Business Valuation Methods for Vodafone Group Plc

Business Valuation
Vodafone Group Plc
User

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Table of Contents
Introduction......................................................................................................................................2
Methods of Estimating Cost of Capital...........................................................................................2
Cost of Debt Capital....................................................................................................................3
Cost of Equity Share Capital.......................................................................................................4
Cost of Preference Share Capital.................................................................................................5
The Cost of Vodafone Equity Providers..................................................................................6
Business Valuation Methods...........................................................................................................7
Discounted Cash Flow Method...............................................................................................7
Internal Rate of Return............................................................................................................9
Asset Based Business Valuation Method................................................................................9
Foreign Exchange Issues Related to the Finance Raised From Bonds in Different Currencies....11
Conclusion.....................................................................................................................................11
Reference List................................................................................................................................13

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Introduction
Valuation of business has been considered as the most significant decisions which are influenced
by a number of factors such as the market forces, competitive forces, and the nature of the
business enterprise as well as the economic factors (Fernández, 2007). Therefore, it becomes
essential for the business and the potential investors to compute the value of the business at the
present date so as to base their decision with regard to making future investment (Fernández et
al, 2002). There are a number of methodologies that have been adopted by organization and the
academics in the researcher with regard to the company valuation that is commonly used.
This report provides as complete analyses of the method of cot of capital such as the cost of
equity, cost of debt capital, and cost of preference shares with examples along with the cost of
equity of a telecommunication company Vodafone Group plc. The company operates in the
global market with its origin in London. The company is listed on the London Stock Exchange
and thus, the data and information with regard to the market rates and value have been taken
from London Stock Exchange and the annual report of the company.
Methods of Estimating Cost of Capital
Cost of capital, one of the most crucial topics in financial management has gained momentum in
the world market due to its adoption by various multinational organizations for the purpose of
business valuation (Gebhardt et al, 2001). The cost of capital, when defined from organizational
point of view, it is the rate at which capital is raised from the market for the purpose of further
investment in any proposed project (Botosan and Plumlee, 2002). In addition to this, when
defined from investor’s point of view, it is the rate of return from the capital that is invested in

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the organization. Therefore, these are different perspective in the financial management theory
concerning the type of investor.
According to the point of view of the scholars Bolton et al (2000), there are a number of methods
that have been commonly used by researchers and business valuation officers for determining the
cost of capital. Some of them include cost of debt capital, cost of equity capital, and cost of
preference capital as well as cost of retained earnings of a firm.
Cost of Debt Capital
Cost of debt refers to the interest that is payable by the organization on debentures issued by it
(Hovakimian et al, 2004). The cost of debt capital can be determined at three instances, i.e. when
debentures are issues at par, at premium and at a discount.
For instance, if a company has issued a debenture of amount $100,000, 12% debentures, at the
tax rate of 50%, the computation of the cost of debt would be as shown in the following table:
Table 1: Example of Cost of Debt
Particulars At Par At Premium 10% At Discount 10%
Principal Amount
[P]
$
100,000.00
$
105,000.00 $ 90,000.00
Interest Rate [R] 12% 12% 12%
Tax Rate [T] 50% 50% 50%
Amount of Interest
[I]
$
12,000.00 $ 12,000.00 $ 12,000.00
Cost of Capital
Formula
(I ÷P) *(1-
T) (I ÷P) *(1-T) (I ÷P) *(1-T)
Cost of Capital 6.00% 5.71% 6.67%
From the above table it can be seen that there is minor difference in cost of capital when the
debentures are issued at a premium of 10% and discount of 10%.