To evaluate the performance of a firm and its share’s value a financial analyst must be able to analyse the firm’s financial statements. When analysing these statements, the analyst must focus on cash flows of the firm because ultimately it is changes in the cash flows of the firm that determines its value. This is also a market consensus. Hence understanding how and why cash flows change is an indispensable component of security valuation.
The objectives of this assignment are:
1.To equip you with a good understanding of the financial statements of the firm;
2.To build up your analytical skills in the area of cash flows analysis;
3.To apply the methods of security valuation to value a real world company.
In addition to developing your knowledge of financial statements and security valuation, the assignment aims to develop the ability to work in groups: learning how to coordinate with and learn from peers as well as how to deal with any negative issues that may arise in the group process. As such, the assignment submission will include an evaluation of the group process. The group evaluation will not attract any marks; however the rest of the assignment will not be marked without a group evaluation. To assist in the smooth running of groups some guidelines are included with the assignment instructions. These are to be used as a guide only. Groups have their own personalities, so it is important to establish your group norms and plans in a way that best suits your group.
1.Search for all available financial data* for Wesfarmers Ltd from the Australian Stock Exchange, the company’s and other finance websites (e.g. Yahoo Finance, Morning Star DatAnalysis and Bloomberg).
2.Give a brief description of Wesfarmers..
3.Explain the purpose of financial statement analysis.
4.Analyse the firm’s current operation using its financial statements (i.e. income statement, balance sheet and cash-flow statement). You should also take into account supply and demand factors (i.e. you need to look at the market conditions at both industry and economy levels).
5.Use an appropriate dividend valuation model to value Wesfarmer's shares (Hint: use the total dividend figures).
6.Draw graphs for Wesfarmers’s adjusted share price and return (you can use daily, monthly or quarterly return). Compare the company's share price and return with your analyses in questions (4) and (5) above.
7.Use the information and results from your analyses in questions 4-6 above; identify if there are areas of cash flow to which the firm needs to pay attention.
8.Suggest relevant investment and financing strategies to improve the firm’s cash flow position.
9.State and justify your recommendations in terms of shareholders’ wealth maximisation.
Note: (*) You should use data for the period 2005-2015 in your analysis. You need to obtain financial statements for Wesfarmers as well as all other relevant financial data and announcements. In particular, the details of the three main types of cash flows (operating, financing and investing) and all key financial ratios should be obtained. If you need to use a value for beta, then you should calculate it yourself, or verify (through your own calculations) the reasonableness of the value that you may have sourced elsewhere.