Company: Woolworths Group Ltd

Declare variables:

Rf = 3%

Beta = 1.2

Growth Rate = 2%

Expected return = 6%

Calculation:

CAPM Model:

E(R) = R_F + [E(R_M)-R_F]

E(R) = 3% + 1.2(6% - 3%)

E(R) = 6.6%

Expected return (6%) is less than CAPM expected return (6.6%)

Return on Shares:

ROS = [($0.53 * 1.2) / $39.060] + 2%

= [0.636/39.060] + 0.02

= 0.016283 + 0.02

= $0.0363 or 3.63%

The return on shares (3.63%) is less than required rate of return (6.6%).

Constant Growth Model:

The next dividend amount (D) per share is $0.55 for Woolworths Group Ltd and the current share price is $39.06 (23/09/21).

P = D/(r-g)

= 0.55(1+0.02)/(0.066 0.02)

=0.561/ 0.046

=12.1957

= $12.20

To conclude, it is evident that calculated share price of Woolworths Group Ltd is $12.20 while the current market price is $39.06. This means that the market price is $26.86 higher than the price calculated, the stock is considered to be overvalued and should be sold. Therefore, we would recommend to sell the shares.

Part A. Compute the after tax cost of retained earnings, assuming the same dividend growth rate as per the above information.

Part B. Computer the current average cost of debt.

Part C. Computer the cost of new share issues, assuming issue at current market price, and a 2% issue costs and company tax rate of 25%.

Part D. Computer the weighted average cost of capital.

Part E. Compute the financial leverage.

Part F. Comment on the appropriateness of the financial leverage of the company in no more than 100 words