Gordon Model and Stock Valuation

This assignment delves into stock valuation using the Gordon growth model. It examines how this model determines the value of a company's stock based on the dividends it pays to shareholders. The text provides context within the broader external business environment and cites relevant academic sources for further exploration.

CASH FLOW ANALYSIS AND
SECURITY VALUATION
WESFARMERS LTD
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Table of Contents
INTRODUCTION...........................................................................................................................3
Background..................................................................................................................................3
Explain purpose of financial statements' analysis........................................................................4
Analyze the firm’s current operation using its financial statements............................................5
Dividend valuation model to value Wesfarmers's shares..........................................................18
Draw graphs for Wesfarmers's adjusted share price and return.................................................19
Identify areas in the cash flow on which higher attention to be payed by the firm...................21
Recommend investment and financing strategies to improve the position of cash...................21
State and Justify suggestions in terms of shareholders’ wealth maximization..........................22
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................24
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INTRODUCTION
Valuation of securities is an important weapon used by an entity owner in order to
ascertain its existing performance in the external market. Ensuring an entity's conditions will
help them in order to craft several strategies to uplift their current position in the market.
Wesfarmers Ltd has been selected for the project report in order to analyze its existing cash
position and assessing all kinds of securities held in the business for long time. This project
report is all about collecting financial data from various external sources that provides reliable
data in facilitating variety of clients of the business. Cash flow and securities analysis will be
helpful for an entity in order to achieve desired market aims and targets. Accomplishing all
market goals is essential for an entity as in this way an entity will achieve all its aims and targets
within a given span of time. Different financial statements are analyzed by an entity in order to
identifies all kinds of errors lies in the current financial statements in meeting all kinds of needs
and higher expectations of an individual. Financial statements such as income statements,
balance sheet and most importantly cash flow statements are evaluated by an individual using
ratio analysis as the major source of comparison technique. Cash is regarded as the essential
element which will be retained in the business for long time period. Status of an entity in the
external market is need to be determined as this would help an entity owner in order to gain
higher level of competitive advantage in order to beat market rivals. Maintaining good and
strong position in the market would be helpful for an entity to create additional value for the
business concern in the external environment.
Background
Wesfarmers is an Australian conglomerate firm deals in various businesses such as retail
stores, providing chemicals, fertilizers and input used in mining that is coal and mining.
Industrial and safety products are also supplied by this entity to facilitate all its potential
customers. An entity will strengthen its business by retaining all the customers in their business
as creation of large base of customers is the ultimate aim of the business. Offering wide range of
products or services is a direct way through which customers are attracted towards the
capabilities of the firm as this helps in increasing higher level of customer satisfaction. Providing
discounts and offers in the initial phase an entity will Satisfy all the customers in order to create
trust relationships with all of them. Current financial performance of this organization is higher
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grab the attention of all the stakeholders especially investors who intends to invest in a business
whose current financial strength in higher in order to generate higher revenues in the near future.
Wide number of external parties are invited to take interest in the services offered by the firm to
get experience of the services provided by the firm in order to give negative or positive feedback.
This entity is registered in the Australian stock exchange in order to create higher market
volatility in boosting the existing performance of an entity (Grant, 2016). Revenues generated
from all the securities invested by the business will create unique identity of the business in front
of all the users located in the similar market. Target market of this entity includes home country
that is Australia in which its regular customers are set up in generating higher revenues for the
business. Market share of this organization extends to UK which is famous tour destination
which attract variety of visitors from all across the world towards the aesthetic beauty of the
current place.
Explain purpose of financial statements analysis
Financial statements prepared by an entity is to reflect its overall performance in the
financial context in order to explore higher external market opportunities. It is regarded as the
process of evaluating standard formats of the financial statements such as income statements,
balance sheet and cash flow statements. In this process all aspect will be reviewed by an
individual in order to target all prospective factors that enhances the quality of resources
recorded in the financial statements of the business. In this particular process financial health of
Wesfarmers will b analyzed by identifying all the frauds and errors lies in the system which
needs to be identified in the initial phase in order to target an entity's existing business
performance. The financial statement analysis used by various stakeholders who are taking
decisions of investing higher capital in the business that creates higher value of the business in
front of its external market users located outside the business (Wu, Al-Khateeb, Teng and
Cárdenas-Barrón, 2016.). Future performance of an entity will be identifies by an entity owner
by analyzing its current financial resources in order to grab higher advantages over all the users
located in the internal as well as external business environment. Various decisions makers who
make important decisions based on the financial information of an entity will accomplish all their
needs and expectations. Business efficiency will get increases with the passage of time as each
and every factors of the business will be redefined in order to enhance the overall quality of all
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the business resources takes places in an entity. Different methods of financial statements used
by an entity owner includes fundamental analysis and Du-pont analysis that emphasis on each
and every component of an entity that are included in the balance sheet. Vertical and horizontal
analysis of financial statements will also ascertain the financial efficiency of an entity in order to
generate higher output in the near future. Financial adjustments can be made in the existing
financial statements in order to uplift the current role of the business. Market opportunities
explored by the business is essential in order to grab higher level of trust and confidence of all
the external market users in achieving all the market aims and targets for the beneficial of the
business. Getting high level of customer satisfaction is essential for the firm in creating its
business position in eliminating all kinds of market threats imposed on an entity.
Analyze the firm’s current operation using its financial statements
Profitability Ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Net
Margin
% 8.11 3.13 3.02 3.03 3.51 3.67 3.79 4.47 3.93
Gross
Margin 49.81 34.86 33.26 33.41 33.28 33.71 33.64 30.97 30.53
Asset
Turnove
r
(Averag
e) 0.99 1.36 1.33 1.32 1.37 1.39 1.4 1.45 1.55
Return
on
Assets
% 8.03 4.25 4.01 3.99 4.8 5.12 5.29 6.49 6.09
Return 23.58 9.09 7 6.39 7.68 8.34 8.76 10.34 9.61
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on
Equity
%
Interest
Coverag
e 6.52 2.8 3.09 4.39 6.14 7.03 8.47 8.35 11.93
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
9
Net Margin %
Interpretation
In the external business environment, final profit used by an entity in reflecting its
external brand image is the net profit. The net profit produces by an entity after deducting all
kinds of expenses from the sales of the business. Net profit is decreasing from one period to
another due to higher tax obligations imposes on an entity.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
30
35
40
45
50
Gross Margin
Interpretation
Gross profit is generated in the business concern when cost of sales are excluded from the
sales and the revenue of an entity. This shows the burden of cost of goods sold on an entity as the
cost will be regulated by an entity in order to maintain its sales level.
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
9
Return on Assets %
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Interpretation
Efficiency of assets are judged by an individual as higher the utilization of assets in
creating higher amount of sales higher will be the Chance of business in generating returns for
the business in the near future.
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
Return on Equity %
Interpretation
Return will be earned by an individual by investing its own capital in the business in
generating higher amount of returns for the betterment of the business entity. Return on equity
initially has higher that later on get decreases due to higher cost incurred by the firm in relation
to return generated.
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2007
2008
2009
2010
2011
2012
2013
2014
2015
0 2 4 6 8 10 12 14
Interest Coverage
Interpretation
This shows the capability of the business as interest paid on the amount borrowed by an
entity owner from external party. Ability of the firm will be assessed as an entity is required to
meet its external market obligations by increasing its existing sales and the revenue within a
financial year.
Liquidity ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Current
Ratio 0.56 1.09 1.29 1.23 1.17 1.02 1.11 1.13 0.93
Quick
Ratio 0.25 0.48 0.66 0.62 0.55 0.5 0.54 0.45 0.27
Debt/
Equity 0.2 0.42 0.23 0.2 0.18 0.15 0.22 0.17 0.19
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Current Ratio
Interpretation
Current ratio shows the relationship among current asset and current liabilities as this
reflects that higher current assets are used to overcome all kinds of challenges imposed on an
entity in form of current liabilities. The current ratio is increases with the passage of time as
higher current assets are included in the business in order to meet all kinds of problems faced by
the business.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Quick Ratio
Interpretations
Inventory is excluded from the current assets of an entity as this will not easily convert
into cash. The liquidity is essential to be checked by the business for all the current assets
included in the business to pay off its liabilities. The quick ratio is decreasing that shows that
without inventory current assets are non-longer strong enough.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Debt/Equity
Interpretation
This ratio assesses the relation among debt and equity in the business as these are
regarded as the essential component of a capital structure. Higher equity will help an entity
owner in order to handle the heavy pressures of debt imposed on an entity. The position of
Wesfarmers remains the same for all of period shows the stability of both the factors in an entity.
Efficiency Ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Payable
Period 75.27 43.58 43.05 45.82 48.29 49.79 52.6 50.15 47.28
Receiva
bles
Turnove
r 7.16 18.62 25.51 25.98 25.85 25.56 25.27 30.67 40.76
Inventor
y
Turnove
4.09 7.44 7.28 7.37 7.57 7.69 7.88 8 7.97
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r
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
10
20
30
40
50
60
70
80
Payables Period
Interpretations
Trade creditors of the business needs to be reduced with the passage of time as this is
regarded as the basic liability incurred on an entity. Short term obligations imposes on the
business which will be eradicate by an entity by paying all the creditors in less period. The skills
of the business gets increases with the passage of time when they pay off all the trade creditors of
an entity in a prescribed time period.
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
30
35
40
45
Receivables Turnover
Interpretation
Trade receivables incurred in the business are evaluated in terms of days in which
payment collected by an entity for its debtors as higher the trade receivables turnover will reduce
the capabilities of the firm. In the given situation, the turnover is increasing that shows weakness
of an entity.
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2007
2008
2009
2010
2011
2012
2013
2014
2015
0 1 2 3 4 5 6 7 8
Inventory Turnover
Interpretation
This turnover shows the use of inventories in the business processes in generating higher
sales and the revenue. It can be seen from the above figure that inventory turnover is gradually
increasing that shows the use of inventories without piling up materials in the firm.
Cash Flow Ratios
Year 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cap Ex
as a % of
Sales 7.01 3.86 3.22 3.32 3.77 4.53 3.9 3.71 3.61
Free
Cash
Flow/Sal
es % 6.4 0.46 2.77 3.11 1.56 1.75 2.68 1.65 2.5
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2007 2008 2009 2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
Cap Ex as a % of Sales
Interpretation
The position of cash in an entity is assessed in relation to the sales and the revenue
generated by the business within a particular time period (Keefe and Yaghoubi, 2016). This
shows the overall efficiency of cash flow in an entity as higher the capital expenditure incurred
lower will be the returns generated by an entity. In the above figure capital expenditure charged
on the sales and he revenue of the firm is decreasing which shows good performance of cash.
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2007
2008
2009
2010
2011
2012
2013
2014
2015
0 1 2 3 4 5 6 7
Free Cash Flow/Sales %
Interpretation
Free cash flows generated in an entity reflects the overall skills and the capabilities of an
entity in maintaining higher share of the firm in the external environment. Cash flow is
decreasing from one period to another shows that an entity has higher amount of costs incurred
in relation to the overall sales and the revenue generated over a particular time period.
Dividend valuation model to value Wesfarmers's shares
Date Price
Adjusted
share price Dividend
Growth
rate (D/p0)+g
07/01/07 38.86 38.165 0.85 6.81% 9.04%
10/01/07 37.47 37.235 1.4 6.81% 10.57%
01/01/08 37 27.03 0.65 6.81% 9.21%
10/01/08 17.06 17.94 1.35 6.81% 14.34%
01/01/09 18.82 25.02 0.5 6.81% 8.81%
10/01/09 31.22 31.475 0.6 6.81% 8.72%
01/01/10 31.73 31.835 0.55 6.81% 8.54%
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10/01/10 31.94 31.83 0.7 6.81% 9.01%
01/01/11 31.72 30.585 0.65 6.81% 8.94%
10/01/11 29.45 29.71 0.85 6.81% 9.67%
01/01/12 29.97 33.38 0.7 6.81% 8.91%
10/01/12 36.79 38.46 0.95 6.81% 9.28%
01/01/13 40.13 42.025 0.77 6.81% 8.64%
10/01/13 43.92 42.5 1.03 6.81% 9.23%
01/01/14 41.08 41.4 0.85 6.81% 8.86%
10/01/14 41.72 42.84 1.15 6.81% 9.49%
01/01/15 43.96 42.785 0.89 6.81% 8.89%
10/01/15 41.61 20.805 1.11 6.81% 12.15%
Draw graphs for Wesfarmers adjusted share price and return
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
0
5
10
15
20
25
30
35
40
45
50
Share price of Wesfarmers
Price
Interpretation
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It can be seen from the above figure that share price of an entity is increases with the
passage of time as the stock price of all the shares of Wesfarmers Ltd is gradually increases from
one period to another. Increasing share prices will attract wide number of investors towards an
entity.
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
500
1000
1500
2000
2500
Comparison of profitability with share price
Profitability
Share price
Interpretation
It can be ascertained from the above figure that profitability of Wesfarmers Ltd is
compared with the overall profitability of an entity. It can be evident from the above comparison
that share price of an entity is less than compared to its profitability. The stock price needs to be
increases by creating its image in the external business environment by satisfying all the needs
and expectations of all the market users
Identify areas in the cash flow on which higher attention to be payed by the firm
The evaluation of the cash flow statement has reveals that an entity need to give emphasis
on the cash outflow of the business as higher costs incurred in the business is decreasing sales
and the revenue of the business. Cost incurred in an entity needs to be regulated as due to this
capital expenditures charged on the total sales will get increases. An entity owner need to give
attention on the costs and all expenditures
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Recommend investment and financing strategies to improve the position of cash
Cash is one of the liquid component used in the business in order to pay off all the short
term market obligation imposed on an entity in form trade creditors that decreases the revenues
generated by the firm within a particular financial year. An entity save itself from liquidity trap
by utilizing higher cash surplus in investing them in another business or in bonds to generate
higher returns in the future (Qandhari, Khan and Rizvi, 2016). Liquidity maintained in the
business will facilitate all the users in their firm in order to grab higher market advantages in the
external business environment for the betterment of the firm. There are various strategies that
needs to be adopted by an entity owner in order to enhance the existing quality of current
financial resources used throughout the business. Cash flow forecasting will be adopted by the
firm in order to target on important aspects of the firm that may generate higher returns in the
near future. Present resources included in the cash flow statements are analyzed properly in order
to achieve all business aims and targets in order to capture higher market share. In the
forecasting mode estimates are prepared in order to measure the existing performance of the
business to generate higher revenues in the future. Forecasting model will emphasize on the
overall costs incurred in the business enterprise as higher the costs incurred in an enterprise
lesser will be the revenues generated by an entity owner in a particular financial year.
State and Justify suggestions in terms of shareholders’ wealth maximization.
Basic aim of finance manager of Wesfarmers is to maximize the existing wealth of
shareholders who have contributed its valuables in the business. Precious elements of the
business are invested in the firm will be compensated by providing higher dividend to all the
shareholders of the business in creating good image of the firm in front of all the competitors. An
entity can attract wide number of competitors in the external business environment by crafting
various managerial strategies in enhancing the quality of all the resources kept in the business for
long period.
Dividend provided to all the shareholders depends on the higher amount of profit
generated by an entity in a financial year (Derouiche, Hassan and Amdouni, 2017). Profit needs
to be increases by an entity owner by focuses on various factors in inducing the current
performance of an enterprise. Level of sales will be increases by the business which in turn
created higher amount of profit in the business in order to grab higher market advantages in the
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external business environment. Operating profit margin will be increases by the business concern
in order to target each and every factors. All kinds of costs incurred in the business will be
identified by the management in the initial phase as this will suppress an entity's overall skills
and the capabilities in order to strengthen its existing business. Tax factors need to be identified
by the business as this will decrease an entity's overall performance within a particular time
period.
Cost reduction strategies crafted by the firm in order to improve an entity's performance
within a particular time period as this helps an entity in order to achieve all the desired market
aims and targets within a given time period (Baik, Cho, Choi and Lee, 2016). Different
principles can be followed by an individual in order to increase its existing income earned by the
firm that facilitates an individual in maximizing earning after tax.
CONCLUSION
It can be summarized from the above project report that finance is precious asset for an
entity which needs to be procured in the business for long time period. This project report is all
about analyzing the cash flow statements and several other financial statements in order to
determine the actual financial performance of an entity. This report emphasis on the stock
valuation in which Gordon model is used to determine the dividend provided by the firm to all its
shareholders in the external business environment.
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REFERENCES
Books and Journals
Wu, Jiang, Faisal B. Al-Khateeb, Jinn-Tsair Teng, and Leopoldo Eduardo Cárdenas-Barrón.
"Inventory models for deteriorating items with maximum lifetime under downstream partial
trade credits to credit-risk customers by discounted cash-flow analysis." International Journal
of Production Economics 171 (2016): 105-115.
Grant, Robert M. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons,
2016.
Namazi, M., Shokrolahi, A. and Maharluie, M. S. Detecting and ranking cash flow risk factors
via artificial neural networks technique. Journal of Business Research. 69(5) (2016). pp.1801-
1806.
Yaari, U., Nikiforov, A., Kahya, E. and Shachmurove, Y. Finance methodology of Free Cash
Flow. Global Finance Journal. 29 (2016). pp.1-11.
Shah, D., Kumar, V., Kim, K. H. and Choi, J. B. Linking Customer Behaviors to Cash Flow
Level and Volatility: Implications for Marketing Practices. Journal of Marketing Research.
54(1) (2017). pp.27-43.
Jones, Stewart. "A Cash Flow Based Model of Corporate Bankruptcy in Australia." Journal of
Applied Management Accounting Research 14. no. 1 (2016): 23.
Tripathi, R. P. "Economic ordering policies under credit financing for deteriorating items with
stock-dependent demand rate using discounted cash flow approach." International Journal of
Management Science and Engineering Management 12. no. 2 (2017): 111-118.
Barbieri, Emilio, Donald M. Nixon, James D. Arnold, and Joseph E. Rossman. "The Financial
Situation of US Farms by Class and Type." Texas Journal of Agriculture and Natural
Resources 3 (2016): 26-30.
Wu, Soushan, Chin-Mei Chen, and Pei-Ching Lee. "Independent directors and earnings
management: The moderating effects of controlling shareholders and the divergence of cash-
flow and control rights." The North American Journal of Economics and Finance 35 (2016):
153-165.
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Kim, Hanjoon. "Principal Component Analysis on the Theory of Corporate Cash Holdings for
Korean Chaebol Firms." Journal of the Korea Academia-Industrial cooperation Society 17.
no. 4 (2016): 255-263.
Online
Dividends of Wesfarmers, 2017. Available through:
<http://www.sharedividends.com.au/wes+dividend+history> [Accessed on 16th May 2017].
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