Finc2011 Major Assignment Essay

1893 Words Aug 27th, 2013 8 Pages
Woolworths Limited Valuation Report

Executive summary
Woolworths Limited (WOW), which is one of the listed companies in Australian Security Exchange (ASX) (ASX 200), is the largest supermarket in Australia (Kruger 2013), it specializes in the groceries, food and retailing (WOOLWORTHS LIMITED (WOW) 2013). The aim of this report is to estimate and determine the dividend growth rate, stock return and current share price of Woolworths. Methods used for the estimation include dividend growth model, Capital Asset Pricing Model (CAPM) and Gordon’s Growth Model. The results of the estimation indicate that the dividend payments will continuous increasing in the future, the return on the company’s assets is reasonable and its share price is
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As a result, rm = 8.31%.
Because rm is the sum of the risk free interest rate (rf) and a premium for risk (Brealey, Myers and Allen 2011), the risk premium, as a part of CAPM equation, can be calculated through: rm = rf + risk premium risk premium = rm – rf
Based on the previous analysis, rf = 3.26% and rm = 8.31%, risk premium = 8.31% - 3.26% = 5.09%. According to the report from last year, the market risk premium is estimated to be 6.0% in October (Michael, Blake and Zolotic 2012), the estimated value of 5.09% is reasonable.

According to the financial information from Reuters (2013), Woolworths’ beta (β) = 0.34. Therefore, by applying CAPM:

Calculation of Next Dividend Payment
The next dividend payment should be determined by using:

In which, d0 is the current dividend payment, d1 is the dividend for the next financial year and g is the growth rate.


The table above shows the dividend history of Woolworths (Morningstar 2013). Since, the total dividend payment in 2012 is $67+59 = $126 cents/$1.26 per share, which should be d0, and the growth rate is estimated to be 7.68% in the previous calculations, d1 = 1.26*(1+7.68%) = $1.36, which is the total dividend payment for 2013. As the interim dividend for 2013 has already paid on

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