OutlineIntroductionWoolworth capital structureBeta: Risk free rate and market risk premium: Cost of equity: Enterprise value: Valuation using constant growth FCFF: Two stage FCFF modelP/E ValuationA P/BV valuationP/BV valuation = Current share price/ current book valueSummary of valuationsConclusionIntroductionContinued from last assessment we basically attempt to develop and provide a range of estimates of the value of the publicly-listed company which is Woolworth. Woolworth Company is basically a retail company that is famed for setting trends world over. It is also believed to be one of the successful international stores, creating what other modern retail stores follow in a bid to stay ahead in the market.
Woolworth ltd’s success depends on its ability to connect with customers by providing them a wide variety of products that meet their desires, and also on the ability of the company to execute the will of its customers effectively. This paper covers some of the developed data that would assist in the investment decisions of the firm or clients. A lot of consideration has been done before coming up with most of the information covered. For instance, When carrying out valuation report we adopt methods that analysis of the firm’s capital structure, valuation using free cash flow to the firm (FCFF), constant growth and multistage growth model, Price to earnings, price to book ratios …etc.
which enable us to come up with clear picture on the financial status of the organization. It goes further to show a broad knowledge of business valuation, both practice and theory, through some of the developed estimates of the value of the firm. This paper critically analyses Woolworths. Woolworth capital structureThe company two forms of capital debt and equity, it does not have preference share capital.
This capital be determined by two ratios Debt ratio and Equity ratio. The Debt Ratio shows us the proportion of assets that are financed through debt and is an indicator of the riskiness of the business as well as the borrowing capacity. A high debt ratio also means that the company is paying a sufficient amount of interest to pay for their loans. These ratios are calculated as follows; Debt ratio = Debt/Equity ratio = From the appendix (excel document the rations for this company are; 2011201020082008Debt ratio60.46%54.97%56.78%62.06%Equity ratio42.22%46.06%38.58%56.17%From the results above, it is clear that Woolworth has no optimal capital structure as the structure is fluctuating from year to year.
The company should strive to reduce its debt to total assets to rate below 50%. Lower debt ratio can be considered as a good sign for any company especially in this industry as some of the risks related to debt like interest rate risk, timing risk are reduced significantly. Beta: Beta is a measure of risk if a stock or portfolio as relative to the market.
The beta of the company to be used in this case is 0.34(Reuters, 2012). This beta indicates that is less risk than the overall market. A higher beta implies a higher expected rate of return but at the same time posing more risk. As a beta greater than 1 indicates that the security's price will be more volatile than the market. Higher return on market portfolio is simply higher benefit accrued to investors from diversified portfolios. The effectiveness of beta as a measure of risk and returns is good but it is limited in the sense that it incorporates only the changes in the stock price but not the risk that can be understood only from reading the financial statements from a fundamental viewpoint.
Beta is one of the important indicators though of the risk and return relationship of stocks when you are just concerned with trading them and not holding them for an indefinite period of time. The CAPM method at least allows investors some degree of measurement on how to value their investments or potential investments and assist in decision making but it should not be treated as the absolute measure of value and allocation decisions.