QUESTION 2 - FIRM VALUTION (50 marks) Sometime in 2021, one prominent investor approached you asking for your informed opinion on whether you think Woolworths Holdings Limited (WHL)s shares were a good buy or not. The investor provided you with historical financial statements that he had collected for the years 2017 to 2021. WHL had 967.822 million shares outstanding trading at R54.78 per share, long-term debt and capital lease obligations of R36.262 billion and a beta on its shares of 0.74. The yield to maturity on the South African 10-Year treasury bond was 10%, the market risk premium at the time was 9.16% and the corporate tax rate was 28%. Woolworths pre-tax cost of debt was estimated as 6.5%. 1) Using the information provided, estimate the growth rates of WHL for the forecast horizon and for the steady state. (5 marks) 2) Use common size analysis and your estimated growth rates to forecast WHLs financial statements for the period 2022 to 2026. (10 marks) 3) Estimate WHLs free cash flows. (8 marks) 4) Estimate WHLs cost of capital for use in your calculations. (5 marks) 5) Determine what WHLs firm value was in 2021. (3 marks) 6) Determine what WHLs equity value per share was in 2021 (3 marks) 7) Based on your analysis, was WHL overvalued or undervalued? Discuss. (3 marks) 8) What tests would you have carried out before making a recommendation? (5 marks) 9) Carry out the tests you discussed above and be sure to include a sensitivity analysis of your value estimates to sales growth and cost of capital. (8 marks) Table 1: Historical Income Statements (R' million) of Woolworths Holdings Limited (2017 - 2021) Period Ending: 2017 2018 2019 2020 2021 25-Jun 24-Jun 30-Jun 28-Jun 27-Jun Total Revenue 67 190 68 592 73 103 72 208 78 763 Cost of Revenue, Total 40 518 41 700 45 139 46 859 49 816 Gross Profit 26 672 26 892 27 964 25 349 28 947 Unusual Expense (Income) 342 6 927 6 153 799 364 Other Operating Expenses, Total 20 466 21 633 22 843 20 623 22 215 Operating Income 5 864 -1 668 -1 032 3 927 6 368 Interest Income (Expense), Net Non-Operating -901 -767 -769 -2 525 -2 301 Gain (Loss) on Sale of Assets - - - - 492 Other, Net 1 1 1 - 591 Net Income Before Taxes 6 726 -2 434 -1 800 1 402 5 150 Provision for Income Taxes 1 278 1 115 -716 843 987 Net Income After Taxes 5 448 -3 549 -1 084 559 4 163 Minority Interest -2 -1 -2 -2 -2 Diluted Net Income 5 446 -3 550 -1 086 557 4 161 Diluted Weighted Average Shares 966 961 957 968 971 Diluted EPS Excluding Extraordinary Items 6 -4 -1 1 4 DPS - Common Stock Primary Issue 3 2 2 1 1 Diluted Normalized EPS 3 4 7 2 5 4 Table 2: Historical Balance Sheets (R' million) of Woolworths Holdings Limited (2017 - 2021) Period Ending: 2017 2018 2019 2020 2021 25-Jun 24-Jun 30-Jun 28-Jun 27-Jun Total Current Assets 10 287 11 497 11 897 16 034 15 483 Cash and Short-Term Investments 1 787 2 023 1 913 5 534 5 624 Total Receivables, Net 1 470 1 758 1 488 2 164 1 325 Accounts Receivables - Trade, Net 1 211 1 480 1 403 2 160 1 277 Total Inventory 6 990 7 542 8 325 8 054 8 501 Other Current Assets, Total 40 174 171 282 33 Total Non-Current Assets 34 706 28 650 24 032 49 032 40 105 Property/Plant/Equipment, Total - Net 13 846 13 959 14 295 35 653 28 431 Property/Plant/Equipment, Total - Gross 21 844 22 872 24 324 47 542 44 286 Accumulated Depreciation, Total -7 998 -8 913 -10 029 -11 889 -15 855 Goodwill, Net 11 547 5 000 4 909 5 412 5 118 Intangibles, Net 8 021 8 410 2 374 2 816 7 135 Long Term Investments 1 015 978 810 742 893 Note Receivable - Long Term 107 115 108 84 100 Other Long-Term Assets, Total 143 188 1 536 4 325 3 546 Total Assets 44 993 40 147 35 929 65 066 55 588 Total Current Liabilities 10 591 11 945 10 636 15 810 14 955 Accounts Payable 4 464 5 000 3 606 5 052 9 625 Payable/Accrued - 115 - - - Accrued Expenses 769 727 605 573 970 Notes Payable/Short Term Debt 183 145 871 97 - Current Port. of LT Debt/Capital Leases 1 005 2 004 263 3 670 3 263 Other Current liabilities, Total 4 170 4 069 5 291 6 418 2 067 Total Liabilities 25 955 27 034 26 501 58 577 46 283 Total Long-Term Debt 12 137 11 711 13 259 41 952 30 571 Long Term Debt 12 114 11 685 13 234 16 023 5 963 Capital Lease Obligations 23 26 25 25 929 24 608 Deferred Income Tax 658 758 63 - - Minority Interest 28 13 15 21 23 Other Liabilities, Total 2 541 2 607 2 528 794 734 Total Equity 19 038 13 113 9 428 6 489 9 305 Common Stock, Total 11 375 11 399 11 407 11 413 11 465 Retained Earnings (Accumulated Deficit) 9 052 2 745 -533 -4 909 -641 Treasury Stock - Common -137 -1 457 -1 711 -1 728 -1 715 Unrealized Gain (Loss) -106 76 12 49 -175 Other Equity, Total 87 350 253 1 664 9 305 Total Liabilities & Shareholders' Equity 44 993 40 147 35 929 65 066 55 588