Financial Management and Valuation Methods

This assignment delves into the critical aspects of financial management within organizations. It examines different valuation methods used to determine a company's worth, such as the market approach, cost approach, and income approach. The analysis includes a specific case study where a company purchased MCB redeemable in 3 years and will be repurchased. Furthermore, the assignment addresses foreign exchange issues that can arise within companies and explores potential solutions implemented by the organization.

FINANCIAL
MANAGEMENT
IN
ORGANISATION

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
(a) Methods of estimating cost of capital....................................................................................1
(b) Business Valuation methods..................................................................................................3
(c) Foreign exchange issues related to the finance......................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance is the lifeline of any organisation which needs to a continuous flow of funds in
and out in a business enterprises (Ogiela, 2015) . Financial management is an important in any
business which is related to marketing and production because it is broad activity of an
organization. It is the process of planning, organizing, controlling and motivating financial
resources to achieve required goals and objectives of a company. In the particular report taken
company Vodafone plc, it is a business based in UK, which can operate in many countries. It is a
British multinational telecommunication company and they have owned network in 25 countries
and their partner network in 47 further countries. In the report focused on various methods of
cost of capital and estimate of the cost of capital of Vodafone investors. Apart from discuss
possible business valuation methods and applying in Vodafone to identify issues of each
estimated values. In addition determine the foreign exchange issues related to the financial raised
from bonds in different countries.
TASK
(a) Methods of estimating cost of capital
Cost of capital is the required return which is important for company as opportunity cost
and making a specific investment. The particular rate of return that could have been earned by
putting the same money into a different investment with equal risk. In hence, the cost of capital
is the rate of return essential to influence the investor to make a give investment. There is
mentioned different methods of estimation of cost of capital -
Cost of Debt
Cost of debt capital states to the total cost or rate of interest paid by an organization in
raising debt capital. In present time total interest paid by company on raising debt capital is not
reasoned as cost of debt because the total interest is activated as cost of debt because the total
interest is treated as an expenses and it is deducted from tax (Cho and et.al, 2012). There is
applied formula to calculate cost of debt -
 Kd = (1-T) * R* 100 (It is applied after tax adjustment)
 When company issues debentures on premium and discount after then calculating cost of
debt and principal amount will be adjusted with these amount after adjust amount will be
net proceed -
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Kd = I / N.P. (after adjusting premium or discount of floating cost)
 Cost of debt after tax adjustment
Kd = IX (1-t) /N.P.
Cost of preference share capital
According to this method total of amount of dividend paid and expenses acquisition for
increasing preference shares. The dividend paid on preference shares is not less from tax, as
dividend is an acquiring of profit and not well-advised as an expenses (Zimmerman and Roberts,
2012) . Cost of preference shares can be calculated by using the following formula -
 Kpc = Dividend / net proceed of preference share capital
Cost of Equity capital
This method is little difficult as compare with cost of debt and cost of preference capital.
There is main reason of this method that the equity shareholders do not receive fixed interest or
dividend. The dividend on equity share change which is depended on profit because it is earned
by a company. This method is very important and there is risk factor plays an important role to
decide rate of dividend to be paid on equity capital. In this method adopted different method to
calculate cost of equity - Dividend Yield method = Ke = Dividend per share / Net proceed per share Dividend yield plus growth rate of dividend method = Ke = Dividend per share /Net
proceed per share + growth rate
 Earning yield method = Ke = Earning per share / Net proceed per share
Cost of retained earnings
Retained earnings are known as profit reserve of a company which are not distributed as
dividend. Retained earnings kept by company for finance long term as well as short term
projects. The investors expect that the company should invest the retained earnings on those
projects which is profitable for company. In addition the investors require that the organization
should divided the profit earned by investing retained earnings in the form of dividend
(Sweeting, 2017).
 Ke = Kr Approach
Weighted average cost of capital
According to this method whole cost which is obtained from several source of capital
and calculate of firm's cost of capital. In the category of capital includes all sources and they are
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proportionately weighted such as common stock, bonds, preferred stock and any other long term
debt which is included in WASS calculation. There is company has followed particular formula -
 WACC = E/V * Re + D/v * Rd * (1 Tc)
(1) Called up share capital is the number of shares which can issue by company at their par value
and a number of shares were allotted during the year in the relation to employee share schemes.
Ordinary shares of
20% each allotted
ans issued and fully
paid
(Number)
2018
(Number)
2017
1 April 28814142848 £4796 28813396008 £4796
Allotted during the
year
660460 - 746840 -
31 March 28814803308 £4796 28814142848 £4796
Vodafone ordinary shares are quoted on the London stock exchange -
(2) Investor in Vodafone = £450 million
Interest rate = 5.9%
Cost of capital = Cost of debt = Kd = (1-T) * R * 100
Cost of debt = Effective interest rate * (1- Marginal tax rate)
(1 – 0.20) * 0.059 * 100
= 4.72
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(b) Business Valuation methods
Business Valuation is conducted by company when they wants to sale out a particular
portion of its operations or wants to merge with or acquire another company. It is the process
which can help to know current worth of a business, using objectives for measure and determine
all appropriate terms of business which can help to calculate value of current worth. There is
discussed about different valuation method which can help to know value of company -
Cost Approach
It is also known as assets based approach which can include to evaluate a company's
value by analysing the market value of a company's assets (Arcilla, Calvo-Manzano and San
Feliu, 2013). With the help of this approach most of the companies have grater values of future
cash flows generated value as a going concern than they would if liquidated for example there
are presenting value of future cash flows generated by the assets generally far exceed the
liquidation value of those assets.
Cost of Equity = 18.92%
Current Earnings per share= 16.79
Growth Rate in Earnings per share
Growth Rate Weight
Historical Growth = 17.55% 12.00%
Outside Estimates = 15.00% 17.00%
Fundamental Growth = 132.61% 71.00%
Weighted Average 98.81%
Payout Ratio for high growth phase= 11.91%
The dividends for the high growth phase are shown below:
1 2 3 4 5
Dividends 3.98 7.91 15.72 31.25 62.12
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Growth Rate in Stable Phase = 15.00%
Payout Ratio in Stable Phase = 90.04%
Cost of Equity in Stable Phase = 18.92%
Price at the end of growth phase = 13767.26
Present Value of dividends in high growth phase = 60.02
Present Value of Terminal Price = 5788.11
Value of the stock = 5848.12
From the above report it has been included that it can shows cost approach and applied in
a company to know estimation.
Market Approach (relative value)
This method consist in valuation method where is used transactional data to provide help
to company for evaluate the value. In this method include private company transactions as well
as public company transactions. The public company can measure the value by using current
stock market data (Dudin and et.al, 2014). In the behind of this approach calculate value of same
companies that have been sold in arms length transactions should represent a good proxy for the
specific company being valued.
Current Earnings per share = 16.79 (in currency)
Current Dividends per share = 2 (in currency)
Period = 5 (in years)
Beta of the stock = 1.37
(Beta is assumed as per past performance of
company in Industry)
Risk free rate= 4.40% (in percent)
Risk Premium= 10.60% (in percent)
EPS five years ago = 7.48 (in currency)
Estimated growth: 15.00% (in percent)
Net Income Currently = 4572 (in currency)
Book Value of Equity = 3149 3,037.00 (in last year (in currency)
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2017)
Tax Rate on Income= 34.60% (in percent)
ROE (Net Income /Shareholder's Equity)*100= 150.54% (in percent)
Retention = 88.09% (in percent)
The particular table based on annual report of a company which can defined market
approach and evaluate the method of a company.
Income approach
The income approach include valuation methods of business that covert future anticipated
economic benefits like cash flow into a single present dollar amount. The income used according
to valuation method which can present by tax profit, pre tax profit, EBIT, EBITDA or other cash
flow measures. The two most commonly used methods under this approach are the single period
capitalization method and the multiple period capitalization.
2018 2017 2016
Net Income 2788 6079 5122
Non Cash Charges
Depreciation - -
Change in Working Capital 584 984 -
Cash Flow from operations 13600 14223 14336
Add: Interest Expenses (1-Tax Rate) 213 1052 (286)
Less: Capital Expenditure 889 950 1210
Value as per Free Cash Flow method 17185 22338 19172
From the above report it has been analysed that the company has highest free cash flow in
2017 as compare to 2016 & 2018 because in this year cash flow from operation much better and
lower capital expenditure of a company. The company face changes in working capital due to
changes in current assets and current liabilities. From the calculation it is comment that the
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company has valued free cash flow in different year in respectively in 2016, £17185 in 2017,
£22338 and in 2018, £19172.
Market Capitalization
It is the simplest method of business valuation which is calculated through multiplying
the company's share price by its total number of shares outstanding.
(c) Foreign exchange issues related to the finance
In the context of Vodafone Plc, the bonds which have been undertake by the company
mandatory convertible bonds + high debt security. The MCB related to short term bonds because
the term period of particular bonds is 3 years which is buy back after 3 years. The company has
adopted this policy because of avoiding equity dilution and economical impact of share
movements. The company has gone with hedging strategy which can profitable for a company
because of economical impact does not affect to the strategy (Filip and Raffournier 2014). The
advantage of this strategy when situation in the favour of selling so company will go with selling
point of view and when situation favour in buying so company has following busying strategy.
The company has purchased mandatory convertible bonds on 25 august 2017 to £729.1 million
shares which can be convert of treasury shares at a conversion price which is £1.9751. The
company has reflected the conversion price at issue £2.1730 adjusted for the pound sterling
equivalents of aggregate dividends paid in August 2016, February 2017 and August 2017. The
bonds amounts difference shows because of accountable regarding change in currency rate. The
company has carrying value of the bonds in 2017, £660 and in 2018, £3062 which can relate to
short term borrowings. The interest rate on this of particular bond 0.0% to 8.125%. In long term
the carrying value £19345 in 2017 and £18804 in 2018 and there is same interest rate provided
by company to bond holders. The fair value will be change of a company in short term and long
term which is
Fair value 2017 2018
Short term borrowings £667 £3057
Long term borrowings £19286 £18714
The company has faced many issues related to the finance raised from bonds in different
currencies -
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 Credit or Default risk – This risk is a borrower will be unable to pay the contractual
interest or principal on its debt facultative. Credit risk is particular related to investor who
can hold bonds in their portfolios. In this type risk consist of government bonds which is
issued by federal government (Habib, Uddin Bhuiyan and Islam, 2013). They have the
least amount of default risk like the lowest returns. On the other hand Vodafone company
tend to have the highest amount of default risk because of lower interest rate on their
bonds.
 Country risk – The particular risk states that a country won't be able to honour its
financial commitments. When a country defaults on its obligation so it will harm to the
performance of financial instruments of particular country as well as other countries it
has relationship with. Country risk happen in Vodafone when they are bought bonds from
another country and on the particular country defaults on its obligations. It is mostly
related to emerging market or countries that have a serve deficit.
 Foreign exchange risk -
 Interest Rate risk – In the risk that an investment's value will change due to change in
the absolute level of interest rates the spread between two rates, in the shape of the yield
curve or in any other interest rate relationship. In the context of Vodafone company it has
been affected to value of bonds more directly than stocks and is a significant risks to all
bond holders (Cohen and et.al, 2014).
 Market risk – In this risk that an investment will face fluctuations and decline in value
because of economic developments and other events that impact the whole market. It is
also known as systematic risk which can affect to all securities in the same manner.
Specifically market risk can consist of inflation risk, currency risk, liquidity risk, interest
rate risk and socio-political risk. It is also consider in Vodafone plc because market risk
impossible to avoid in completely way. These above risks can be relieved to some extent
by diversification.
 Political risk – In these type risk an investment's returns could sustain due to political
changes and instability. This type of risk can related to change in government, legislative
bodies, other foreign policy makers or military control. This type of risk origin in
Vodafone plc when other countries politics will be change and affect to companies
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policies. It is also called as geopolitical risk because it becomes more of a factors as an
investment's time horizon gets longer (Bandy, 2014).
CONCLUSION
As per the above discussion it has been concluded that financial management is very
important for any company because it is lifeline for any organisation. In any company manage
finance and survive business for long time is important to manage. There company has applied
different valuation method to know about current worth of a company such as market approach,
cost approach and income approach. There are company has purchased MCB from other
company which is redeemable in 3 years and company will buy back again. Various issues are
origin in foreign exchange which is origin in company and which is solve by company.
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