Valuation of Woolworth Limited: Corporate Finance Report

Running Head: Corporate Finance
Corporate Finance

Corporate Finance
Contents
Executive Summary.................................................................................................. 2
Profile of the Company.............................................................................................. 2
Beta of Woolworths Limited........................................................................................ 3
Computation of Discount rate of Woolworth Limited using Capital Asset Pricing Model........5
Calculation of Woolworth Limited’s Current Stock Price with Constant Dividend Growth
Model...................................................................................................................... 6
Limitations of the Constant Dividend Growth Model/Gordon Growth Model........................8
References.............................................................................................................. 9
Appendix.............................................................................................................. 10
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Corporate Finance
Executive Summary
This report deals with the valuation of Woolworth Limited. Here, market risk of Woolworth
has been calculated by running the regression analysis on the returns of market and
Woolworth Limited daily return. After computing the beta of Woolworth Limited, it has been
compared with the beta calculated by the financial website. In this case, the beta is taken
from yahoofinance.com. Then the possible reasons of change in the beta values estimated
by us employing CAPM model and as per the yahoo finance are stated and explained. Also,
a constant dividend discount model is explained and is used for the calculation of current
stock price of Woolworth Limited. At the end, the drawbacks or limitations of using this model
is explained in detail.
Profile of the Company
Woolworth started its operations in the year 1924 in Woolworths Stupendous Bargain
Basement. The business was founded by Percy Christmas. At present it is headquartered in
Bella Vista, New South Wales. Presently it has generated revenue of $5.76K per employee.
At present, the competitor lists of Woolworth include Metro, Coles, Carrefour, Distributors,
Safeway, ALDI, Giant Eagle, Supermercato24 etc. Where the revenue of Woolworth Limited
is $1.28 Billion, the revenues of its competitors are; $2B (Coles), $99.8B (ALDI), $2B
(Distributors), $36.3B (Safeway), $8.9B (Giant Eagle), $4B (Carrefour), $80M (Metro) and
$5M (Supermercato24).
In 1929, the first store was opened in New Zealand. Then by 1930 there were six stores in
total which started in New South Wales, Queensland and Western Australia. Earlier the
company was operating with the name Woolworths Limited but then in 2017 it has changed
to Woolworths Group Limited (Woolworths Group Limited, 2019). The group deals in the BIG
W, Australian Food, New Zealand Food, and also in other segments. Australian food
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Corporate Finance
Segment is involved in the process of procuring and reselling the food products to customers
living in Australia. The Australian Food looks over the operation of 1008 Woolworth’s
supermarkets and metro stores. It also manages the operation of countdown supermarkets
and is even involved in the wholesale operations. The other segment of Woolworth is
endeavour drinks which is engaged in the obtaining and reselling of liquor products to the
Australian customers. There are 1545 liquor stores which are functioning under Dan Murphy
and BWS Brands, summer gate stores, Langtons, cellarmasters, and winemarket.com.au.
The BIG W segment is into procuring and reselling discount general merchandise products
in Australia. Presently, there are 183 BIG W stores. In Australia, Woolworth offers leisure
and hospitality services under Hotel segment which includes food drinks, accommodation,
gaming, entertainment etc. Hotel segment manages 323 hotels which include bars, gaming,
dining etc. The Woolworth is involved in the property leasing business too. Woolworth and
Caltex share a strategic alliance across wholesale food, loyalty, fuel supply, redemption etc.
(Yahoo Finance, 2019).
Beta of Woolworths Limited
Beta-
There are two types of risks, one is systematic risk and the other is unsystematic risk.
Systematic risk refers to those risks which is not specific to any industry or firm. It has an
impact on all the sectors. However, systematic risks can be controlled but cannot be
diversified. For example, a sudden increase by the Government in the tax burden by 1% on
stock market transactions. This is a risk which will affect all the sectors and the industries.
So, systematic risk are the common causes that have an impact on almost all the companies
like, inflation rate, political instability, interest rates, exchange rates, war etc. These risks
cannot be diversified through investing in different sectors or other strategies however; these
risks are diversified through derivatives. Unsystematic risks are the firm specific or industry
specific risk. These are the risk which occurs suddenly because of the disturbance in normal
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