Financial Management Assignment | Cost of Capital

   

Added on  2020-06-06

13 Pages3222 Words69 Views
FINANCIAL MANAGEMENT FORORGANISATIONS
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TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Methods of estimating cost of capital..............................................................................................1Business valuation methods and issues associated with them.........................................................3Evaluation of senior secured debt in January 2017 in relation to overall source of finance...........8CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................10
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LIST OF TABLESTable 1: Calculation of cost of equity..............................................................................................2Table 2: Calculation of enterprise value..........................................................................................2Table 3: Calculation of WACC.......................................................................................................2Table 4: Computation of cash flows................................................................................................3Table 5: Percentage growth rate of cash outflow elements.............................................................4Table 6: Present value of cash flows...............................................................................................4Table 7: Computation of terminal value..........................................................................................5Table 8: Equity overall value...........................................................................................................5Table 9: Intrinsic value calculation..................................................................................................5Table 10: Price earning ratio............................................................................................................7Table 11: Calculation of EPS..........................................................................................................7
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INTRODUCTIONCorporate finance is the one of growing domain on which currently are placing dueattention so as to make accurate business decisions. In the current report, different approachesare discussed in detail that are related to computation of cost of capital in the business. In middlepart of the report, DCF, earning per share and price earning ratio are computed and issuesassociated with these approaches are discussed in detail. At end of the report, secured debt thatfirm raised from market is discussed in respect to overall sources of finance. METHODS OF ESTIMATING COST OF CAPITALThere are number of methods of estimating cost of capital. It must be noted that cost ofcapital is measured in number of ways and there are advantage and disadvantage of all thesemethods for the business firms. Some of the methods that can be used to meaure cost of capitalare explained below.Weighted average cost of capital: Weigthed average cost of capital is the one of theimportant model of computing cost of capital. Under this method, cost of equity and costof debt is computed. Weight is given to debt and equity in the capital structure and cost ofdebt and cost of equity is multiplied to weights (Benninga, 2010). Finally, corporate taxpercentage is deducted from relvant value and in this way weighted average cost ofcapital is computed. It can be said that weighted average cost of capital is the one of theimportant method of computing cost of capital in the business. Cost of debt: In case of cost of debt formula interest rate and corporate tax rate is taken into acount. In this approach from one first of all from 1 corporate tax rate is deducted andrelvant value is multiplied byb rate of interest. Finally, computed value is multiplied to100 and in this way cost of debt is computed. Tax rate is deduced because in case loan istaken in business it is not necessary to pay tax to the government. Cost of equity: Cost of equity is computed by using CAPM model which is also knownas capital asset pricing model. Under this model beta, market premium and risk free rateof return is taken in to acount (Baldwin and Von Hippel, 2011). By using this approachreturn percentage that must be atleast earned on equity is computed. That percentage isconsiderd as cost of equity by the business firms and investors.1 | P a g e
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