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Frank winfield 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 food markets. nutrient and retailing ( WOOLWORTHS LIMITED ( WOW ) 2013 ) . The purpose of this study is to gauge and find the dividend growing rate. stock return and current portion monetary value of Woolworths. Methods used for the appraisal include dividend growing theoretical account. Capital Asset Pricing Model ( CAPM ) and Gordon’s Growth Model. The consequences of the appraisal indicate that the dividend payments will continuous increasing in the hereafter. the return on the company’s assets is sensible and its portion monetary value is expected to lift.
Finc2011 Corporate Finance I
In add-on. recommendations associated with the investing determination will be provided to the public investors sing to the hazards in the market by comparing with companies within the same industry. However. there are still a figure of restrictions of the study such as a few premises are made for computations and restrictions due to the difference of hazard free rate.
Calculation of Growth Rate:
The attack used to gauge the growing rate ( g ) for dividend payments of Woolworths is: g = Ploughback Ratio x Return on Equity ( ROE )
Ploughback Ratio = 1 – Payout Ratio
In which. payout ratio refers to the ratio of dividends to net incomes per portion ( EPS ) ( Brealey. Myers and Allen 2011 ) . Souce: hypertext transfer protocol: //www. woolworthslimited. com. au/annualreport/2012/pdf/WW_AR12_Full. pdf
Based on the figures above. the growing rate ( g ) for the 2012 should be: g = ( 1 – 0. 8528 ) x 0. 2722 = 4. 01 %
In order to calculate out a more accurate growing rate. the norm should be taken from 2008 to 2012. As it is shown in the tabular array. the mean g = 7. 68 % .
Harmonizing to Woolworth’s one-year study ( 2012 ) . the payout ratio is rather stable. despite there is a sudden addition in 2012 ; hence. we could presume that the dividend payout ratio is changeless. Meanwhile. although Woolworths’ Return on Equity ( ROE ) shows a little lessening from 2008 to 2012. it is still reasonably steady – stopping point to 28 % . Since both of two premises – changeless dividend payout and return on equity – are satisfied ( Mellare 2013 ) . g = Ploughback x ROE is suppose to be an appropriate method to gauge the dividend growing rate for Woolworths.
Calculation of needed return utilizing CAPM
Capital Asset Pricing Model ( CAPM ) is a method used to mensurate the hazard and return of an plus. which describes that each expected hazard premium of an plus should lift in proportion to its beta ( Brealey. Myers and Allen 2011 ) :
In which. Rhode Island refers to the return on plus. releasing factor refers to the hazard free rate of return. beta is the covariance and ( rm-rf ) is the market hazard premium ( Brealey. Myers and Allen 2011 ) .
To get down with. hazard free rate ( releasing factor ) should be determined. Generally. 10 old ages authorities bonds rate is considered to be risk free rate as it is normally believed that a authorities would be improbable to default on its duties ( McNickle 2011 ) . However. it does non intend that authorities bonds face no hazards. it still encounter rising prices and involvement rate hazard ( Brealey. Myers and Allen 2011 ) .
Beginning: hypertext transfer protocol: //www. rba. gov. asu/statistics/tables/xls/f02d. xls? accessed=2013-05-22-21-18-20
Harmonizing to the Capital Market Yields – 10 old ages Government Bonds provided by Reserve Bank of Australia ( 2013 ) . the 10-year authorities bond rates in 21th May 2013 is 3. 26 % . which should be used as the hazard free rate ( releasing factor ) for the computation of CAPM.
hypertext transfer protocol: //www. ato. gov. au/super/content. aspx? menuid=0 & A ; doc=/content/60489. htm & A ; page=36 & A ; H36
However. those may reason that based on the historical information from Australian Taxation Office ( 2013 ) – the tabular array above. the norm of hazard free rate from 2003 to 2012 is calculated to be 5. 34 % . which should be the hazard free rate for the computation alternatively of 3. 26 % . Nevertheless. since the hazard free rate is ever altering. in order to gauge the return for plus more accurately. the current hazard free rate 3. 26 % is supposed to be taken for the appraisal.
In this phase. the hazardous needed return ( rm ) . the same as market return. should be calculated. Stock market index is an attack to measure the value of stock market and S & A ; P/ASX 200 is the most important stock market index which tracks the public presentation of two hundred large Australian corporations ( Australia Stock Market ( S & A ; P/ASX 200 ) 2013 ) . Currently. S & A ; P/ASX 200 is a primary portion market index in Australia which replaced the All Ordinaries in April 2000 and has become the benchmark for investing for the Australian Securities Exchange ( ASX ) ( ASX 200 2013 ) . Therefore. S & A ; P/ASX 200 is the best index of the market return and used to find the market return. Beginning:
hypertext transfer protocol: //blackboard. econ. usyd. edu. au/bbcswebdav/pid-636137-dt-content-rid-201558_2/courses/FINC2011_SEM1_2013/All % 20Ords % 20Accumulation % 20Indices. forty
Based on the information from S & A ; P/ASX 200 Accumulation index ( day-to-day ) . which is provided by Mellare ( 2013 ) . the annual index could be calculated by averaging all of the day-to-day indexes for that twelvemonth. Annual market return ( rm ) can be determined by:
In which. old market index refers to the index for twelvemonth T and new index is the index for twelvemonth ( t+1 ) .
A tabular array for the computation of market return will be created in a similar manner with the S & A ; P/ ASX200 tabular array ( see Appendix – 1 ) for the periods of 10
old ages in order to follow with ASX.
Due to the monetary values in 2013 is non completed. the market return for fiscal twelvemonth ( FY ) 2012 can non be estimated faithfully. Importantly. averaging rm for 10 old ages from FY 2002 to FY 2011 is important for the intent of finding a more accurate figure. As a consequence. rm = 8. 31 % . Because rm is the amount of the hazard free involvement rate ( releasing factor ) and a premium for hazard ( Brealey. Myers and Allen 2011 ) . the hazard premium. as a portion of CAPM equation. can be calculated through: rm = releasing factor + hazard premium hazard premium = rm – releasing factor
Based on the old analysis. rf = 3. 26 % and rm = 8. 31 % . hazard premium = 8. 31 % – 3. 26 % = 5. 09 % . Harmonizing to the study from last twelvemonth. the market hazard premium is estimated to be 6. 0 % in October ( Michael. Blake and Zolotic 2012 ) . the estimated value of 5. 09 % is sensible.
Harmonizing to the fiscal information from Reuters ( 2013 ) . Woolworths’ beta ( ? ) = 0. 34. Therefore. by using CAPM:
Calculation of Following Dividend Payment
The following dividend payment should be determined by utilizing:
In which. d0 is the current dividend payment. d1 is the dividend for the following fiscal twelvemonth and g is the growing rate.
Souce: hypertext transfer protocol: //datanalysis. morningstar. com. gold. ezproxy1. library. usyd. edu. au/af/company/dividendhistory? ASXCode=WOW & A ; xtm-licensee=dat
The tabular array above shows the dividend history of Woolworths ( Morningstar 2013 ) . Since. the entire dividend payment in 2012 is $ 67+59 = $ 126 cents/ $ 1. 26 per portion. which should be d0. and the growing rate is estimated to be 7. 68 % in the old computations. d1 = 1. 26* ( 1+7. 68 % ) = $ 1. 36. which is the entire dividend payment for 2013. As the interim dividend for 2013 has already paid on 26/04/2013. the concluding dividend for 2013 which is the following dividend payment should be: $ 1. 36–0. 62= $ 0. 74 per portion.
Determination of Expected Current Share Price
The changeless divident growing theoretical account. which is Gordon’s Growth Model. is used for gauging the current portion monetary value: In which. P0 refers to the current portion monetary value. d1 is the divident payment for the following twelvemonth. rhenium is the needed rate of return and g is the growing rate.
In order to cipher the current monetary value P0. foremost. d1 demand be calculated which should be the dividend for the following twelvemonth – 2014. Hence. d1 = 1. 36* ( 1+7. 68 % ) = $ 1. 46
As required rate of return ( rhenium ) consists of both capital additions and dividend outputs ( Mellare 2013 ) and capital additions is the same as g ( Mathis 2001 ) . rhenium = capital additions ( g ) + dividend outputs.
Souce: hypertext transfer protocol: //www. woolworthslimited. com. au/annualreport/2012/pdf/WW_AR12_Full. pdf
Harmonizing to the historical information from annural study of Woolworth ( 2012 ) . taking the norm of all of the dividend outputs for the last five old ages – from 2008 to 2012. the dividend output = 3. 8808 % . Therefore. rhenium = 7. 68 % + 3. 88 % = 11. 56 %
Last. the expected current portion monetary value in 2013 is:
P0 = 1. 46/ ( 11. 56 % -7. 68 % ) = $ 37. 63
Recommodation and Discussion
Investing determinations are rely on the return and hazard associated with a security. Harmonizing to CAPM. actural returns are measured by beta. which is defined as a security’s sencitivity relation to the alterations in the value of the market portfolio ( Brealey. Myers and Allen 2011 ) . over the long tally. Beta of Woolworths Limited is 0. 34 ( Reuters 2013 ) . which is a good mark as it indicates that the company is insensitive to the market hazard.
Comparing it with other companies. Wesfarmers Limited ( WES ) . the Perth-based pudding stone which selling nutrient to clients ( Greenblat 2013 ) . has same state of affairs with Woolworths in footings of turning tendency of dividend payment and sharing market hazard as they operates within the same industry – nutrient industriy. Beta of Wesfarmers is 0. 96 ( Reuters 2013 ) . which means that Wesfarmers is more hazardous than Woolworths as it is every bit hazardous as the market porfolio ( Brealey. Myers and Allen 2011 ) . As good. beta of Goodman Fielder ( GFF ) . another nutrient company. is 0. 98 ( Reuters 2013 ) . which means it portions about the same hazard with the market porfolio ( Mellare 2013 ) – realtively in the same state of affairs with Wesfarmers. Therefore. when refering with the hazards. it is recommended to put in Woolworths.
However. under CAPM. high-beta securities will ensue in high return: Rhode Island = releasing factor + ?* ( rm – releasing factor )
As all of these three companies are in the same market. they portion the same market hazard but the proportion is different based on their beta. Although. securities of Wesfarmers and Goodman Fielder are more hazardous than Frank winfield woolworths due to higher beta. they provide higher return to investors. Since investing determinations are depend on personal involvements ( Mellare 2013 ) . it can non be denied that there are a few investors prefer higher returns with higher hazards. Furthermore. the higher returns compensate investors for higher hazard. hence. it is improbable to find whether invest in Woolworths is a better option.
However. puting in Woolworth is still recommended. Investing in low-risk securities provides changeless and stable returns. Investing in Woolworths is worthwhile non merely because Woolworths provides rather changeless returns. but besides its possible to growing due to its strong profitableness and hard currency flows ( WOW – Woolworths Limited 2012 ) .
Overall. it is recommended to put in Woolworths.
It is of import to detect that there are a figure of restrictions for this study. First. the method used for ciphering dividend growing is based on the premises – changeless dividend payout and return on equity. but in world. both dividend payout and return on equity are improbable to be changeless. Consequently. the computation of g may non be accurate. As good. since the 10-year authorities bond rate. which is considered as hazard free