Identify and explain the relevance of five financial ratios

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Reference no: EM133535777 , Length: word count:5000

Assessment Task - Company Valuation Report

You are required to analyse WOOLWORTHS GROUP (ASX Code: WOW and Workspace Code: WOW.AX) and prepare an investment recommendation report. The report provides an assessment of the company's current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the company's shares. Your report should make a case for the company's shares to be rated in one of the following ways:

Company Analysis
Provide an overview of the company's history, operations and any structural changes it has undergone since it began. This is to understand how the company got to where it is today and what may occur in the future.Also, discuss the ESG factorsrelevant for the company, including analysis of the company's contribution to the conservation of the natural world, consideration of people and relationships and standards for running a company.

Industry Analysis
Analyse the industry structure in which the firm operates and whether it is domestically focussed or has a global nature. Identify the industry's major companies and where they operate, and how they compete with WOOLWORTHS.

Evaluate the relative historical financial performance of the company among its peers
• identify the firm's major competitors and discuss why they have been selected
• identify and explain the relevance of five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the company and its peersover a historical period of five financial years.
• explain the performance of the company compared to its peers using this analysis
• analyse and explain the reasons for changes in these ratios over the past five years and comparethem to the average of the past five years
• do not simply describe the changes in the ratios è analyse and comment on the reasons for the change in ROE for the firm and its competitors with reference to the difference in the three components over five years
• relevantcharts/graphsshould be used to illustrate these figures

Analyse the company's/industry's current issues and explain the effect of these issues on the company's future earnings

a) At the Macroeconomic Level
• general factors that apply to the industry (GDP, employment, growth of the industry, regulation, global factors, supply, demand, prices, etc.)

b) At the Microeconomic Level
• the company- and industry-specific factors (operation, financials, objectives, competition, etc.)
c) As a SWOT analysis
• detail the Strengths, Weaknesses, Opportunities and Threats to the company
d) As either a PESTEL or a Porter analysis
• analyse the company's position in its industry using one of these techniques

• Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33

2. The Risk-Free Rate of Return
Use the 10-year Australian Government bond yield as a proxy for the RFR. This yield can be found on Workspace page AU10YT=RR. Take the current Bid yield (do not use the bond price)

3. The Market Return
Use this estimate of the market return E(RM): 8.90% (Source: Canstar)
• The CAPM required return should be used as the discount rate in your valuation models

Estimate the intrinsic value of the company's shares using the dividend discount model (DDM)
• you must use a Multi-Stage DDM. Follow the methodology discussed in the Equity Valuation slides
• justify the number of years usedfor each of your growth periods
• determine the growth rate for Stage 1 using the Retention Ratio and ROE formula
• estimate the growth rate for Stage 2 using your discussion in thecompany's/industry current issues section
• estimate the terminal (Stage 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value
• calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company
• provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
• provide justification and reasoning for your growth rate assumptions for growth in Stage2 and Stage3
Estimate the intrinsic value of the company's shares using the Free Cash Flow to Equity (FCFE) model
• you must use a multi-stage FCFE model to calculate the intrinsic value of the stock
• source the components for FCFE from the company's financial statements using Workspace
• calculate the FCFE per share over the past six yearsand use the growth rate in FCFE per share as your growth for Stage 1
• estimate the growth of FCFE for Stage 2 using your macro and microanalysis
• estimate the terminal (Stage 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value
• calculate the present value of each future year's FCFE to calculate present value, then add them to calculate the intrinsic value of the company
• provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
• provide justification and reasoning for your growth rate assumptions for growth in Stage 2 and Stage 3
• are your estimated growth ratesthe same as that used for your DDM model or different? Why?

Apply Relative Valuation techniques to ascertain the valuation of the firm
• compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers
• determine the relative valuation of the firm using these multiples (do not attempt to calculate the share price)
• analyse and comment on the relative valuation of the firm in comparison to its peers
• is it overvalued or undervalued using this methodology?

Using relevant charts, evaluate the company's share price performance over the lastfive years
• compare the relative performance of the company to the S&P/ASX 200 Index (Workspace Code: .AXJO)
• compare the relative performance of the company to its peer group
• comment on these charts, referencing reasons for any significant changes you have identified
• use common-base charts from Workspaceto give the best view of these relationships

Perform a technical analysis of share price movements over the last five years
• use 50-day vs 200-day moving average lines and volume analysis to identify Buy and Sell signals
• show and commenton these analyses with reference to Workspacecharts
• use volume analysis to confirm your price signals
• draw support and resistance lines to indicate price trends and channels

Evaluate your findings
• Why do the intrinsic values you have calculated differ from the current/recent share price?
• How does this difference inform your investment recommendation?
• What is your investment decision based on your evaluation?
• Is your recommendation to Buy, Sell or Hold shares in this company?
• Is it different from the signal obtained from the technical analysis? Why?
• Does your qualitative analysis agree with your quantitative analysis? If not, why not?

Presentation of Report

The report is to be presented in the form of a stock analyst's investment report. It should have an Executive Summary (see below), outlining the main findings, at the beginning. The remainder can be structured in line with the above points. Attach details of your working and calculations, and any other relevant information, as an Appendix. DO NOT send a separate Excel file. Do not include all the data for the beta calculation, just the regression statistics from Excel.
• Illustrate your arguments with relevant charts and diagrams, which should be labelled and referenced, where appropriate.
• Relate all the information in your analysis to your investment recommendation.
• Build a case for your recommendation by using your findings from each of the points above.
• Your report should look professional, with charts and diagrams as required to illustrate your points. Charts copied from Workspace should be easily readable, meaning that the scale, data points and annotations should be clear and not blurred or distorted. If it can't be read, it will not be graded.

Attachment:- Valuation_Assignment.rar

Reference no: EM133535777

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