Corporate Finance - Assignment Sample
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Added on 2020-10-23
Corporate Finance - Assignment Sample
Added on 2020-10-23
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CORPORATE FINANCE
Table of ContentsINTRODUCTION...........................................................................................................................1MAIN BODY ..................................................................................................................................1a) Calculation of cost of equity by CAPM Model .................................................................1b) Ungeared equity beta for deriving company's asset beta...................................................3c) Appropriate ratios of Marks and Spencer of 5 years for dividend policy .........................4d) CAPM – Derived cost of equity finance is suitable for investment appraisal process ordividend growth model is reliable .........................................................................................6CONCLUSION ...............................................................................................................................7Appendix..........................................................................................................................................91. Calculation of cost of equity ..............................................................................................92. Ungeared equity beta into asset beta .................................................................................9Calculation of ratios to identify the dividend policy ...........................................................10
INTRODUCTIONCorporate finance is the areas of finance that is consider with capital structure, sources offindings etc. to create value for the shareholders. This assignment will include Marks andSpencer which is involved in the retail industry and provide clothing for the men, women andkids in different regions. Marks and Spencer are having a global presence and it provide itsproducts and services in different areas to gain more market share and enhance their profitabilitylevel. In this study, it will determine the cost of equity finance on the basis of Capital assetspricing model. Moreover, it will include equity beta to derive company's assets beta.Furthermore, it will contain information regarding ratios to discuss the dividend policy of theMarks and Spencer. The cost of equity provide understanding to the organisation regarding theexpenses which are required by the firm for acquiring the equity finance. Moreover, it assists inmaking decision regarding which source of financing can be acquired by the organisation forincreasing the return and getting the finance at least price. MAIN BODY a) Calculation of cost of equity by CAPM Model Capital asset pricing model is used to determine the required rate of return of an asset. Itpredicts the relationship between the risk of an asserts and its expected returns. Cost of equity isrelated to determining the cost of equity finance. With the help of cost of equity marks andSpencer is able to make decision regarding these sources of funding to acquire for their operationon the basis of cost of equity it will be able to understand the rate of return profitable for thebusiness.Capital asset pricing model require three information which consist of rate of return, beta valueand the risk-free rate.Calculation enclosed in appendixFrom the above it can be interpreted that the cost of equity for marks and Spencer is7.44% which shows that the company in order to get the equity finance is required to incur thecost of about 7.44%. The data used in the calculation is because this data is required to identifythe cost of equity. Risk free rate of return shows the amount of the rate which will provide thefirm with return which does not contain any risk. Beta value shows the financial leverage. Withthe help of cost of equity Marks and Spencer is able to understand the cost required to beincurred to get the sources of equity finance. With the help of capital assets pricing model marks12387
and Spencer is able to calculate its cost of equity which will provide understanding about theexpenses to be incurred for getting the equity financing (Marks and Spencer Group PLC(MKS.L), 2018). With the help of cost of equity calculated the Marks and Spencer can makedecision regarding the source of financing whether to get the equity finance of debt financing. The market rate of return is the rate at which the equity finance is available in themarket. Cost of equity is required to be determined because with the help of this informationMarks and Spencer is able to make decision regarding which source of finance can be acquiredbat less cost. The capital assets pricing model is useful in determining the cost of capital becauseit is an easy method and also it require less information for the calculation of cost of equity. So,it can be justified that the cost of equity is 7.44% which shows that Marks and Spencer will berequired to incur this much cost in order to get the equity financing. Capital assets pricing modelis most effective way of calculating the equity financing as it helps in identifying accurateinformation regarding the cost of equity which is beneficial for the firm in understanding thenature of the equity (Dang, Li, Z and Yang, 2018). The information included in this formula for calculating the cost of capital is relevantbecause for identifying the cost of equity it is required to understand the market rate of returnbecause without this rate the firm is not able to make comparison between the return which aremore profitable for business (Foley and Manova, 2015). With the help of risk-free rate of returnmarks and Spencer will be able to understand the rate at which the firm will incur no losses as atthat rate their will no risk of return. The risk-free rate provide understanding about the rate atwhich the returns are risk free. So, it can be said that the above data considered for calculation ofcost of equity is accurate and revenant for determining the cost of equity as per the capital assetpricing method.The cost of equity provide understanding to the organisation about the cost required bymarks and Spencer to get the equity financing. By using the capital assets pricing model Marksand Spencer can determine the cost of equity by gathering the information from the financialstatement of Marks and Spencer. The cost of equity finance is required to understand because itsassist in identifying the most beneficial investment opportunity which have the less cost ofacquisition. The cost of equity helps in understanding about the cost which will be incurred bythe company for acquiring the equity finance.22387
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