The company also has an alliance with the Lloyds Banking Group in financial services (Reuters-b, 2011). In the recent financial crisis the retailers across the world witnessed a fall in the net income owing to the reduced consumer spending. With the rebound in the economy the performance of the retail industry is expected to improve. The economies across the world are slowly on the way to recovery. With a rise in the level of economic activity it is anticipated that there will also be arise in the disposable income of the consumers. This is likely to have a positive impact on the retail businesses as well. The consumer demand is expected to rise with the increase in the income level. It is expected that the consumers will increase their retail spending which will also boost the earnings of the retail businesses. Future of retail- Advancement in technology like internet facilities has made retailing an exciting and challenging field. The recent fundamental changes have altered the ways and mechanism of retailing. Despite this retailing is necessary in some form or the other. For instance though the manufacturers are now able to sell directly to the consumers through online system but still it is difficult for the consumers to make all the purchases online. The traditional retailers operating through physical stores would still be necessary. This is because for some products the consumers are convinced only after a thorough examination of the product before purchasing it. In some cases the experience of going to the retail store is as important as making the purchase (Harris, 2000). Valuation of Sainsbury The fundamental analysis involves valuing a company based on important financial...
The average growth rate in net income over the five years is calculated as 18%. This rate is higher than the estimated cost of equity. For this reason this figure has been ignored.
The risk free rate is taken as 3.65%. The beta of the company available from the financial website ‘Reuters’ is taken as 0.71. The beta of the company is less than one indicating that it is a defensive investment (Bodie, et al., 2009, p.312). In other words the share price of the company increased or decrease less than in proportion to the market movements (Business Valuation Resources, LLC, 2007, p.171). The market risk premium is taken as 5% and the rate of tax is taken as 30%. Here the market risk premium is the excess return offered by the market over and above the risk free rate of return. When this figure is adjusted with the market beta it gives the risk premium of the stock (Hunt, 2009, p.44). This assumption is based on the logic that any rise in sales is accompanied by a corresponding increase in capital expenditure and depreciation. It is because to enhance the level of production the company will have to invest in fixed assets. If the investment in the fixed assets increases there will also be a matching rise in the level of depreciation. The forecasted current assets and current liabilities are also assumed to maintain their proportion to sales. As the sales grow by 5.32% even the working capital of the company is expected to rise by the same proportion.