Investment Analysis - Woolworths - Assignment Example

Investment analysis Student’s name Course/Number Date Instructor’s name Outline I Event study A) Model B) Abnormal returns and cumulative abnormal returns C) Findings in relation to market efficiency II The claim that the fund manager III Woolworths A) Company profile B) Valuation ratios C) Intrinsic Value D) Conclusion References List 1. Event study a) In the excel file. SUMMARY OUTPUT Regression Statistics Multiple R 0.996075 R Square 0.992166 Adjusted R Square 0.988249 Standard Error 0.005526 Observations 4 ANOVA   df SS MS F Significance F Regression 1 0.007736 0.007736 253.3078 0.003925 Residual 2 6.11E-05 3.05E-05 Total 3 0.007798         Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.012458 0.002776 4.487626 0.046239 0.000513 0.024402 0.000513 0.024402 AORD 1.119163 0.070318 15.91565 0.003925 0.816607 1.421719 0.816607 1.421719 The model is Y= 1.119AORD+0.0124 The result of the traditional F-Test is a significantly high 253.307 helps reject the null hypothesis that none of the selected independent variables has power to explain the variations in the dependent variables. Deploying the F-test (p-value) delivers a similar result, in that because of the significant difference (5% > 0.393%) between the 5% hypothesis and the probable F-statistic the model has significant power to explain the changes in foreclosure rates. In addition, the R-Square value of 99.22% shows that there exists a good fit between the independent and the dependent variables. b) It is easier to calculate abnormal return for CBA during the period of announcement. The formula for calculating abnormal return is as follows Abnormal return = observed return – expected return. Normally expected return is the average return of the stock in the market while observed return during the period of announcement. This means abnormal return is the measure of the return that is in excess of a normal market return of a stock. This excess return is related to days relative to the announcement which will affect the market dynamics. It is considered that the day the news is released the value of abnormal return is 0.it is usually also assumed it is value is negative before their announcement and it is positive after the announcement. The graph shown below shows the distribution of abnormal return of CBA. The graph as cumulative abnormal return begins day 10 to day -10. The graph begins with cumulative abnormal return 10 for day 10 after the announcement to cumulative -10 that is 10 days after the announcement. As it can be observed from the graph, the cumulative abnormal return was around 0 before the announcement. When the announcement was made the graph went upward then started coming down and in day 10 it was 0. This means the public had reacted to information from day0-6. c) In this case the market appears to be semi-s strong because the information that release the market is reflected immediately in the stock price. This information affects the traders` view about the stock and they rush to buy with the hope of cashing in on the future. It is clear that the information released to market is influential to the stock price and was an expected. An expected information which as a bearing in the cumulative abnormal returns is information relating to change in dividend, change in the management and such like information. Positive information will have a positive price change while negative information will have negative price change. In this case it appears the information positive because the cumulative abnormal return is positive. there are many reactions which include instant reaction where the new information is reflected in share price immediately. The other is when the price is reflected after some time and this is called delayed reaction. Lastly there is reaction when price shoots up abnormally and it is recollected later. (2.) The claim that the fund manager will be able to generate an abnormal rate of return of around 43 basis point per month cannot be supported by the regulation statistic provided. From the statistics the cheapest is 4.434 and 46.64 which falls outside the rejection area. Alternatively the p-value for the test is 0.005. This figure is below the level of significance of 1%, 5% and 10%. The model used by the fund manager shows that only 75.06% of the variations that are considered in the model. This means 24.94% of the variations are not in the analysis. The model has only considered one variable . The p values and t statistics values are outside the acceptable areas. Looking at the results provided by Ben, one thing comes into mind; that Ben’s argument is correct as the coefficient have t statistics of intercept ; 1.713985 , rm-rf is 61.1677, SMB 8.573441, HML 22. 45863. The critical thing for 726 observations for significance levels of 0.5% to 25% is as follows: Details Intercept Rm-rf SMB HML t-calc 1.713985 61. 1677 8.573441 22.45863 Critical t 1.282 to 2.326 1.282 to 2.326 1.282 to 2.326 1.282 to 2.326 p-value 0.086 8.1E-288 6.08E - 17 4E -85 significance 1.1- 0.1 0.01-0.1 0.01-0.1 0.01-0.1 From the table above, it shows clearly only the intercepts coefficient, t calculations within the acceptable region for t-critical. All other coefficient have t values which are not nearer the t critical. The same case applies to the t values. The ability of the regression to predict the variations accessed by the value of coefficicient of determination that is only able to predict 85.83% of the total variations in the values of variables. This is shown by r2 of 0.85635. The values behold these are considered outliers. However in both cases there are positive values of the coefficient suggesting that the expectations of the relationships between the variables is positive. It is common understanding that beta influences the value of the stock as well as there is no inverse relationship. 3. Woolworths Company profile Woolworths is a company registered in Australia and was incorporated in 1924 with a slogan” every city needs Woolworths: Sidney has it now. Every man, woman and child needs a handy place where good things are cheap” (Woolworths limited). The company has 190, 000 fulltime employees in 996 supermarkets. It is a household name in Australia, New Zealand and India. The future prospects of the company are shown in the financial statements of the company. The company has embraced online store by allowing some customers to purchase the products available online. Valuation ratios Intrinsic value is the real or actual value of a firm or any other asset of the firm on the basis of its perceived truthfulness as to its value which includes every aspect of the business, i.e. both tangible and intangible aspects of the firm. This intrinsic value of the firm or any asset may be or may not be equal to the existing market value of that firm or asset. The ‘Value Investors’ make use of a range of techniques, which may be termed as analytical techniques, so as to determine the intrinsic value of firms, their stocks or other assets. The objective behind carrying out such analysis is to find out particular investments for which the real or intrinsic value is greater than their existing market value (Brealey, Myers and Marcus, 2007). Book value of a company and the intrinsic value of that company are two different methods of measuring the value of a company or its stocks. The book value of the company is determined by subtracting the total liabilities of the company from its total assets. In this way, the net assets or value a company has gained from its inception is determined. In other words, this value represents the amount receivable by the shareholders in case the company goes under the liquidation process. However, there are various issues related to the usage of the book value as a value to evaluate the investment feasibility in a company. As for instance, it is highly unlikely that the shareholders of a company would receive the value of the firm equal to the book value in case of its liquidation. However, the book value of the company still serves a useful basis for the determination of the drop in the profitability of the company given that the market goes down (Brealey, Myers and Marcus, 2007). On the other hand, intrinsic value of a company is a value measured on the basis of future cash flows a firm is expected to have for its shareholders. The intrinsic value measurement approach for a firm aims at determining the value of actual net assets a company may be expected to generate in future. The value determined in this way is regarded as the true or actual value of the firm under consideration as far as the investors’ points of views are concerned. This value is determined by way of first determining the present value of the earnings expected in the future periods by the investors together with the sales revenue expected to be generated by the firm in the future (Brealey, Myers and Marcus, 2007). Significance and Measurement of Intrinsic Value to Investors and Corporations While making investments in the stocks, an investor aims at avoiding the purchase of overvalued stocks and purchasing such stocks which are under-valued, which means that the existing price of the stock to be purchased is lower than the real or intrinsic value of such stock. It is therefore observed that the analysts and investors make use of different analytical techniques in order to predict the intrinsic value of a stock under consideration (Brealey, Myers and Marcus, 2007). The most common techniques or models used for the determination of the intrinsic value of the stocks of a company include the dividend valuation model and the corporate or firm valuation model. Under the dividend valuation model, the analysts focus on the dividends of the company to which the stock under consideration belong, whereas the corporate or firm valuation model requires the investors or analysts to take into consideration the sales or revenues, different expenditures and the free cash flows of the companies (Brealey, Myers and Marcus, 2007). The valuation ratios that will be considered in this case include earnings per share, return on equity, dividends per share and price/ book value. The return on equity is 27.62%, Earnings per share is 1.58 and price/book value is 3.95.The share price of the company is currently trading at 25.03 while the company has no beta .The stock prices of the company appears to be stable with a standard deviation of 1.22. This means the capital gain of the company is very little for the last 3 years. This is supported by lack of dividends by the company to the shareholders. This may be the reason why the share value is not changing very much. The graph below shows the trend for the shares. The shares of this company will be valued using earnings per share since capita assets pricing model will not be used due to unavailability of beta. Return on equity will be considered as required rate of return of the company. The main reason for the choice of earnings per share is due to the fact that shareholders are concerned about the earnings of the company. This will be used to determine whether the shares are undervalued or overvalued. A share is undervalued when the share book value ids greater than the market value and it is overvalued when the market value is greater than the book value. The share value always changes when the company declares annual profit. This is because the profit information is important to investors in choosing a place to put their money. Undervalued share is less risky as compared to overvalued. Having said this it is time to calculate the value of the share using return on equity and earnings per share. Therefore Value= Value= = 5.72 The intrinsic value of the share is 5.72, while the market price is 25.03. This means that the intrinsic value is lower than the market value. Thus, the stock is overvalued by the market. This means that it is the high risk investment to investors. It should be noted that a portfolio of an investor will consist of stock, bonds, assets, and treasury bills. When stock like Woolworths is introduced to the portfolio, it will affect the return of the investor. The decision to buy, sell, or hold depends on, among other market and growth factors, the calculated value of stock. Stocks judged to be undervalued are bought while those judged to be overvalued in relation to their theoretical value are sold. On the other hand, investors hold on to stocks which are neither overvalued nor undervalued in relation to their theoretical value. In this case, company’s P/E falls within the range of 10-17 which is considered fair value, meaning the company stock is neither undervalued nor overvalued (Nikolai, Bazley and Jones, 2009). As such, investors are advised to hold on to company’s stocks if the P/E Ratio was their main determinant of a financial decision. References List Brealey, R., Myers, S. & Marcus, A., 2007. Fundamentals of corporate finance. Sydney: McGraw-hill. Nikolai, L., Bazley, J. & Jones, J., 2009. Intermediate Accounting. Mason: Cengage Learning. Woolworths limited 2012. http://www.woolworthslimited.com.au/phoenix.zhtml?c=144044&p=our-history Woolworths limited 2012. Annual report 2011 http://media.corporate-ir.net/media_files/IROL/14/144044/WWL0002_AR2011_WEB.pdf Read More