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FINC20018 - Managerial Finance Assignment - CQ University, Australia

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Practical and Written Assessment -

The task -

The assignment is designed to assess your understanding of business finance theories and explores a number of areas within the course by applying your learning to a real company. Through this project, you need to be able to demonstrate critical and analytical skills in academic writing, various research synthesising skills and be able to communicate clearly and effectively.

Please note this is a finance assignment for real business, so make sure you have the appropriate combination of quantitative and qualitative analysis.

Executive Summary -

In this assignment, we have analyzed the financial performance of Woolsworth Limited that is one of the largest retail chain companies operating in Australia and New Zealand. In the given assignment, we have analyzed the value of company's stock and determined the theoretical stock value of the company so as to advise whether it will be beneficial for the potential investor to invest funds in this company. Further we have evaluated the operational performance of the company over the past years and also discussed the benefits that a long term investor may derive from investment of his funds in the company.

Introduction to the company:

Woolworth Group Limited is a major Australia based company with its significant interest in the retail business in amongst the whole of Australia and New Zealand. The company is the second largest brand in the whole of Australia in terms of its revenue figures after West farmers and is the second largest company in New Zealand.

Maximizing shareholder value

The company is engaged in the retail operations and offers a huge variety of products to sell through its retail chain of the company. The company has been operating across Australia and New Zealand with its number of retail stores. Further, the company is a public limited company in which the amount of public has been invested upon.

The value of shareholders of the company gets maximized if their return from investment in the company gets maximized over the years in terms of revenues, profits, and dividend of the company. We have discussed several facts and figures to support our answer.

The gross profit margin of the company refers to the amount of direct profit earned by the company from direct operations (Parkinson, 2018)). The gross profit of the company has been increased from 26.94 percent to 27.11 percent that shows the increase in efficiency of the company. With the increase in the rate of gross profit, the control of the company over its cost has been expressed in the balance sheet of the company.

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The net profit margin of the company refers to the net amount earned by the company after its settlement of indirect expenses including depreciation and taxes. We have calculated EBIT margin in order to evaluate the operating performance of the entity. The EBIT margin of the company is for the last audited year has been reported to be $2548 million that in terms of percentage is calculated as 9.5% growth from the last years EBIT figures. The increase in profitability has been majorly due to the increase in Australian food products offered by the company.

Apart from the increase in profitability and revenues, the company was able to reduce its cost of finance by 20.6% of its finance cost incurred by the company in the last operating year ending June 2017. The company was able to reduce the financing cost due to continuous repayment of its debt.

The net profit after tax of the company was reported to be $1605 million that have been increased by 12.9% from the last year figures. The earnings per share of the shareholders have also been increased by 123.4 cents from last EPS that was reported to be 11.4%.

Analysis of the company's history in share trade volumes amongst the shareholders

There were various changes in the equity that has been reported as follows:

  • Shares were issued in the public in the form of a dividend reinvestment plan. The amount received from the issue of shares under this plan by the company was $479 million. This is also called as capitalization of profits through which company issues shares in place of disbursement of dividend to the shareholders.
  • Further $ 55 millions of shares were issued to the underwriters for below subscription of shares.
  • Further, there were no major changes in the shareholding pattern of the company for the last year ending June 2018.

Long term and short term expected returns from the company

The company has been satisfactorily performing in the retail sector of Australia and New Zealand. The gross profit and Net profit margin of the company have been outperforming as discussed above (Parkinson, 2018). The company has also been focusing to reduce the cost of finance by way of repayment of its debts and loans through which company's profits have been increasing over the years.

While talking about short term returns from investment in the shares of the company, it doesn't seem to provide huge gain in short term. The share price of the company as on today 23rd of Jan 2019 is $30.20. The expected annual yield in form of a dividend is 3.11% of the company. The price-earnings ratio of the company as on today is 22.54. The share price in short term can be expected to reach $31.50 at maximum size and it can see a downfall to $28.50 to a minimum size in the short run. It is, therefore, better suggested not to buy this share to gain from a short run investment perspective.

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However, the share of the company offers huge amounts of earnings with the continuous growth in products and revenues of the company. With the decline in debts, the profitability of the company is also rising over year on year. The company offers decent dividends and bonus shares in form of dividends to increase the wealth of the shareholders. Further, the company has been shifting towards E-commerce and expanding its product base and market base so as to make available a large number of featured products to the strong market base. This will lead to growth in the share price in the long run.

Current equity valuation of the company and the determination of whether to invest or divest from the company.

The current value of stock in the market is $30.20 as on 23rd of Jan 2019. The theoretical market price per share of the company is valued to be 22.54(Price-earnings ratio)*1.326(EPS) = $29.888

Based on our determination of the theoretical share price of the company, the share of the company is perfectly valued based on the theoretical share price of the company with adjustment given to growth. It would be therefore advisable to sell the share at the current date to gain some profit in the short run, however, the share price seems to be very attractive for the long run.

Evaluation of investment projects undertaken by the company and determination of profitability from the undertaken projects.

The investment of the company in its fixed assets has been increased from $9179 million by $ 623 million during the year. The additional investment was driven by the additional requirement of store refurbishment of the company (Parkinson, 2018). The amounts to be invested in information technology got offset with the number of sales of stores and spares and depreciation.

Further, the company has been expanding its operations in the field of E-commerce through investment in information technology that will help the company to increase the customer reach. The company has developed its website and also wants to address the grievances of the customers through round the clock online service with the issues in products and services delivered by the company. The company further expanding its customer reach through adding new stores in the list of stores and with the combined efforts of the group, the company has been able to reach 2900 mark in its number of stores.

Analysis of the dividend policy of the company.

The company declared the final dividend of $50 cents with an interim dividend paid earlier of $43 cents totaling near to $ 93 cents. The dividends have been paid by the company in cash that counts growth of 11 percent from the last year's dividend after repayment of debts and loans amounting to $677 million this year. This shows the company has been working hard towards the management of the capital structure and demands of its shareholders at the same time.

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Apart from the cash dividends announced by the company, the company recognizing its strong position of franking credits has also announced a fully franked special dividend of $ 10 cents for the year.

Estimation of overall cost of capital and analysis of current capital structure. Indicating reasons that potential investors shall consider to invest in this company.

The company has been financed by debt and equity. Also by the retained earnings that are the profits earned by the company over the years and do belong to the equity shareholders of the company only (Feigin, 2016). The company's cost of capital can be determined in form of cost of debt and cost of equity. The cost of debt of the company is depicted in the balance sheet of the company in form of interest expense that amounts $154 million. The financing costs of the past year amounted to $ 194 million. The finance costs of the company have declined by 20.6% over the year due to repayment of debts that amounted to $677 million in the current year ending June 2018. The remaining total borrowings of the company at the end of the current year ending 2018 amounts to $ 2199 million that will be further repaid by the company in coming years so as to reduce the costs of finance of the company and increasing the profitability of the company.

The total amount of equity shareholders in form of equity and reserves invested in the company at the end of current year amounts to $10849 million. The cost of equity refers to the expectation of equity holders to receive any sort of return over their investment. The reward received by the equity holders is in form of increase in the price of share and dividends received in cash. The current cost of equity in terms of the amount paid in cash by the company is calculated as follows:

The current price of equity share: $30.20

Dividend per share: $0.93

Cost of equity: $0.93/$30.20*100

: 3.079%

The above-calculated cost of equity does not account for the cost of finance and other costs incurred in the issuance of shares since there are no shares issued in fresh and all other shares are traded in public.

Based on the above-given details of the company, finally, it is concluded whether the company seems to be an attractive investment opportunity for potential investors.

Based on discussing the various figures and ratios of the company it can be concluded that the company has been successful in satisfying their customers with the quality offering of its products over the market. The number of the customer base has been seen to be increasing with the growth in sales by 3.4% over the year (Knox, 2015). Further the Earnings before interest and tax of the company has been increased by 9.5% for the company during the current year over last year despite the fact being the company has invested in initiatives that will take a long time to mature and reap benefits out of it.

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The trading performance of the entity has been outperforming over the current year with a reduction of its debt by $677 million and after that, the company paid dividends of 93 cents per share to its shareholders in cash and 10 cents as fully franked dividend per share.

The company has also worked upon to bring some changes in operations in order to expand their business and profitability and the highlights of those changes have been discussed hereunder:

  • The company has been efficiently working towards the feedback received from the suppliers, customers and trading partners in order to continuously deliver the best available service in the market.
  • The company has been making efforts to maximize their reach and the combined efforts helped the company to cross 2900 of stores in Australia and New Zealand.
  • The company has been upgrading their stores and has been ruling over number 1 spot in the market in Drinks business.

The above mentioned financial highlights of the company are itself appealing to convince the shareholders to invest in the company. The company has been operating effectively in the market with decent financial prospects and huge growth prospects (Paull & Hennig, 2018). The company has been further expanding its operations and customer base to increase the amounts of a company's profitability thereby claiming to number one spot in the retail chain market of Australia and New Zealand. Therefore, it can be concluded to be a very good investment opportunity for the potential investor in the retail food chain industry (portfolio) for the purview of the long run.

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