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Corporate Finance of Diageo : Report

   

Added on  2020-01-15

6 Pages1425 Words180 Views
Corporate Finance1

Table of ContentsINTRODUCTION................................................................................................................................31. Computation of cost of equity by using dividend growth model ...............................................32. Calculating cost of equity of Diageo by using Capital Asset Pricing Model..............................43. Critical discussion of different valuation techniques...................................................................4CONCLUSION ...................................................................................................................................5References............................................................................................................................................62

INTRODUCTIONCorporate finance deals with the management of various financial sources which have highlevel of influence on the capital structure of the firm. Manager of the firm plays a vital role inmaking strategic decisions which enhances the value of firm to the shareholders (Damodaran,2016). The present report is based on Diageo which is one of the largest British Multinationalalcoholic beverages' company. It is the largest producer of beer and wine whose headquarter issituated in London. The present report will shed light on the return which Diageo offers to itsshareholders for the appraising risk which they have undertaken by investing money in the equityshares. 1. Computation of cost of equity by using dividend growth model Cost of equity refers to the return which business organization pays to their equityshareholders in form of divided. It assists investors in making suitable decisions in relation toinvesting money. Moreover, capitalist invest money with the aim to make value addition on itthrough equity share returns (Cornell, 2015). In this, by assessing the growth which takes place inthe dividend of Diageo investors are become able to make further profitable decision. Dividend isone of the main factors which offers high level of benefit to the shareholders (Barberis and et.al.,2015). In this, existing and potential shareholders can make suitable investment decision by takinginto account the dividend growth model. Dividend growth model: P = D / K – G P: Price of the security K: Required rate or return according to the CAPM model g: Expected growth rate D = Dividend payout ratio K = .73%D = 67.9%G = 3.58%P: .679 / .0073 - .0358= .679 / -.0285= -23.82From the above calculation it has been analyzed that dividend payout ratio of Diageo is67.9% in the accounting year 2015. Besides this, growth which takes place in the share prices of thefirm during the period of two years are 3.58%. Further, through CAPM model it has been assessedthat investors needed .73% return for the risk taken by them. In this. On the basis of the above3

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