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Investment Assignment (Doc)

   

Added on  2020-09-17

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INVESTMENT ASSIGNMENT
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TABLE OF CONTENTSINTRODUCTION...........................................................................................................................11. Cost of capital estimation by Kyle books for Royal Mail Plc.................................................12 First decisions in New Heritage Doll Company.......................................................................54 Finding fair value of share price...............................................................................................7REFERENCES..............................................................................................................................12
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INTRODUCTIONWith the globalization of the companies, firm expanded their businesses at the globalmarket place and in order to finance their worldwide operations, they procure capital from boththe debt and equity by paying interest and dividend as financial cost. The report here layemphasizes upon examining the cost of capital estimate of Royal Mail Plc reported in the Kylebook. Besides this, New Heritage Doll Company’s will be suggested with the best capitalbudgeting decisions for accelerating business growth & progress. Lastly, American Greetingbusiness will be recommended with an appropriate advice regarding whether it shouldrepurchase its shares or not. 1. Cost of capital estimation by Kyle books for Royal Mail Plc Royal Mail Plc is one of the world’s leading pioneer companies that provide postalservices across the world. The company is headquartered in London and listed on London StockExchange. In order to finance firm’s capital requirement, Royal Mail Plc procure funds fromboth the sources that are debt & equity funds. Collecting funds through any of these sourcesbring cost to the company as the monetary return to the fund suppliers. In other words, cost ofcapital can be regarded as the financial cost that entity needs to pay in return for the fund utilizedso as to finance the business function. It depends upon the mode or source of fund that RoyalMail Plc had used in its organization either debt or equity. In economics and investment, it isdefined as a rate of return that firm could earn by putting the capital in a different investmentprospective with equivalent risk (Boubakri, Guedhami and Saffar, 2016). Alternatively, it alsocan be regarded as an opportunity cost that is required to make a specific investment.Capital structure: As already said that Royal Mail Plc’s finance manager use acombination of equity & debt in designing an optimum capital structure, therefore, it incur boththe cost of equity & cost of debt in the business. Thus, it’s overall cost means weighted averagecost of capital (WACC) is the mixture or composition of return requires to compensate all thecreditors. It really matters for the valuation purpose, it is because, companies look afterprocuring required amount of capital at least cost. Moreover, it is also used as a discountingfactor in order to derive fair value of investment. Finding out the opportunity cost of capital/WACC typically involves the computation ofreturn for both the debt suppliers and equity holders. It is necessary for the Royal Mail Plc to1 | P a g e
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obtain a minimum return equal to WACC so that it can satisfy its financial commitments to thefund providers. Royal Mail Plc’s capital structure in 2015Source of capitalBook value (GBP million)Capital contribution %Current debt2906.18%Non-current debt55911.91%Shareholder’s equity384681.92%Total Capital4695100.00%Current DebtNon-current DebtEquity2905593,846Source of capital Figure 1 Sources of capital of Royal Mail Plc in 2015Cost of debt: Debt capital is an external source of finance wherein company takeborrowings from the lenders for the required period and which is paid in periodical instalmentsas per the repayment schedule (Chui, Kwok and Zhou, 2016). On such source, although firmowes statutory obligation to pay interest as cost, still, the benefit associated with this is it offerstax advantages because tax authority charge taxes on earnings after tax. This is the only reasonwhy debt is treated as cheaper financial source which offers trading on equity benefits tomaximize shareholder return. Cost of debt indicates the effective rate which Royal Mail Plc needto pay to the lender on the borrowed capital (Goh and et.al., 2016). 2 | P a g e
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