions underpinning both valuation methodologies are, in general, poorly-
understood. This results in two outcomes: (1) value is estimated incorrectly and (2) there is a lack of
understanding of the range of possible outcomes and the factors which determine those outcomes.
Examples: SFG Consulting performed independent valuations of GroundProbe Pty Ltd’s executive stock options
(for the purpose of discharging GroundProbe’s disclosure requirements under AASB accounting standards) and
the valuation of Colins Foods Holdings’ Tracking Stock Bonus Plan (using Monte Carlo simulation analysis).
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SFG Consulting: Capabilities Statement
SFG Consulting has advised on capital structure issues and the appropriate weighted average cost of capital
(WACC) for regulated and unregulated entities. Our approach combines sophisticated simulation techniques
with the latest applied research on topics such as credit ratings, financial distress and interest rates.
In relation to capital management issues, the traditional approach to estimating an optimal capital structure is
typically based on a single key statistic – often the weighted average cost of capital (WACC) or the firm’s credit
rating. Conversely, our more rigorous approach incorporates a number of key financial indicators. An approach
based solely on WACC minimisation may be flawed if there is a lack of publicly-traded equity or a need for
financial flexibility. Utilising a multi-dimensional model provides a superior examination of the optimal capital
structure that overcomes these problems.
Estimate the optimal capital structure. The optimal capital structure of a firm represents a trade-off
between interest tax shields and the costs of financial distress. Given the recent increase in global
interest rates from historic lows, determining a firm’s optimal capital structure will become increasingly
important; and
Examine the impact that a proposed equity or debt raising (or buyback) would have on the firm’s key
financial indicators. For instance, we can estimate the probability that a firm’s credit rating would fall
below investment grade – or the probability that dividends would fall below a certain threshold –
following a proposed debt issue.
Example: We advised the NSW Treasury on the optimal capital structure for two large energy companies. As
part of this project we built a detailed financial model to analyse the effects of various proposed capital structure
changes. In each case, we reported probabilistic ranges for firm value and cost of funds, the probability of the
credit rating falling, and the probabilities of being able to pay various levels of dividends (for government
budgeting purposes). This resulted in the issue of $500 million of debt.
As a integral part of the capital management process, estimating and understanding the weighted average cost of
capital (WACC) is crucial for all firms. The WACC is a forward-looking return that is required by investors
before committing capital to the firm.
For regulated firms, the consequences of underestimating or overestimating the WACC are substantial. If the
WACC is set too low, firms will not be allowed to earn an adequate return on their investment, thereby resulting
in under-investment in critical services. In contrast, if the WACC is set too high, regulated prices will be too high
and consumers will be disadvantaged. Similarly in the commercial setting, if the WACC is underestimated, firms
will undertake projects that destroy shareholder value. But if the WACC is overestimated, firms will forego
profitable projects.
Therefore, estimating the WACC is of paramount importance. However, most practitioners estimate the WACC
with spurious accuracy. A number of WACC parameters cannot be estimated precisely, but can only be tied
down to an economically reasonable range. SFG Consulting has developed a technique for incorporating
parameter estimation error into the WACC calculation. This allows us to quantify the probability that a particular
regulated return will be sufficient to meet the regulated firm’s cost of funds. This framework can also be used to
set hurdle rates in line with corporate strategy.
Estimate the cost of capital in regulatory determinations. SFG Consulting has extensive experience in
estimating the cost of capital in regulatory settings, having advised clients in more than 20 regulatory
determinations. This advice has led regulators to vary parameter estimates and allowable returns on
review.
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SFG Consulting: Capabilities Statement
Estimate the cost of capital or required return on equity for capital budgeting purposes. Many
organizations use hurdle rates to evaluate projects and clients often seek our advice to review their
methodology. Our advice focuses on setting hurdle rates that are consistent with corporate strategy.
Example: A major Australian transport company and the board of a utility company sought our advice to review
the WACC and hurdle rates used internally for project valuation. Our advice focussed on how hurdle rates can be
set with reference to corporate strategy given uncertainty surrounding the firm’s true cost of funds. Our analysis
also included the estimation of the WACC of distinct business segments.
Our advice remains at the forefront of corporate finance practice, with our staff publishing in leading
academic journals including the Journal of Financial Economics, International Review of Finance and Accounting
and Finance.
The growth of financial derivatives over the past two decades has improved risk management practices
worldwide. However, many firms are yet to fully appreciate the strengths and weaknesses of various derivative
products.
Our aim is to help clients improve their risk management practices by helping them understand derivatives. Used
correctly, derivatives can reduce exposure to adverse market movements. However, used incorrectly, derivatives
can bankrupt companies. This is highlighted by the recent collapse of Sons of Gwalia.
Example: SFG Consulting, in conjunction with Frontier Economics, were retained by the Murray-Darling Basin
Commission to propose a design of option based instruments to secure water (i.e. water trading options).
Example: Our experience in analysing risk management techniques has been utilised in court proceedings. In a
series of cases, Professor Gray, assisted by SFG Consulting, was retained on behalf of Australian cotton growers
in actions against cotton merchants. In these cases, cotton growers entered into “cotton marketing agreements”
with merchants. These agreements exposed the grower to significant foreign exchange and other risks. Some of
these contracts involved speculative positions in foreign exchange options and futures contracts, including some
exposure to exotic derivative instruments such as knock-out currency put options. We prepared a series of
reports to identify and explain the nature of the financial risks associated with the agreements and to quantify the
losses suffered.
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SFG Consulting: Capabilities Statement
4. Contact Details