Woolworths Case Study

Published: 2021-06-29 07:06:01
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Executive summaryRisk can be defined as the uncertainty of a negative event occurring, coupled with an exposure to that event. In putting it differently, risk can be viewed as the size of a loss plus the probability of the loss occurring. Effective risk management practice is therefore necessary for creating economic value in a firm by using financial instruments to manage exposure to risk. The purpose of this study is to analyze the fairness of the current share price and 2) the management of the share price of Woolworths for the future and to analyze the risk position of Woolworths and provide recommendation regarding the effective management of risk within this organization. A statistical analysis tools will be used to assess the risk at Woolworths and also give recommendation if whether it makes sense to hold an investment portfolio that comprises of 50% shares in Woolworths and 50% shares in the market. Evaluation methodsFor a listed company like Woolworths, the most important factor that drives the share price is profitability, also known as earnings. The important profit statistic for shares is the earnings per share (EPS), and it’s normally expressed in cents per ordinary share. It is also generally accepted that when earnings increases, the share price rises and when the earnings decrease the share price also falls, however the correlation is not usually the exact one. It is for this reason that the earnings yield for Woolworths and the Market was tabulated and compared to calculate Beta which is a slope of the “characteristic” line, or the regression line showing the relationship between a Woolworths stock and the stock market.Part 1: Objective: Calculate if whether the share price based on historical data is fairly priced.Calculation of Beta for WooliesTable1. Earnings yield for the market and Woolworths  PeriodWoolworthsJSE (203) CRISharepriceCapitalgainsSharepriceCapitalgains2004712.00 12656.86 20051029.0044.5218096.5442.9820061373.0033.4324915.237.6820072114.0053.9728957.9716.2320081076.00-49.1021509.2-25.7220091237.0014.9627666.4528.6320102451.0098.1432118.8916.0920112939.0019.9131985.67-0.4120125008.0070.4039250.2422.7120136426.0028.3146256.2217.85From the earnings yields above, a chart was drawn to determine beta

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