Security Analysis Of Wesfarmers Llimited †MyAssignmenthelp.com

Question: Discuss about the Security Analysis Of Wesfarmers Llimited. Answer: Introduction: Investors invest into the financial securities and in the market to enhance the worth of their invested money. So, it becomes necessary for the investors to look over the up and down in the market, analysis of market, security analysis etc before funding in that security. This would help the company to save themselves from any sudden risk. Various tools could be used by the investors and the analysts to find the best security in the market such as gearing ratios, WACC, cost of equity and debt, market growth, market return, risk free rate etc. which helps the investors to make a better decision by considering the performance and profitability of that security (Hillier, Grinblatt and Titman, 2011). Wesfarmers: For this report, Wesfarmers limited has been taken into consideration. This company has been registered into the Australian stock exchange. Wesfarmers limited is one of the largest companies in the Australian retail industry. According to annual report of the company, revenue of the company has been enhanced to $ 56.93 billion. Currently, this company has been recognized as biggest empowerment company. This company offers its product into the supermarket of Australia and it is also operating its business in other countries as well. Calculation of WACC: For analyzing the value of the company and the security of the company, WACC has been calculated. For calculating the WACC, it is required for the investor to calculate various other factors as well such as cost of equity and debt, market growth, market return, risk free rate etc. the analysis and calculation of all of the above are as follows: Return on equity: Return on equity is calculated to investigate the value of equity of the company. This analysis depict about the entire cost which occurred in the company, if company enhances the funds from the equity. In this calculation, per share unit cost has been analyzed. Dividend discount model and CAPM model has been investigated for this report. Dividend discount model: DDMs calculation depict that Wesfarmers return on equity (ROE) is 2.014%. According to this, company would have to pay the total 2.014% of net profit as cost of equity to the shareholders (Morningstar, 2017). CAPM Model: CAPMs calculation depict that Wesfarmers return on equity (ROE) is 2.715%. According to this, company would have to pay the total 2.715% of net profit as cost of equity to the shareholders (Morningstar, 2017). Return on debt: Return on debt is calculated to investigate the value of debt of the company. This analysis depict about the entire cost which occurred in the company, if company enhances the funds from the debt. In this calculation, total cost of debt has been analyzed (Weygandt et al, 2015). According to these calculations, currently company is paying total 0.000973 from net profit to the debt holders of the company. Beta Coefficients: In addition, for calculating the WACC of Wesfarmers, beta coefficient has been measured. Currently, companys beta of last 5 years is 0.022795 (Yahoo finance, 2017). The graph of beta has been given below: Risk free rate: 10 years risk free rate (Rf) of the Australia is 2.75% (Bloomberg, 2017). G (Growth rate): Wesfarmers shares growth rate of each year has been analyzed. Currently, the growth rate is 5% of the company. WACC: Through the above calculation, it has been found that the weighted average cost of capital of Wesfarmers is 0.0192. For calculating the WACC of the company, cost of equity and debt, market growth, market return, risk free rate etc has been calculated. The calculation of every factor is in the appendix. Through the cost of debt and cost of equity of the company, it has been found that the cost of debt is quite lower than the cost of equity off the company (yahoo finance, 2017). Calculation of gearing ratios: Gearing ratio of a company is calculated according to the assets, equity, and debt of the company. This depict about the stability of the company in terms of finance. Gearing ratio has been calculated over Wesfarmers and it has been found that the gearing ratio is 0.19385 means 19.39% which is very lower and thus it could be said that the stability of the company is quite strong in terms of finance (Parrino, Kidwell and Bates, 2011). Various factors and figures have been investigated before for this analysis such as equity of the company, total assets and liabilities of the company, current liabilities of the company etc. It has been found that the gearing ratio is the best way to analyze the economical stability and financial stability of the company. Not any issues have been faced while calculating the gearing ratios of the company. Entire figures have been easily found from the annual reports of the company. The company is very stable so it would be beneficial for the investor to invest in this company. Findings: Decisions related to capital structure of a company are usually taken by the financial manager of a company as they have enough knowledge about the debt and equity ratio, gearing ratio, cost of capital etc. the decision made by them over the capital structure is way better (Strebulaev, 2007). Capital structure includes debt and equity of a company. The capital structure of a company could be best if the better combination is made of debt and equity. This impacts the total cost of capital of the company as the cost of debt is different and the cost of equity is also different. This analysis expresses that Wesfarmers capital structure ratio is quite impressive and financial risk of the company is lower still company could reduce the total cost through raising the funds more from debt. Company could raise the funds till 40% as till that level the financial stability of the company would be in control and the cost reduction could also been done. Recommendation: Thus according to the weighted average cost of capital and the gearing ratio of the company, it has been found that the company is performing well and company is just required to enhance the funds from debt to reduce the cost of capital and manage the financial stability of the company. References: Bloomberg. (2017). Australian bonds and rates. https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia on 18th Sept 2017. Morningstar. (2017). Wesfarmers limited. Viewed from https://financials.morningstar.com/valuation/price-ratio.html?t=WESregion=ausculture=en-US on 25th Sept 2017. Reuters. (2017). Wesfarmers limited. Viewed from https://www.reuters.com/finance/stocks/overview?symbol=WES.AX on 25h Sept 2017. Wesfarmers. (2017). Home. Viewed from https://www.wesfarmers.com.au/ on 25th Sept 2017. Yahoo Finance. (2017). Wesfarmers limited. Viewed from https://au.finance.yahoo.com/quote/WES.AX?p=WES.AX on 25th Sept 2017. Strebulaev, I. A. (2007). Do tests of capital structure theory mean what they say?. The Journal of Finance, 62(4), 1747-1787. Parrino, R., Kidwell, D.S. and Bates, T. (2011).Fundamentals of corporate finance. John Wiley Sons. Weygandt, J. J., Kimmel, P. D., Kieso, D. E. (2015).Financial Managerial Accounting. John Wiley Sons. Hillier, D., Grinblatt, M. and Titman, S., (2011).Financial markets and corporate strategy. McGraw Hill.