Financial Analysis Of Woolworths And Wesfarmers

Detecting and calculating the Stock price returns and market index return

The assessment aims in detecting the level of systematic and unsystematic risk in Woolworths and Wesfarmers of the organisation. This determination of the risk mainly helps in understanding the level of returns, which could be generated from the investment. therefore, with the detection of the overall risk attributes of the organisation. The statistical calculations are mainly used in deriving the overall systematic risk and unsystematic risk of both the organisations. The weighted average cost of capital is mainly calculated to understand the level of minimum returns, which the organisation needs to generate from the investment. The dividend calculation for both the organisation is mainly calculated to understand the level of returns, which could be provided from the investment. Lastly, relevant evaluation is mainly conducted to understand the investment scope, which is presented in both the companies that could be evaluated by the investors to generate higher rate of returns from investment.

The calculation of stock price return and market index return has been conducted adequately, which suffices all the relevant information, which is needed for the calculation of systematic and unsystematic risk. This calculation has mainly helped in detecting the level of returns, which could be detected from investment in both the companies. The market return is also calculated to understand the level of price changes that has been witnessed by the company on each capital market movement. In this context, Frank & Shen (2016) stated that companies with the use of risk and return calculation is able to draft a portfolio, which could have the lowest risk while obtaining higher returns.

The above table mainly helps in detecting the level of systematic and unsystematic risk for that chosen organisations. In addition, the determination of the risk evaluation helps in understanding the level of risk, which could be associated during the investment period. Furthermore, the systematic risk is mainly calculated with the help of regression calculation, which is derived by analysing the return of the stocks and All Ordinary Index of Australia. This calculation helps in detecting the systematic risk or beta of the stock, which is controllable by the investors, However, further calculation is conducted to detect the level of unsystematic risk, which is uncontrollable by the investor during their investment period. In this context, Baker & Wurgler (2015) stated that with the detection of the risk and return attributes the investors are able to understand the investment opportunity within a stock and adequality formulate their portfolio, which can increase their return from investment, while reducing the overall risk.

Calculating the total risk, systematic risk, and unsystematic risk for the companies selected in investments

The derivation of the calculation represented in the above table indicates that Unsystematic Risk of Woolworths is relevantly higher than Wesfarmers, which will directly affect investment scope of the investors. Therefore, the systematic risk of Woolworths is lower than Wesfarmers, which allows the investors to minimise the level of risk of their portfolio. On the contrary, Ortiz-Molina & Phillips (2014) argued that higher risk involved in investment raises the concern for investors, as their investment capital can be hampered from investment.

The above calculation conducted in the table represents the capital structure of Wesfarmers, which helps in understanding the level of WACC that needs to be maintained by the organisation. The cost of equity is mainly calculated from two different ways, which are related to dividends and non-dividend paying companies. This helps in detecting the actual weighted average cost of capital for Wesfarmers, which could be used by the investors, while making adequate investment decisions. According to Brotherson et al., (2015), investors use WACC valuation to make adequate investment decision, while generating higher rate of return. On the contrary, Core, Hail & Verdi (2015) argued that investors ignoring indicators of fundamental analysis relatively increases the level of risk involved in investment. Hence, from the evaluation it could be detected that using the CAPM model for cost of equity the WACC is mainly at the levels of 9.27%, while the use of dividend discount model relevantly leads to 7.11%. Thus, the calculation of cost of equity has helped in detecting the level of WACC values for Wesfarmers, which ranges from 6.67% to 8.59%.

The calculation has mainly helped in detecting the level of risk involved in investment for the investors interested in Woolworths. The calculation has mainly helped in understanding the level of risk on equity, by calculating the beta of the stock. In addition, both the CAPM model and dividend discount model is mainly used during the calculation process, which helps in deriving the range of cost of equity values that could be used in the calculation process. This calculation of both the method has mainly portrayed two values of cost of equity, which are 8.24% and 9.05%. This change in values has portrayed a range of WACC, which are from 7.67% to 8.38%. This valuation could help in understanding the level of minimum returns, which the organisation needs to provide during the fiscal year. Frank & Shen (2016) indicated that organisations are mainly able to understand the level of risk and return involved in investment with the evaluation of WACC and Beta.

Detecting and calculating weighted average cost of capital WACC for the selected organisations

Figure 1: Dividends paid by Wesfarmers

(Source: Wesfarmers.com.au, 2018)

The above figure represents the section, which indicates the dividends that has been paid by the organisation. From the evaluation it could be detected that the organisation has increased their dividends paid duding 2017 fiscal year. In addition, the organisation aims in delivering growing dividends each year, which helps in attracting more investors into their vicinity. Therefore, from the evaluation it could be detected that the organisation is aiming for dividend relevancy theory in delivering the dividends to its investors. This mainly indicates that the organisation aims in increasing the dividend payment each year, which can be seen in the above figure.

Figure 2: Dividends paid by Woolworths

(Source: Woolworthsgroup.com.au, 2018)

The dividend payment structure adopted by Woolworths can be identified from the above figure, where the organisation has paid dividends in accordance with the income. The company has been following irrelevance dividend policy, as the organisation gives dividends in accordance with their profits. The inconsistency in the dividend payment is directly affecting the dividend policy, which has been adopted by the company. In this context, Travlos, Trigeorgis & Vafeas (2015) stated that investors by detecting the pattern of dividend growth finds relevant investment opportunity to maximise their profits over the period.

The above table indicates the dividend pay-out ratio of Wesfarmers and Woolworths, which is calculated for determining the retention, which are conducted by both the companies with their income. From the evaluation it is detected that Wesfarmers pays the maximum to their shareholders, as their dividend pay-out is at the levels of 87.73%. In the same case, Woolworths is identified to have a dividend pay-out ratio of 70.35%, where the organisation conducts retention of their income up to the level of 29% for future growth.

The table indicates the change in return of the organisation when dividend is declared. From the evaluation is could be detected that there is no significant change in the return of the organisation during the period of dividend declaration. Hence, it could be understood that the dividend declaration does not have an adverse or positive impact on performance of the share price. This mainly indicates that the dividends paid by the company is anticipated by the investors, where there is no significant change in the valuation of their share price. Kajola, Adewumi & Oworu (2015) stated that investors rely on constant dividend payments from their investment as it increases the rate of retune, which could be delivered by the organisation.

From the evaluation it could be detected that investments in Wesfarmers is much more beneficial for the investors, as the company is projecting a positive return attribute. In addition, the dividend pay-out ratio of the organisation is also higher than Woolworths, which make it an attractive investment. The WACC of Wesfarmers is also lower than Woolworths, which allows the organisation to obtain lower returns due to the low debt accumulation. Furthermore, the risk attribute of both the companies is relevantly low, which make the stock attractive for investment. Therefore, from the evaluation it could detected that investment in both the companies could be beneficial for the investors. However, use of different weights can be conducted to form a portfolio with both the stocks to increase the level of exposure in the Australian market and generate higher returns with low risk. Hence, investment of 70% in Wesfarmers from the capital of 2,000,000 can be conducted while rest of the funds could be unvested in Woolworths.

Conclusion:

The assessment aims in detecting the level of investment, which could be conducted in Woolworths and Wesfarmers, which could allow the investor to generate higher rate of return. The statistical calculation is used in deriving the values of systematic risk and unsystematic risk, which allows the investors to detect the risk attributes of the investment. In addition, from the evaluation the WACC of both the companies are detected, which is an essential instrument while making investment decisions. Therefore, after evaluating the current financial performance of the both the organisations relevant investment can be conducted. The portfolio of investment can be changed due to the risk factor and minimum retune factor. Hence, investment in Wesfarmers could be conducted at the level of 70% of 2,000,000, while the rest 30% can be invested in Woolworths.

References

Attig, N., Boubakri, N., El Ghoul, S., & Guedhami, O. (2016). The global financial crisis, family control, and dividend policy. Financial Management, 45(2), 291-313.

Baker, M., & Wurgler, J. (2015). Do strict capital requirements raise the cost of capital? Bank regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5), 315-20.

Brotherson, W. T., Eades, K. M., Harris, R. S., & Higgins, R. C. (2015). ‘Best Practices’ in Estimating the Cost of Capital: An Update.

Core, J. E., Hail, L., & Verdi, R. S. (2015). Mandatory disclosure quality, inside ownership, and cost of capital. European Accounting Review, 24(1), 1-29.

Finance.yahoo.com. (2018). Au.finance.yahoo.com. Retrieved 12 August 2018, from https://au.finance.yahoo.com/quote/WES.AX/history?period1=1404066600&period2=1498761000&interval=1d&filter=history&frequency=1d

Finance.yahoo.com. (2018). Au.finance.yahoo.com. Retrieved 12 August 2018, from https://au.finance.yahoo.com/quote/WOW.AX/history?period1=1404066600&period2=1498761000&interval=1d&filter=history&frequency=1d

Finance.yahoo.com. (2018). Finance.yahoo.com. Retrieved 12 August 2018, from https://finance.yahoo.com/quote/%5EAORD/history?period1=1404066600&period2=1498761000&interval=1d&filter=history&frequency=1d

Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), 300-315.

Huang, T., Wu, F., Yu, J., & Zhang, B. (2015). Political risk and dividend policy: Evidence from international political crises. Journal of International Business Studies, 46(5), 574-595.

Jacob, M., & Michaely, R. (2017). Taxation and dividend policy: The muting effect of agency issues and shareholder conflicts. The Review of Financial Studies, 30(9), 3176-3222.

Kajola, S. O., Adewumi, A. A., & Oworu, O. O. (2015). Dividend pay-out policy and firm financial performance: Evidence from Nigerian listed non-financial firms. International Journal of Economics, Commerce and Management, 3(4), 1-12.

Kajola, S. O., Desu, A. A., & Agbanike, T. F. (2015). Factors influencing dividend payout policy decisions of Nigerian listed firms. International Journal of Economics, Commerce and Management, 3(6), 539-557.

Ortiz-Molina, H., & Phillips, G. M. (2014). Real asset illiquidity and the cost of capital. Journal of Financial and Quantitative Analysis, 49(1), 1-32.

Travlos, N. G., Trigeorgis, L., & Vafeas, N. (2015). Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus.

Wesfarmers.com.au. (2018). Wesfarmers.com.au. Retrieved 12 August 2018, from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0

Woolworthsgroup.com.au. (2018). Woolworthsgroup.com.au. Retrieved 12 August 2018, from https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order