a) Consider the 2021 Annual Report for Wesfarmers Ltd (WES). Briefly illustrate how WES
governance is organized. Do you notice any strategies in place to align manager and shareholder
interests at WES based on the Annual Report? Provide one example. (3 marks)
b) What is the net working capital for WES in 2020 and 2021? What type of current asset
management strategy is the company pursuing? Explain why, and what are the pros and cons of
this strategy. (3 marks)
c) Consider the WES 2021 Annual Report. Identify two of the major risks discussed in this report.
Are these risks systematic or unsystematic? Why? (2 marks)
d) You are trying to value WES shares today (end of 2021). Assume the current price of WES shares
are $49.97. Assume that the total dividend paid by WES in 2021 was a lump sum. You also
estimate that for the next two years dividends will grow respectively at 50% and 25% per year.
After this (starting in time 3) you estimate dividends will grow at a constant rate of 3.5% forever.
Assume that today the Australian 10 year government bond has a yield of 1.15%, the market risk
premium is 4.55% and the beta of WES is 0.72. Based on this price would you purchase WES
shares? Why or why not? (7 marks)
e) What was the market capitalization of WES on the 31 January 2022, assuming that the total
number of shares outstanding is the same as at the end of the 2021? (Use the closing price on
that day). (2 marks)
f) What source of funding (non-current) is WES primarily using to finance its operations? What are
the advantages and disadvantages of this source of financing? (3 marks)
g) Assume that WES would like to replace its non-current “lease liabilities” (in 2021) with a new issue
of bonds. Assume that the issue will have a coupon rate of 5% with a 15 year maturity. Assume
the bonds are semi-annual coupon bonds and each have a face value of $1,000 and the required
rate of return for similar bonds in the market is 4.5%. What would be the issuing price of these
bonds? How many bonds will WES have to issue in order to replace its non-current “lease
liabilities”? (5 marks)
Sample Solution
