Financial Analysis and Valuation

The assignment presents a detailed financial analysis of a company. It covers various aspects such as calculating the cost of debt using outstanding debt, interest rate, and tax rate. Additionally, it applies the Capital Asset Pricing Model (CAPM) to determine the required rate of return, considering risk-free rate, market risk premium, and beta. The document also calculates the gearing ratio by analyzing long-term and current liabilities against total assets. Finally, it summarizes the company's capital structure, outlining the proportion of debt and equity financing.

Running Head: Corporate Finance 1
Project Report: Corporate Finance

Corporate Finance 2
Executive summary
This report paper has been analyzed and prepared to investigate the capital structure
ratio and gearing ratio of Wesfarmers. In this learning, diverse techniques have been used to
estimate the cost of equity (Ke), cost of debt (Kd) and cost of capital (K) of Wesfarmers.
Further, gearing ratios of company have also been measured to investigate the presentation of
business, through this report paper, it could be concluded to the company to enhance the
funds from debt to manage the cost of the company.

Corporate Finance 3
Contents
Introduction.......................................................................................................................4
Wesfarmers.......................................................................................................................4
Calculation of WACC.......................................................................................................4
Return on equity...........................................................................................................4
Dividend discount model..............................................................................................4
CAPM Model................................................................................................................5
Return on debt...............................................................................................................5
Beta Coefficients..........................................................................................................5
Risk free rate.................................................................................................................5
G (Growth rate).............................................................................................................6
WACC..........................................................................................................................6
Calculation of gearing ratios.............................................................................................6
Findings............................................................................................................................7
Recommendation..............................................................................................................7
References.........................................................................................................................8
Appendix...........................................................................................................................9

Corporate Finance 4
Introduction:
Investors invest into the financial securities and in the market to enhance the worth of
their invested money. So, it becomes necessary for the investors to look over the up and down
in the market, analysis of market, security analysis etc before funding in that security. This
would help the company to save themselves from any sudden risk. Various tools could be
used by the investors and the analysts to find the best security in the market such as gearing
ratios, WACC, cost of equity and debt, market growth, market return, risk free rate etc. which
helps the investors to make a better decision by considering the performance and profitability
of that security (Hillier, Grinblatt and Titman, 2011).
Wesfarmers:
For this report, Wesfarmers limited has been taken into consideration. This company
has been registered into the Australian stock exchange. Wesfarmers limited is one of the
largest companies in the Australian retail industry. According to annual report of the
company, revenue of the company has been enhanced to $ 56.93 billion. Currently, this
company has been recognized as biggest empowerment company. This company offers its
product into the supermarket of Australia and it is also operating its business in other
countries as well.
Calculation of WACC:
For analyzing the value of the company and the security of the company, WACC has
been calculated. For calculating the WACC, it is required for the investor to calculate various
other factors as well such as cost of equity and debt, market growth, market return, risk free
rate etc. the analysis and calculation of all of the above are as follows:
Return on equity:
Return on equity is calculated to investigate the value of equity of the company. This
analysis depict about the entire cost which occurred in the company, if company enhances the
funds from the equity. In this calculation, per share unit cost has been analyzed. Dividend
discount model and CAPM model has been investigated for this report.
Dividend discount model:

Corporate Finance 5
DDM’s calculation depict that Wesfarmer’s return on equity (ROE) is 2.014%.
According to this, company would have to pay the total 2.014% of net profit as cost of equity
to the shareholders (Morningstar, 2017).
CAPM Model:
CAPM’s calculation depict that Wesfarmer’s return on equity (ROE) is 2.715%.
According to this, company would have to pay the total 2.715% of net profit as cost of equity
to the shareholders (Morningstar, 2017).
Return on debt:
Return on debt is calculated to investigate the value of debt of the company. This
analysis depict about the entire cost which occurred in the company, if company enhances the
funds from the debt. In this calculation, total cost of debt has been analyzed (Weygandt et al,
2015). According to these calculations, currently company is paying total 0.000973 from net
profit to the debt holders of the company.
Beta Coefficients:
In addition, for calculating the WACC of Wesfarmers, beta coefficient has been
measured. Currently, company’s beta of last 5 years is 0.022795 (Yahoo finance, 2017). The
graph of beta has been given below:
Risk free rate:
10 year’s risk free rate (Rf) of the Australia is 2.75% (Bloomberg, 2017).

Corporate Finance 6
G (Growth rate):
Wesfarmers share’s growth rate of each year has been analyzed. Currently, the growth
rate is 5% of the company.
WACC:
Through the above calculation, it has been found that the weighted average cost of
capital of Wesfarmers is 0.0192. For calculating the WACC of the company, cost of equity
and debt, market growth, market return, risk free rate etc has been calculated. The calculation
of every factor is in the appendix. Through the cost of debt and cost of equity of the
company, it has been found that the cost of debt is quite lower than the cost of equity off the
company (yahoo finance, 2017).
Calculation of gearing ratios:
Gearing ratio of a company is calculated according to the assets, equity, and debt of
the company. This depict about the stability of the company in terms of finance. Gearing ratio
has been calculated over Wesfarmers and it has been found that the gearing ratio is 0.19385
means 19.39% which is very lower and thus it could be said that the stability of the company
is quite strong in terms of finance (Parrino, Kidwell and Bates, 2011).
Various factors and figures have been investigated before for this analysis such as
equity of the company, total assets and liabilities of the company, current liabilities of the
company etc. It has been found that the gearing ratio is the best way to analyze the
economical stability and financial stability of the company. Not any issues have been faced
while calculating the gearing ratios of the company. Entire figures have been easily found
from the annual reports of the company. The company is very stable so it would be beneficial
for the investor to invest in this company.

Corporate Finance 7
Findings:
Decisions related to capital structure of a company are usually taken by the financial
manager of a company as they have enough knowledge about the debt and equity ratio,
gearing ratio, cost of capital etc. the decision made by them over the capital structure is way
better (Strebulaev, 2007). Capital structure includes debt and equity of a company. The
capital structure of a company could be best if the better combination is made of debt and
equity. This impacts the total cost of capital of the company as the cost of debt is different
and the cost of equity is also different.
This analysis expresses that Wesfarmer’s capital structure ratio is quite impressive
and financial risk of the company is lower still company could reduce the total cost through
raising the funds more from debt. Company could raise the funds till 40% as till that level the
financial stability of the company would be in control and the cost reduction could also been
done.
Recommendation:
Thus according to the weighted average cost of capital and the gearing ratio of the
company, it has been found that the company is performing well and company is just required
to enhance the funds from debt to reduce the cost of capital and manage the financial stability
of the company.

Corporate Finance 8
References:
Bloomberg. (2017). Australian bonds and rates. https://www.bloomberg.com/markets/rates-
bonds/government-bonds/australia on 18th Sept 2017.
Morningstar. (2017). Wesfarmers limited. Viewed from
http://financials.morningstar.com/valuation/price-ratio.html?
t=WES&region=aus&culture=en-US on 25th Sept 2017.
Reuters. (2017). Wesfarmers limited. Viewed from
http://www.reuters.com/finance/stocks/overview?symbol=WES.AX on 25h Sept 2017.
Wesfarmers. (2017). Home. Viewed from http://www.wesfarmers.com.au/ on 25th Sept 2017.
Yahoo Finance. (2017). Wesfarmers limited. Viewed from
https://au.finance.yahoo.com/quote/WES.AX?p=WES.AX on 25th Sept 2017.
Strebulaev, I. A. (2007). Do tests of capital structure theory mean what they say?. The
Journal of Finance, 62(4), 1747-1787.
Parrino, R., Kidwell, D.S. and Bates, T. (2011). Fundamentals of corporate finance. John
Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting.
John Wiley & Sons.
Hillier, D., Grinblatt, M. and Titman, S., (2011). Financial markets and corporate strategy.
McGraw Hill.

Corporate Finance 9
Appendix:
Dividend Discount Model
Dividend expected 0.01211276
Growth rate 2%
Price per share 36.510365
cost of equity 2.014%
Calculation of Weighted average cost of capital
Price Cost Weight WACC
Debt 5757 0.00097273 0.19385 0.000188565
Equity 23941 0.02364278 0.80615 0.01905959
29698 Kd 0.019248155
Calculation of cost of debt
Outstanding debt 5757
interest rate 8
Tax rate 0.3
Kd 0.000972729
Calculation of CAPM
RF 2.75%
RM 1.21%
Beta 0.022795127
Required rate of return 2.715%
Calculation of Gearing
ratio
Long term
liabilities 5757
Current liabilties 10417
Total assets 40115
Gearing Ratio 0.19385
Capital

Corporate Finance 10
Structure
Price
Debt 5757
Equity 23941
29698
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.0233
7
R Square
0.0005
46
Adjusted R
Square
-
0.0176
3
Standard
Error
0.0504
91
Observation
s 57
ANOVA
df SS MS F
Significa
nce F
Regression 1 7.66E-05
7.66E-
05
0.030
054 0.863005
Residual 55 0.140215 0.002

Corporate Finance 11
549
Total 56 0.140292
Coeffici
ents
Standard
Error t Stat
P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept
0.0118
91 0.006809
1.746
346
0.086
334 -0.00175
0.0255
37 -0.00175
0.02553
7
X Variable 1
0.0227
95 0.13149
0.173
36
0.863
005 -0.24072
0.2863
06 -0.24072
0.28630
6