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Assessment 2: Individual Assessment
Executive Summary
The ultimate purpose of this report is to assist the investors to determine if investment in Woolworths based on the sensitivity analysis, scenario analysis, break-even analysis and simulation analysis. We will also evaluate how the decision making related to the capital budgeting techniques could be used like IRR, NPV to estimate the concept of capital budgeting for Woolworths. We will also discuss on the scenarios analysis of Woolworths as well as the break-even analysis which will be based on estimation. Through this we will be able to estimate the point of breakeven quantity or amount of Woolworths. Finally, we will do a simulation analysis based on the probability that the investors likeability of losing the money by investing in Woolworths will be lesser than the probability of earning more than $1 million.
Introduction:
Company Background
Woolworths is an Australian supermarket chain as well as grocery stores which is owned and managed by the Woolworths group. As of 2019, Woolworths’s market share is 33% and is one of the biggest supermarket chains in Australia. It was founded in the year 1924 and they specialize in the selling of DVDs, groceries, vegetables, packaged foods, healthcare and beauty products, stationeries, pet and baby care and household products. There are more than 987 Woolworths stores and 64 metro convenience stores of Woolworths located in various parts of Australia. Recently, Woolworths have launched their online platform which is called ‘click and collect’ along with home delivery services to their customers. There are more than 225000 employees working in Woolworths as per the latest 2020 figures. The revenue generated by Woolworths in 2020 was A$42.151 billion and was the top player in the Australian supermarket chain segment.
Sensitivity Analysis:
Sensitivity analysis of Woolworths will assist us to determine the impact of changes with respect to a particular variable like NPV or IRR which could be used to estimate the impact on the organization’s business. This will also help to evaluate the effect of variations on the various parameters. Sensitivity analysis can be helpful in various ways. Firstly, it will help in identification of the parameters which will have a major impact on various ratios of the company and the values. It will also help to identify the ratios which needs to be controlled by eliminating the various conditions which can impact Woolworths (Kotas, 1986). Secondly, it will assist in creating cases which cover most and help in determining of the business is a success or not. Therefore, through sensitivity analysis we can estimate the effect of specific factors and therefore make it easy for the firms to estimate if those factors are impacting the performance of Woolworths or not. In this case we will try to make the sensitivity analysis of the Weightage average cost of capital of Woolworths.
    Particulars
    Amount (in Millions)
    Enterprise Market Value of Woolworths
    65650
    Equity
    
    Price
    40.72
    No. of shares
    1268
    Market value of common equity
    51619
    Cash & equivalents
    2235
    Debt
    
    Market value of Debt
    2753
     
    Market Value
    Weight
    After-tax cost of capital
    Debt
    2753
    5.06%
    2.90%
    Equity
    51619
    94.94%
    3.43%
    WACC
    
    
    3.40%
    D/E Ratio
    5.33%
    
    
    Sensitivity Analysis: D/E = 10%
     
    Market Value
    Weight
    After-tax cost of capital
    Debt
    2753
    9.09%
    2.90%
    Equity
    27530
    90.91%
    3.43%
    WACC
    30283
    
    3.38%
    D/E Ratio
    10%
    
    
    Sensitivity Analysis: D/E = 3%
     
    Market Value
    Weight
    After-tax cost of capital
    Debt
    2753
    2.91%
    2.90%
    Equity
    91767
    97.09%
    3.43%
    WACC
    94520
    
    3.41%
    D/E Ratio
    3%
    
    
The above data of Woolworths represents the Weighted Average cost of capital through which we can estimate the best alternative of investing in the company. As per the first scenario, it is observed that the WACC is at 3.40% whereas the Debt Equity ratio (D/E) ratio is at 5.33%. To account for the probable changes in the capital structure of Woolworths there are two sensitivity analysis done with respect to this. As per the first...