Financial Management in Organisation

Financial
Management in
Organisation

Table of Contents
INTRODUCTION...........................................................................................................................1
REPORT..........................................................................................................................................1
(a) Methods of Estimating Cost of Capital.............................................................................1
(b) Possible methods of business valuation............................................................................3
(c) Evaluation of foreign exchange issues related to funds raised from bonds in different
countries.................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financial management is considered as an important aspect in any organisation. As it is
very important for any company to be financially strong in order to gain success, stability and
growth. Finance is the most essential element, it is required by every organisation to run it
business successfully or to start the new start-up. It includes various financial statements and
proper analysis in order to formulate new strategies to increase its stability and growth (Banerjee,
2012). This report contains analysis of financial statements of Vodafone Group PLC to calculate
its cost of capital for their equity investor and for the investors of 5.9% bond which is due by
year 2032. This report also talks about various business valuation methods used to compute the
value of any company.
REPORT
(a) Methods of Estimating Cost of Capital
Cost of Capital: Cost of capital is required as a necessary return which is required by
companies to create a capital budgeting project. It is the weighted average of a company's cost of
equity and cost of debt. This metric is used internally to judge that the capital project which
company wants to acquire is worthy of expenditure which will be incurred. To estimate cost of
capital following methods are used:
COST BY SPECIFIC SOURCE OF FINANCE
 Cost of Debt: Cost of debt means the interest which the company has to pay to its
debenture holders (Parker, 2012). The debentures can be issued at premium or at par or at
discount or redeemable debentures, to calculate the cost of debentures issued will be
calculate by using the following formula
At Par
Kdb = I/P
where I is interest payable and P is principal
At Discount or Premium
Kdb = I/NP
where I is interest payable and NP is Net Proceeds (principal + premium – discount )
After Tax
Kdb = I/NP (1-t)
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where I is interest payable, NP is Net Proceeds and t is tax rate
Redeemable Debentures
Kdb = I + 1 / n (RV – NP) / 1 / 2 (RV-NP)
where I is interest payable, NP is Net Proceeds, n is number of years and RV is Redeemable
Value
 Cost of Preference Share Capital: Cost of preference share capital is the is the fixed
rate of dividend which is payable to preference shareholders. If company defaults in the
payment of this dividend it affects the company's capacity to raise fund.
At Par
Kp =D/P
where D is Dividend payable and P is principal
At Discount or Premium
Kp = D/NP
where D is Dividend payable and NP is Net Proceeds (principal + premium – discount)
Redeemable Preference Share
Kp = D + 1 / n (MV – NP) / 1 / 2 (MV-NP)
where D is Dividend payable, NP is Net Proceeds, n is number of years and MV is Minimum
Value
 Cost of Equity Share Capital: Dividend in the case of equity share capital is not fixed.
Equity shareholders get dividend at fluctuating rate and even some time they are not even
paid. In this case the return may be of different form.
Dividend Per Share
Ke = D/P
Where D is Dividend Paid and P is Principal
Dividend Per Share plus Growth
Ke = D/P + g
Where D is Dividend Paid, P is Principal and g is the growth
Earning Per Share
Ke = EPS/NP
Where EPS is the earning per share and NP is the Net profit.
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