Corporate Finance: The Reject Shop Valuation Report - FINC 2011

This report conducts a financial analysis of The Reject Shop, an Australian Securities Exchange (ASX) listed company, using valuation models to determine its share price. It begins with an introduction to the company's core activities, competitive advantages, and industry position. The analysis includes calculating the company's beta using regression analysis and comparing it with published data, followed by determining an appropriate discount rate using the Capital Asset Pricing Model (CAPM). The dividend growth model is employed to estimate the current stock price, and a revised stock price is calculated based on the report's own variables and assumptions. The report justifies the chosen variables and their impact on valuation, and utilizes a comparable stock valuation approach. Ultimately, the report offers a recommendation based on the findings, providing investors with insights into the financial performance and share price movement of The Reject Shop.

Financial analysis of The Reject Shop
COmpany Selected- The Reject Shop
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U n i v e r s i N a m e -

Executive Summary
Financial analysis is imperative method to identify the whether the particular stock and
shares of the company will be beneficial for creating value on the invested capital or not.
Investors need to use proper financial analysis tools to evaluate the share price movement,
profitability and financial leverage of company if they want to invest their capital in a particular
company. It will not only assist them to identify financial performance of company but on the
basis of the existing financial information they could easily identify the future performance and
outcome of the business in long run. The Reject Shop Australian listed company has been
selected in this report to analysis the financial performance and share price movement.

Table of Contents
Introduction.................................................................................................................................................4
Core activities of the Reject Shop............................................................................................................4
Competitive advantage............................................................................................................................5
Industry...................................................................................................................................................5
Financial analysis of The Reject Shop.........................................................................................................5
Task-1..........................................................................................................................................................5
Task-2..........................................................................................................................................................5
Computation of the beta based on the regression analysis on the share price of the Reject Shop
Company and all ordinary stock exchange..............................................................................................6
Comparison of the beta Reject Shop Company with the beta shown on the Morning start for the Reject
shop Company.........................................................................................................................................8
Are these value differ if yes then why?....................................................................................................8
Task-3..........................................................................................................................................................9
Computation of the appropriate discount rate for the Reject Shop by using the CAPM model...................9
Computation of the discount factor for the cash flow of the Reject Shop Company................................9
Task-4........................................................................................................................................................10
Determine a current stock price for your company................................................................................10
Computation of the dividend growth rate of Reject Shop......................................................................11
Task-5........................................................................................................................................................12
Using your own variables, determine a current stock price for the company that you think might
represent something close to its fair value.............................................................................................12
Task-6........................................................................................................................................................14
Why do you believe the variables you have chosen give a more appropriate value than those used in
questions 4 and 5? Discuss....................................................................................................................15
Task-7........................................................................................................................................................16
Method of comparable’ stock valuation approach................................................................................16
Recommendation.......................................................................................................................................17
Conclusion.................................................................................................................................................19
References.................................................................................................................................................20

Appendix...................................................................................................................................................22

Introduction
This report has been prepared to undertake a valuation exercise on the selected company
named The Reject Shop which could be used by investors to make their investment decisions.
This report has revealed the share price valuation and beta calculation of company to determine
the viability of the financial performance and share price movement of company. This analysis
will help in determining the future financial performance of company. In the beginning of this
report valuation model have been used with a view to identify the estimate share value of
company. This will help in calculation of the share price for the company and then the critically
evaluate the value assist in determining the future value and return on capital employed earned
by company. The CAPM model is also used which will assist in determining the cost of the
capital of the company based on the risk free rate of return, market premium and beta of
company. The dividend growth model is also measure financial tool to determine the constant
changes in the share price value of company and estimation of the future value. Furthermore, the
share price valuation will again be made on the basis of own assumption and set factors which
might positive and negatively impact the business growth and share valuation of company (The
Reject Shop, (207).
The Reject Shop is one of the best Australia variety discount store chains that have been offering
retail services and goods to clients. This company has been operating its business through its 340
variety stores chain services. It has been analyzed that company has increased its share price by
62% since last three years which showcase the positive indicator for the future growth and
sustainable future growth of the business. Company who have currently undertaken the proposal
of business integration with other small organizations so that company could be expanded in
long run. The overall turnover of the Reject Shop Company has increased by 22% since last five
year and it has hold AUD $ 82 million of sales to its customers from its all the operations (The
Reject Shop, 2016).
Core activities of the Reject Shop
The core activities of Company are to offer retail series through its variety discount store chains
at very least cost.

Competitive advantage
The competitive advantage of company is to offer retail services at very least cost with
the unique quality and products (The Reject Shop, (2017).
Industry
The retail industry of Australia has increased its turnover 112 billion and out of it, the reject shop
company has grabbed 13% market share. The rest of the market is grabbed by the Wesfarmers,
Woolworths, Telstra and Morrison plc (The Reject Shop, (2016).
Financial analysis of The Reject Shop
The financial analysis of company is done to identify whether the company is financially healthy
or facing high long term sustainability risk in its business. The ratio analysis as financial tool has
been used to evaluate how well the Reject Shop Company has performed throughout the time
(The Reject Shop, 2016).
Task-1
In order to prepare the business financial report, the selected company is The Reject shop. All the
financial analysis and valuation methods have been used to identify the true value of the shares,
growth rate and financial performance of company (Yahoo finance, 2017).
Task-2
Computation of the beta of the Reject Shop Company
Beta could be defined as measurement tool to evaluate the volatility or systematic risk of the
security selected and the same would be compared with the market changing factors. The beta
value of company showcase the changes in the share price of the company based on the changes
in the share value of the market factors. It shows the interrelation between the changes in the
share price movement of the company with the changes in the share price of the market. The beta
value of company is computed by using the regression analysis on the share price of the Reject

Shop company and all ordinary stock exchanges. These both share price value is used to make
the computation of the beta (Yahoo finance, 2017).
1/1/2016
3/1/2016
5/1/2016
7/1/2016
9/1/2016
11/1/2016
1/1/2017
3/1/2017
5/1/2017
7/1/2017
9/1/2017
11/1/2017
(0.60)
(0.50)
(0.40)
(0.30)
(0.20)
(0.10)
-
0.10
0.20
0.30
The Reject Shop
Adj Close (All ordinary
share index)
Source: (The Reject Shop, 2016).
This graph showcases the changes in the share price of the Reject Shop Company in comparison
with the changes in the share price movement of the all ordinary index (The Reject Shop, (2016).
On the basis of the above graph, it is considered that the Reject shop has very high fluctuation in
its share price movement which may negatively impact the investment capital. The share price of
the Reject shop company will be compute by using the divided discount model which will be
further used to determine whether the shares of the company are undervalued or overvalued.
Computation of the beta based on the regression analysis on the share price of the Reject
Shop Company and all ordinary stock exchange
Regression
Statistics

Multiple R 0.13161
6
R Square 0.01732
3
Adjusted R
Square
-
0.01543
Standard
Error
0.01822
4
Observations 32
The regression statistics shows the relation between the on the share price of the Reject Shop
company and all ordinary stock exchange and the interrelation between both the factors (The
Reject Shop, (2016).
ANOVA
df SS MS F Significance
F
Regressio
n
1 0.00017
6
0.00017
6
0.52884
6
0.47273

Residual 3
0
0.00996
3
0.00033
2
Total 3
1
0.01013
9
The Anova is used to set up the measure the relation between the two significant factors (Yahoo
finance, 2017).
Coeffici
ents
Standard
Error
t Stat P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercep
t
0.00943 0.003237 2.913
249
0.006
696
0.00281
9
0.01604 0.002819 0.01604
X
Variable
1
0.01674
7
0.023029 0.727
218
0.472
73
-
0.03028
0.06377
9
-0.03028 0.063779
Source: (Yahoo finance, 2017).
After analyzing the above given tables, and regression analysis between share price of the Reject
Shop company and all ordinary stock exchange, the x variable have been found. The x variable is
the beta point of the Reject shop which is computed based on the data related to share price of
the Reject Shop Company and all ordinary stock exchange (The Reject Shop, (2016).

Comparison of the beta Reject Shop Company with the beta shown on the Morning start
for the Reject shop Company
All the details shown in the Morningstar is based on the several factors which may positively and
negatively impact. As per details shown in the information tab of the yahoo finance, the beta of
the Reject shop has been shown as 1.16 points (Yahoo finance, 2017).
Are these value differ if yes then why?
The computation of the beta of the Reject shop based on the regression analysis between
share price of the Reject Shop Company and all ordinary stock exchanges shows .016 points
beta. This means that if the share price of the all ordinary stock exchange moves with the 1 point
then the share price value of the Reject Shop will move with .016 points. On the other hand, as
details shown in the information tab of the Morningstar, the beta of the Reject shop has been
shown as 1.16 point which reflects that the if the share price of the all ordinary stock exchange
moves with the 1 point then the share price value of the Reject Shop will move with 1.16 points.
The difference between the both calculations is differ due to the changing business factors, share
price value and other estimations. Therefore, difference in changing business factors and
assumptions may result to the differences between both (The Reject Shop, (2016).
Task-3
Computation of the appropriate discount rate for the Reject Shop by using the CAPM
model
The CAPM model is also known as capital asset price model which is used to evaluate the cost
of capital of company. The CAPM model considers the risk free rate of return, market premium
and beta of company to compute the cost of equity (Yahoo finance, 2017).
Cost of capital= RF+ (RM-RF) Beta
It is analyzed that cost of capital is also used to determine the discounting factors for computing
the present value of the future cash inflow.

Ideally, CAPM model is used when company wants to accept the one project out of the available
project. It is analyzed that computation of cost of capital is the measure factor to determine the
discounting factor of all the future cash inflow and outflow so that company could determine
present value of the cash flow in the business (Yahoo finance, 2017).
Computation of the discount factor for the cash flow of the Reject Shop Company
By using the formula given below, there is computation of the expected return is done. The
expected return of company is used to determine the discounting rate of company.
(Yahoo finance, 2017).
Risk free rate of return= 2.69 (10 years yield rate of the Australian government securities)
Market risk premium= (RF- RM) = 6.5% p.a
Cost of capital of company= RF+(Rm-RF)Beta
Cost of capital= 2.69+ (6.5%).016 (The Reject Shop, (2016).
Cost of capital= 2.7

Therefore, the discount rate would be 2.7% at which company would determine the present value
of the future inflow and outflow of cash (The Reject Shop, (2016).
Task-4
Determine a current stock price for your company
It is analyzed that in order to compute the current stock price of Reject shop, Dividend growth
model is use. In order to compute the share price of company, firstly we have to use the cost of
capital, dividend paid to the shareholders by the company and growth rate. In addition to this, if
the growth rate is not given then the computation of the dividend growth would be based on the
retention ratio and return on equity of company.
There is formula which could be used to compute the share price value of shares of Reject Shop
Value of the stock = D1/ KE-G
Task-5
Using your own variables, determine a current stock price for the company that you think
might represent something close to its fair value.
The below given table reflects the estimation of the current stock price of the company at the end
of the fifth year by using the constant dividend growth mode (The Reject Shop, (2016).
Compute the Estimated Value of the stock at the end of year 2
using the Constant Growth Model
D5 $ 0.29
k 2.70%
g 2.25%
V2? $ 14.45
The share price of the Reject shop company will be AUD $ 66.35 which reflects that if the
shareholders buy the shares of company at AUD 3.18 then after five years, then they would have
good amount of profit earning capacity (The Reject Shop, (2016).
Computation of the share price value of the Reject Shop (Yahoo finance, 2017).