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Accounting and Finance Report

Contents

Woolworths Group.

Discounted cash flow..

Relative valuation model

Bibliography.

Woolworths Group

Woolworth groups limited has extensive retailing interests in Australia and New Zealand and it is one of the largest Australian firms. It is Australia's second largest corporation, following the supermarket conglomerate Wesfarmers, based in Perth. And also New Zealand's second largest company. In 2008, the company became world's 19th largest retailer. It was also Australia's biggest supplier of take-off liquor and also the provider of poker games and has the biggest hotel in Australia.

Woolworth opened on 5 December 1924 the first store in the former imperial arcade of Pitt Street in Sydney, where Westfield Sydney now stands.

While the Woolworths Group's same names have no relation to the F.W. Woolworth Corporation headquartered in the United States, Woolworths Holdings Limited is a now defeated Woolworths Group in the United Kingdom or South Africa with a chain of retail stores. It has a big application: supermarkets (under the Australian Woolworths brand and the New Zealand brand Countdown), liquor retailer (as the Austrian BWS and the Australian Dan Murephy's) and hotel and advertisement department shops under the Australian Leisure and Hospitality Group (ALH Group). Australia’s name. The corporation reported a massive loss in the 2016 financial year of 1,235 billion dollars on August 25, 2016. And for the next two decades after it was publicly released on the ASX, they have had to contend with an increased loss of $2 billion, this was mostly attributed to the collapse of the corporation and losses in large companies, this accounted for $2 billion.

There are five founders in the Woolworth. Percy Christmas, Stanley Chatterton, Cecil Wayne, George Creed, and Ernest Williams have been identified as such. It was the Preston Lanchester Gowing who was one of the founding partners and became the president of Gowings Company afterwards. The name of the draught leaflet was drawn up by the Cecil Scott Wayne, who was "Wallworthes Bazaar" F.W.Woolworth, who was called as a play by, the owner of, in the U.S. and UK, the Woolworth Chain. However, several of the promoters of the Woolworth want to give their firm a new name, as the one of Ernest Robert Williams suggests, but instead Percy Christmas dare to register the Woolworth, which he has had succession by discovering that the name is still eligible for use in New South Wales. The Woolworths Group in South Africa is also not associated with it. A company needs to evaluate its assets so that it can make changes that are necessary to improve the condition if the condition of the company is not good. Following is the discounted cash flow and relative valuation approach to evaluate the value of the corporation.

Discounted Cash Flow

WOW

(in million)

Actual

       

CAGR

 

2016

2017

2018

2019

2020

(16-20)

Sales

53,664

55,034

56,944

59,984

63,675

-6%

% growth

 

-5.8%

-5.1%

 

-5.8%

 
             

Total costs

-39,822

-40,375

-41,540

-43,938

-48,429

-6%

% sales

76.1%

73.2%

72.9%

73.4%

74.2%

 
             

EBITDA

15,246

16,046

15,404

14,659

13,842

-3%

% margin

23.9%

26.8%

27.1%

 

25.8%

 
       

Depreciation & Amortization:

-985

-1,038

-1,103

-1,222

-2,458

 

% sales

3.9%

2.0%

1.9%

1.9%

1.8%

 

EBIT

12,788

14,824

14,301

13,621

12,856

0%

             

Taxes (30%)

-3,836

-4,447

-4,290

-4,086

-3,857

 
             

Capex

           

% sales

 

0.0%

0.0%

 

0.0%

 
             

Increase/Decrease in NWC

 

-265

-184

-572

-2,479

 
             

Unlevered Free Cash Flow

 

11,334

10,930

10,001

7,506

 

 

Wacc Calculation

2016

2017

2018

2019

2020

 

Debt to Total Capitalization

39.5%

29.9%

24.5%

30.3%

64.3%

Equity to Total Capitalization

61%

70%

76%

70%

36%

Debt to Equity Ratio

65.2%

42.7%

32.4%

43.4%

179.9%

           

Cost of Equity

         

Risk-free rate (2)

1.5%

1.5%

1.5%

1.5%

1.5%

Market risk Premium (3)

6.6%

6.6%

6.6%

6.6%

6.6%

Levered Beta (4)

0.40

0.40

0.40

0.40

0.40

Size Premium (5)

2.5%

2.5%

2.5%

2.5%

2.5%

Cost of Equity

6.7%

6.7%

6.7%

6.7%

6.7%

           

Cost of Debt

         

Cost of Debt

6.8%

7.7%

7.2%

5.6%

4.6%

Taxes

30.0%

30.0%

30.0%

30.0%

30.0%

After Tax Cost of Debt

4.8%

5.4%

5.0%

3.9%

3.2%

           

WACC

5.9%

6.3%

6.3%

5.8%

4.5%

Total cost

Short-term

490.7

254

604

274

3587

Long-term

3870.9

2777

2199

2855

15072

Total equity

8781.9

9876

10849

10484

9032

Total non-current liabilities

5727.6

4215

3513

4547

16249

Interest expense

298.2

232

202

174

866

Discounted cash flow is one of the valuation methods in which it is used to measure the values of any invested amounted that was based upon on its future upcoming cash flows. Discounted cash flow analyses that are used to calculate the todays invested value that was based upon the projects that how much money it will be going to make by it in the future. All this type of value is applied to the financial investment of both of the company’s owner and the investors that want to make some changes into their businesses, like the purchase of the new tools, etc.

Following are the advantages of discounted cash flow:

  1. To calculate the expected value of the future cash flow in the present time, it can calculate by using the discount rate of the discounted cash flow.
  2. Many of the businesses or the company’s used the weighted average cost of capital for the discount rate, as the shareholder thinks it as the return rate of the investment that was expected by the shareholders.
  3. The DCF has some limits in it, basically that was referred to the estimations of the future cash flows, which could also be inaccurate.
  4. Discounted cash flow that helps to regulate the value of an investment that was based on its future cash flows.
  5. If the discounted cash flow is more than the current cost of the investment that was been made, there are some hopes that the result of values in the future was in positive returns(Woolworth, 2020).

Following are the advantages of discounted cash flow:

  1. The future cash flows would be expected on many of the varieties of factors, such as demand of the market, the economic status, surprising difficulties, and much more.
  2. Estimate that the cash flow is too low, which can make the appearance of an investment costly, which could be resulted in missed opportunities.
  3. The main limit of Discounted Cash Flows is that it needs to make many of the assumptions.
  4. Estimate that future cash flows are too high to lead to the selection of an investment that cannot be paid for in future.
  5. For one investment, the future cash flows from an investment or project must be properly evaluated.
  6. Selecting the model discount rate is also an assumption and it should be correctly estimated to be worthwhile for the model.

Following is the work of the discounted cash flow:

One of the main purposes of the discounted cash flow analysis is to take a measure that how much money is going to invest that would be going to receive from the investment, In the future, that would adjust for money's time value. The money is spent on what is worth a dollar of today more than a dollar of tomorrow in the future just because it can invest. In this way, a reduced cash flow analysis can be appropriate where anyone invests money under the many expectations for future returns in the present period. (French, 2005).

The current value of expected future cash flows is determined using the discounted cash flow analysis. An investor may use the present value concept to regulate whether future cash flows of an investment or project equal to or exceed the value of their initial investments. The opportunities should be considered if the value to be calculated by discounted cash flow exceeds the actual investment costs.

Formula

= CF1/1+R +CF2/1+R+CF3/1+R

CF1 is the cash flow for the period 1 while the CF2 is the cash flow for the period 2.

Relative Valuation Model

Relative valuation approach

 

P/E

 

2020

2019

2018

2017

2016

 

Price

36.39

33.23

29.96

25.36

20.56

 

EPS(cents)

92.70

206.20

132.60

119.40

-97.70

 

EPS (dollars)

0.93

2.06

1.33

1.19

-0.98

 

Price to earnings ratio

39.26

16.12

22.59

21.24

-21.04

 

Workings

2020

2019

2018

2017

2016

 

Market price

 

Market capitalization

45963916000

41826271000

39347185000

32826402000

26291279000

 

Shares

1263091936

1258690067

1313323941

1294416480

1278758725

 

Formula

Market capitalization/no. of shares

Price

36.39

33.23

29.96

25.36

20.56

 

P/B

2020

2019

2018

2017

2016

Price

36.39

33.23

29.96

25.36

20.56

Share capital

6197000000

6033000000

6201000000

5719000000

5347000000

Shares

1263091936

1258690067

1313323941

1294416480

1278758725

Book value per share

4.91

4.79

4.72

4.42

4.18

P/B

7.42

6.93

6.35

5.74

4.92

P/S

Market capitalization

45963916000

41826271000

39347185000

32826402000

26291279000

Sales

63863000000

60281000000

57180000000

55286000000

53949500000

P/S

0.72

0.69

0.69

0.59

0.49

A relative valuation model is a method of assessment used to compare the value of the company with the value of its competitor to assess the financial value of the company. A model of relative valuation replaces the absolute value model, which tries, based on its estimated future free cash flow discount on current values and with any other companies remarks, to regulate the inherent company's value. Like the absolute evaluation model, investors can use the relative valuation models to regulate whether the stock of an undertaking is a good buy or not.

Following are the advantages of relative valuation model

  1. A relative model of valuation disagrees with the absolute model of value which does not reflect any average company.
  2. A relatively value model compares the value of a company with the value used by its competitors to regulate the financial value of the company.
  3. A relative valuation template may also be used to assess the value of an inventory price of a company compared to the average of the other company.
  4. The price-to - earnings (P / E) ratio is one of the most famous relative estimates...

Types of the relative valuation models

There are many of the types of the relative valuation models:

  1. Enterprise value(EV)
  2. Price-to-sales (P/S) for retail
  3. Price to free cash flow
  4. Price to cash flow for real estate
  5. Operating margin

The price-to - earnings (P / E) ratios are one of the famed relative valuation multiples. It can be calculated by dividing the share price by the income price per share (EPS), and can be shown as the share price of the company as the multiples of prices. A high cost-to-earnings enterprise that is highly priced for each dollar of income and is regarded as overestimated as its competitors. This makes a company which traded at a lower price / dollar ESP and could be considered underestimated by its low price / earnings ratio. This type of framework can be applied to measure the relative market price with any of the multiple prices. So when an industry or company has 10x average prices for income of this type and a certain company of this type trades 5x income, it is called the competitor to be relatively undervalued (Dunis, 2004).

Relative assessment utilizes ratios, multiples, and benchmarks to regulate the value of the business. When the relatively high value is regulated by the average resulting from the average across the industry, the benchmark can be selected more efficiently. On the other hand there are no external benchmarks or averages for the absolute assessment. A cumulative market value for all of the outstanding shares of every company that is shown as a plain dollar amount and gives you a little information about the relative value.

Bibliography for Uncertainty in Valuation Models

Dunis, C. (2004). Relative valuation aproach, https://www.springer.conm.

French, N. (2005). Discounted cash flow, https://www.emrald.com.

Woolworth. (2020). About us, https://www.woolworth.com.

ARAFAT, M. F. Y., & DARMANSYAH, A. Absolute and Relative Valuation Models to Accommodate Pre-IPO Appraisal of an Airport Authority: A Case Study of PT. Angkasa Pura II Persero.

Trinh, T. H., & Thao, L. T. N. (2017). Corporate valuation modeling for strategic financial decisions. Asian Economic and Financial Review, 7(12), 1153.

Franke, M. (2020). Uncertainty in Valuation Models: A Simulation-Based Evaluation of the Technology Bubble. Available at SSRN 3559324..

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