Woolworths Ltd (WOW) Valuation Report

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Executive Summary

This report provides a price analysis and valuation of the Australian Security Exchange (ASX) listed company, Woolworths Ltd (WOW). Historical data is utilised with the Retention Growth Model to estimate the expected perpetual semi-annual growth rate of the company’s dividends. The Capital Asset Pricing Model is used to estimate the required rate of return for this company and the current expected share price is calculated using the Constant Dividend Growth Model. All data can be found in the appendices.
The results of the analysis show that the WOW stock is undergoing rapid growth and is currently under-priced. The findings suggest that at present, Woolworths Ltd represents a great investment opportunity.
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Rather, for this stock, a non-constant2 or multi-stage growth model should be used to accommodate for the current period of high growth, as the current high growth rate would not be sustainable indefinitely.

For the purpose of demonstrating understanding for this assignment, I will use the semi-annual dividend growth rate and the annual required rate of return to show the correct method of calculating expected current share price, although this would normally be incorrect.

The expected share price at the time of issue of the previous dividend on 22/03/2013 was 38.15 (This is incorrect). However, two months have passed since that date so we must consider growth of the expected share price during that period. We will use the estimated semi-annual growth rate to calculate this figure which we will denote PMay. This can be calculated by assuming that the dividend value grows at a constant rate in between issues. Since two months have passed, the estimated dividend one period from now will have grown approximately one third of the semi-annual growth rate. The
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