Corporate Accounting: Cost of Capital and Market Capitalization

This article discusses the computation of cost of capital and fair value of shares for Fortescue Metals Group Limited. It also explains the market capitalization of the company and its growth.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note

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CORPORATE ACCOUNTING
Table of Contents
Question 2........................................................................................................................................1
Part f.............................................................................................................................................1
Question 3........................................................................................................................................3
Part a............................................................................................................................................3
Reference.........................................................................................................................................4

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Question 2
Part f
Computation of Cost of Capital:
Particulars Amount
Market Return 9%
Risk-Free Rate 0.25%
Fortescue Beta 1.12
Cost of Capital 10.05%
Fair Value of Shares:
0 1 2
Particulars 2017 2018 2019 onwards
Dividend Growth Rate 0% -4.17%
Dividend $ 0.45 $ 0.45 $ 0.43
Cost of Capital 10.05% 10.05%
Terminal Value $ 3.03
PV of Dividends in 2018 $ 0.41
PV of Terminal Value $ 2.50
Fair Value of Shares $ 2.91
The calculations for the fair value of shares is shown in the above table along with
calculations which is related to costs of capital of the shares of the business. The current share
price which is computed with the help pf dividend and cost of capital of the business is shown to
be $ 2.91. The cost of capital is shown to be 10.05% as per the calculation shown above. The
analysis for computing the fair value of shares of the business, the present value of the dividend

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CORPORATE ACCOUNTING
is to be computed and also the present value of the terminal value from the shares is also to be
computed as shown in the above table (Ashton and Wang 2013).
It is recommended that the shares should be purchased as the terminal value of the shares
which shows present value of future cash flows of the business is shown to be higher than the
fair value of the shares which means that the shares can be purchased at a cheaper rate and in
addition to this, the shares price of the business is expected to increase in near future and
therefore the shares should be purchased in present time.
Question 3
Part a
The market capitalization of the business which is shown for the business of Fortescue
Metals Group Limited is $ 11.797 billion as per current market estimates of the company. The
market valuation of a business reflects the dollar market value of the outstanding shares of the
company as per market estimates. The market valuation of a business reflects the number of
outstanding shares which the business has and also measures the current market price of the
shares of the company (Au.finance.yahoo.com. 2018). The market capitalization amount is
calculated by multiplying the outstanding shares which a company has with the current market
price of the shares of the business (Marques, Fuinhas and Marques 2013). The market
capitalization of the business has increased in comparison to previous year’s analysis which
shows that there is growth in the business of the company (Raza and Jawaid 2014). The number
of shares which is held by the company has improved significantly as shown in the financial
information available for the company which can be regarded as the main reason for the increase
in the marker capitalization of the business.

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Reference
Ashton, D. and Wang, P., 2013. Terminal valuations, growth rates and the implied cost of
capital. Review of Accounting Studies, 18(1), pp.261-290.
Au.finance.yahoo.com. 2018. Au.finance.yahoo.com. Retrieved 20 September 2018, from
https://au.finance.yahoo.com/quote/FMG.AX/
Marques, L.M., Fuinhas, J.A. and Marques, A.C., 2013. Does the stock market cause economic
growth? Portuguese evidence of economic regime change. Economic Modelling, 32, pp.316-324.
Raza, S.A. and Jawaid, S.T., 2014. Foreign capital inflows, economic growth and stock market
capitalization in Asian countries: an ARDL bound testing approach. Quality & Quantity, 48(1),
pp.375-385.