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Valuation of shares of JB Hi Fi Ltd

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Added on  2020-01-16

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Giving recommendations in relation to make investment in the company’s shares 9 QUESTION 3 10 Giving recommendations to JB Hi Fi Ltd regarding capital structure by using trade-off theory 10 Table 1Current value of bond 4 Table 2 Calculation of weighted average cost of capital 6 Table 3 Free cash flow and data of cash, debt and shares outstanding 7 Table 4 Cost of equity 7 Table 5Computation of enterprise value 8 Table 6Input for WACC 8 Table 7Calculaiton of WACC 8 Table

Valuation of shares of JB Hi Fi Ltd

   Added on 2020-01-16

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Business Finance
Valuation of shares of JB Hi Fi Ltd_1
TABLE OF CONTENTSQUESTION 1..................................................................................................................................3A Re-estimation of the cost of capital.........................................................................................3B Cost of bond.............................................................................................................................3QUESTION 2..................................................................................................................................6A.Valuation of shares of JB Hi Fi Ltd..................................................................................6b. Updating the valuation of JB Hi Fi Ltd...................................................................................7c. Giving recommendations in relation to make investment in the company’s shares................9QUESTION 3................................................................................................................................10Giving recommendations to JB Hi Fi Ltd regarding capital structure by using trade-off theory...................................................................................................................................................10YTable 1Current value of bond..........................................................................................................4Table 2 Calculation of weighted average cost of capital.................................................................6Table 3 Free cash flow and data of cash, debt and shares outstanding...........................................7Table 4 Cost of equity......................................................................................................................7Table 5Computation of enterprise value..........................................................................................8Table 6Input for WACC..................................................................................................................8Table 7Calculaiton of WACC.........................................................................................................8Table 8Input table for valuation of shares.......................................................................................8Table 9Second input sheet of valuation...........................................................................................9Table 10 Calculation of fair value of shares....................................................................................9
Valuation of shares of JB Hi Fi Ltd_2
QUESTION 1 A Re-estimation of the cost of capital Cost of capital is the minimum required rate of return that is necessary for Val Ltd to earnon their total invested or employed money so as to meet their financial obligation. B Cost of bond On the issue of bond, Val Ltd will be require to pay interest to the holders in return forthe money acquired, its cost has been computed here as under:= Coupon rate/Market price*100(1-tax rate)= ($1000*12.5%)/($1000*92%) * (1-30%)= 9.51%Table Current value of bondYears to maturity20Principal amount1000Coupon rate12%Frequency2Market interest rate15%Periodic interest payment60Current value of bond$800.00Cost of equity capital
Valuation of shares of JB Hi Fi Ltd_3
Capital assets pricing model (CAPM) is the best model to value the cost of equity capitalthrough using following formula, mentioned below: Cost of equity (Ke) = Rf + beta (Rm-Rf) /Risk free-rate + (Val Ltd’s beta*Risk premium)Here, Rf - Risk-free rate Rm – Market rate of return Rm-Rf = Risk premium Beta 1.6Risk free rate (Treasury bonds)3% Market risk 10.0% Risk premium (Rm-Rf)7.00%Thus, Ke = 3% + 1.6 (10%-3%)= 3% + 1.6 (7%)= 3% + 1.6 (7%)= 3% + 11.2%= 14.2%Cost of preference share capital (Kp) – On preference share capital, Val Ltd has to paydividend at a decided or pre-determined rate to the share holders. Therefore, its cost can becomputed as follows:Kp = Annual dividend per share/Market price *100= 9/63*100= 14.28%Cost of debt: On the debt capital, VAL Ltd is liable to pay interest at a decided rate, on suchpayment, tax benefits is available, henceforth, cost will be computed as follows:
Valuation of shares of JB Hi Fi Ltd_4

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