The assignment calculates the WACC for MYOB and JB Hifi by considering the cost of equity and debt for both companies. It also examines the time value of money and yield to maturity, providing a comprehensive analysis of the financial performance of these two companies.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
FINANCE: CASE STUDY
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Table of Contents INTRODUCTION..........................................................................................................................3 TVM AND BOND VALUATION QUESTION............................................................................3 a) Cash receives from case company.........................................................................................3 b) Annual operating revenue......................................................................................................3 c) EAR of the loan option..........................................................................................................4 d) Quarterly payment made by the company..............................................................................4 e) Yield to maturity of the Bond................................................................................................4 f) Amount of coupon payment....................................................................................................5 RISK AND RETURN ESTIMATES...............................................................................................5 RISK AND RETURN ANALYSIS.................................................................................................7 CONCLUSION................................................................................................................................8 REFERENCES...............................................................................................................................9
INTRODUCTION Finance is required to perform the various business activities. It consists of equity and debts which are the source finance used by the business. In this assignment, It will provide information about the various option available for the organisation to be used for funding their operations. In this report MYOB is considered which provide tax and other services. It will assist in determining the cost of equity, time value of money and bond valuation etc. TVM AND BOND VALUATION QUESTION a) Cash receives from case company Time value of money years Monthly Instalment yearly instalment discounting factor @7%cash flows 126.2314.40.93293.20 226.2314.40.87273.44 326.2314.40.81255.00 426.2314.40.76237.81 Time value of money1059.5 From the above calculation it can be interpreted about the time value of money. It is identified that the monthly instalment for the sale made by the company were 26.2 which is required to be paid by the customers on the basis of 4 years. The discounting factor at the rate 7% is calculated which assisted in identifying the cash flows for the period (Brooks, 2019). The future value of the cash which will be paid by the customer is equal to 1059.5. b) Annual operating revenue Annual operating revenue in 5 years particularAmount ($) Total revenue445.2 growth rate (%)0.101
growth after 1 years490 growth after 5 years2451 From the above determination it can be interpreted that the annual operating revenue for the period were 445.2 which is growing at the rate of 10.1%. So, the operating revenue calculated which will be present with the company after 5 years is equal to 2451. c) EAR of the loan option EAR of Loan optionAprEAREAR % Loan A (Monthly)0.05450.0565.588 Loan B (semi annually )0.0550.0565.576 Loan C(daily)0.0540.0555.548 Effective annual rate take in to consideration the compound interest as well. From the calculation it is interpreted that the Loan having the low EAR is better option to be chosen by the company (Cleverley and Cleverley, 2017). The Loan C which is based on daily provide that the company will have to pay low rate as compared to other by choosing the loan C. d) Quarterly payment made by the company particularAmount ($) property cost420000 APR (quaterly)3.80% Quarterly amount10500 payment at the end of period10899 payment at the end of 10 years108990 The Above calculation provide understanding about the payment for the purchase of property on the basis of instalment which is required to paid on the quarterly basis (Damodaran, 2016). It can be interpreted that The quarterly payment which will be made by the company will
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
be equal to 10500 without interest but at the end of period the payment will be equal to 10899 which is required to be paid with interest. e) Yield to maturity of the Bond particularAmount ($) Annual coupon bonds100 remaining maturity (years )8 annual coupon rate4.1 Current price of bond92 Yield to maturity5.31% From the above calculation it can be interpreted about Yield to maturity which the return on the basis of the coupon. It is identified that the yield to maturity which is calculated is equal to 5.31% which shows that the earning of the coupon at the end of maturity will be equal to 5.31%. f) Amount of coupon payment particularAmount ($) Par value bonds1000 Coupon rate(semi annually)7.00% years remaining for maturity6 market rate of return4.8 Coupon payment35 From the above calculation it can be interpreted about the payment which is required to be paid for the bonds (Gitman, Juchau and Flanagan, 2015). The coupon payment which is calculated is 35 that means company is required to pay 35 for the bonds. RISK AND RETURN ESTIMATES Cost of equity (MYOB (MYO))
Risk free rate of return1.979 market risk premium6.00% beta value0.36 Expected rate of return2.0006 From the above calculation It can be interpreted about Cost of equity which is calculated for determining the cost of acquiring the equity finance for the business operations (Härdle, Chen, and Overbeck, 2017). Moreover, it is identified that the expected rate of return by using the equity finance will be equal to 2.0006. JB hifi cost of equity Risk free rate of return1.979 market risk premium6.00% beta value-0.2 Expected rate of return1.967 The expected rate of return for JB Hifi is 1.967 which means the cost of equity for the MYOB is higher than that of JB HIFI. It is calculated on the basis of the beta value, market risk premium and risk free rate of return. Portfolio expected rate of return Equity585.3 stock beta0.36 Risk free rate1.979 market risk premium6.00% cost of equity2.0006 The rate of return is calculated on the basis of the beta value and the equity finance which assist in determining the cost of equity by considering the risk free rate of return.
Cost of debt debts450.5 maturity period5 years corporate tax30.00% Interest rate0.0119 Cost of debt0.83% particularweightAfter taxTotal weight Total assets1035.8 Weight of equity56.51%0.47%0.27%0.01130481.13% Weight of debts43.49%13.05%5.67%0.0036099150.36% cost of equity2.00%0.00252694050.25% cost of debts0.83% WACC5.94%WACC1.74% The above calculation provided understanding about the weighted average cost of capital. which is calculated on the basis of cost of equity and cost of debt (Heaton, Polson and Witte, 2016). On the basis of the cost of equity and cost debts the weights are calculated. JB Hifi Equity500 stock beta-0.2 Risk free rate1.979 market risk premium6.00% cost of equity1.967 Cost of debt
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
debts400 maturity period5 years corporate tax30.00% Interest rate0.0119 Cost of debt0.83% particularweightafter taxTotal weight Total assets900 Weight of equity55.56%0.46%0.26%0.01092777781.09% Weight of debts44.44%13.33%5.93%0.00368888890.37% cost of equity1.97%0.00258222220.26% cost of debts0.83%WACC6.18%WACC1.72% RISK AND RETURN ANALYSIS From the basis of Part 2a and B it can be said that the cost of equity and the cost of debts which is calculated for the both companies is comparable and can assist in identifying the higher rate of return for the companies by financing through debt or equity (Horst, 2018). On the basis of the calculation in the part 2a which has provided understanding about the expected rate of return for MYOB and Jb hifi. It identified that the expected rate of return for MYOB is higher than that of JB HIFi which means the company by using the equity finance for the operation sand in vestment purpose will be profitable than the other company. Moreover, on the basis of part2b, It has provided information about portfolio on the basis of which the weighted average cost of capital is calculated (Arcand, Berkes and Panizza, 2015). It has provided information that the weighted average cost of capital is calculated on the basis of cost of equity and cost of debt for the two companies to identify which company is profitable by using the source of capital which is equity and debt. It is determined that the WACC for the Jb hifi is more than that of the MYOB so , It is recommended to the MYOB that it should increase the WACC to create value for the investors by providing them higher returns. For the investment purpose the WACC for the MYOB is lesser than the other company so to have the better investment it is required that the cost of equity should be lower to provide higher value and return for the investors (Shoup, 2017).
The risk associated with the investment is higher for the company and the return provided by acquiring the finance is lower. CONCLUSION From the above report it has been concluded by the MYOB which is involved in providing various services relating to tax and other. It is identified that the cost of equity finance is higher for the company than the other company which means the other company is able to create higher value for the investors. Moreover, it has determined the time value for the money for the sale which has provided the future value of money for the sale on the basis of instalment purpose made by the customers. It has also provided information about the yield of maturity which is calculated to identify the earning which is made on the basis of the coupon. On the basis of the calculation it is determined that the company MYOB is having cost of equity which is equal to 2.0006 which means the cost of acquiring the capital.