Financial Management: WACC, Market Value, Cost of Equity and Debt

Running head: FINANCIAL MANAGEMENT
Financial management
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1FINANCIAL MANAGEMENT
Table of Contents
1. History of the company............................................................................................................2
2. Weighted average cost of the capital (WACC)........................................................................2
3. Market value for equity............................................................................................................5
4. Market value for debt...............................................................................................................6
5. Total market value....................................................................................................................6
6. Cost of equity...........................................................................................................................6
7. Cost of debt..............................................................................................................................6
8. Gearing ratio.............................................................................................................................7
9. Recommendation......................................................................................................................7
10. Reflection..............................................................................................................................8
11. Reference..............................................................................................................................9
12. Appendix.............................................................................................................................11

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1. History of the company
Listed under ASX, Nufarm Limited is one of the leading manufacturers and developers
for protection solutions for seeds as well as crop. For more than last 100 years the entity is in
search of more effective approaches for fighting diseases, pets and weeds for enhancing the
yields in context of customer crop through turning the scientific breakthroughs into the local
solutions. The entity carries out the operations related to marketing and manufacturing all over
Australia, Asia, New Zealand, Africa and Europe. 2 major segments of the entity are – crop
protection and the seed technologies (Nufarm, 2019).
2. Weighted average cost of the capital (WACC)
WACC is the computation of the company’s capital cost where each of the capital
categories is weighted proportionately. All the capital sources that include the preference shares,
common stock and borrowings along with other long term borrowings are taken into
consideration under the computation of WACC. WACC of the company goes up with the
increase in beta and goes down with the decrease of beta. WACC is computed through
multiplying the cost for each capital component by the proportional weight. In the next step sum
of the result is considered and then the same is multiplied by (1-corporate rate of tax)
(Zabarankin, Pavlikov & Uryasev, 2014).
Step 1 – Beta
Beta for the task is computed through establishing relationship between last 5 years
return of Nufarm’s stock and return of All ordinaries Index (AORD) for the same period.
Computed beta for the company is 1.06 (Au.finance.yahoo.com, 2019).
Step 2 – Risk free rate
Risk free rate for return is theoretical return rate for any investment with the zero risk. It
symbolizes the rate of interest that an investor expects from any absolute risk free investment
over the particular time period. Generally, risk free rate is available for different time periods
like 3 months, 1 year, 6 months, 3 years and 5 years (Vaidya, 2017). Long term risk free rate is
considered to be more accurate as the rates takes into consideration risk, inflation and interest

3FINANCIAL MANAGEMENT
rate. On the other hand, short term risk free rate like for 3months period is less accurate as it
takes into consideration the temporary scenarios. For the calculation Nufarm’s WACC one year
risk free rate provided in the financial report of the company is considered. Risk free rate stated
in the annual report of the company is 2.0% (Nufarm, 2019).
Step 3 – Cost of debt
As the company’s different borrowings have different rate of interest the cost of debt is
computed through dividing the finance expense provided under the income statement by
summing up the long term and short term borrowing provided in the balance sheet of the
company (Cho et al., 2018). It is computed as –
Cost of debt = 118638 / (519968+1148715) = 7.10% (Nufarm, 2019).
Step 4 – Cost of equity
Cost of equity can be computed through 2 methods. These are –
 Through CAPM – it represents the relationship among the expected return for the assets
and systematic risk. It is largely used throughout the finance for the purpose of pricing
risky securities and to generate the projected return for the assets (Elbannan, 2015).
Under this approach the cost of equity is computed as follows –
Ke = Rf + β ( Rm – Rf )
Where Ke = Cost of capital,
Rf = Risk free rate = 2.0%
Rm = Market risk premium = 4.38%
β = Beta = 1.06
Therefore, Ke = 2.0% + 1.06* (4.38% – 2.0%) = 0.045 or 4.50%
 Through dividend growth model – through dividend growth model, dividend rate for the
next year, current market value of the stock and growth rate of dividend is considered.
Cost of equity is computed as below –