Fin 2011 Major Assignment

ASX-Listed Company Valuation Report

Exclusive Summary

This report implements a share price valuation based on Woolworths Limiteds which is an Australian Securities Exchange (ASX) listed company. In Part one, the beta (0.66) is based on the calculation of its historical share prices from September 2010 to September 2015 which is a five-year period, followed by the explanations of the differences compared to Morningstar (0.67). In Part two and three, by using the Capital Asset Pricing Model (CAPM) and a constant growth rate (8%), the appropriate discount rate and the current stock price are obtained which is 6.99% and -$148.51 respectively. The reason for this unrealistic negative share price has been explained in this report. Part 4 employs a two-stage growth model to calculate the stock price ($47.14), indicates the importance of growth rate on stock valuation. Lastly, in order to present a more reliable stock price, variables including beta and growth rate have been changed in part 5. Therefore, the final stock price is $37.74 which is more realistic comparing to Woolworths’ fair value.

Introduction

Woolworths Limited, an Australian public company, was founded in 1924 in Sydney (WL 2015). The company operates its store mainly in Australia and New Zealand, having over 3000 stores according to its website stated (WL 2015). Woolworths, accounting for 43% in Australian grocery market share (SA 2015), operates through six main segments including span food, liquor and petrol, general merchandise, supermarkets, hotels and home improvement (YF 2015). The company is considered as a giant in the industry, competing with Coles Supermarket and Metcash’s IGA (Wright & Lund 2003). Recently, the credit rating for its bonds has been downgraded from AAA to Baa1 according to Moody’s website, and may continue with this rating in the future (Moodys.com 2015).

Part 1 Calculation of Beta

1) Historical data

The historical data is chosen from September 2010 to September 2015 which is a five-year period with a monthly frequency. When choosing the time period of the historical data, there are some factors to consider because the period should be long enough to capture the volatility and risk for the market (Bartholdy & Peare 2005). For example, if choosing one-year data, it may best reflects a company’s current position but it may disregard the business cycle which is usually 10 years (Chordia & Shivakumar 2002). However, a 10-year period is too long which includes too many outdated data or pop-up events. Therefore a five-year period is sufficient which can both reflect current data base and generate a accurate future prediction (Bartholdy & Peare 2005). In terms of frequency, daily frequency and weekly frequency again involves large amount of data and there may have mismatch between company’s data and the market’s data, therefore is better to use monthly frequency. Thus, it is best to use five years of monthly data.