Financial Management in Organisation - Assignment
Added on 2020-01-07
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FINANCIAL MANAGEMENT INORGANIZATION
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3(a)Methods of estimating cost of capital and limitation of computed figures.............................3(b) Valuation of Easy jet by using varied methods......................................................................7© Method of purchasing Target Company................................................................................11CONCLUSION..............................................................................................................................12REFERENCES..............................................................................................................................13Table 1Calculation of cost of debt without considering tax for Easy jet.........................................3Table 2 Cost of debt without considering tax for Easy jet..............................................................4Table 3 Cos of equity for Easy jet...................................................................................................4Table 4 Cost of capital by using earning yield method...................................................................5Table 5 Cost of capital on the basis of CAPM model.....................................................................5Table 6 Calculation of enterprise value...........................................................................................5Table 7Computation of WACC.......................................................................................................6Table 8 Four year cash flows of Easy jet.........................................................................................7Table 9 Growth rate on year on year basis of Easy jet....................................................................8Table 10 Cost sheet of Easy jet for last four financial years...........................................................8Table 11 Present value of cash flows at 4.08% discount rate..........................................................8Table 12 Calculation of terminal value as percentage of total value...............................................9Table 13 Calculation of equity value...............................................................................................9Table 14 Intrinsic value of shares of Easy jet..................................................................................9Table 15 PE ratio of Easy jet and industry....................................................................................10Table 16EV/EBITDA ratio............................................................................................................11
INTRODUCTION Valuation methods are commonly used by the firms to make decisions. In the current reportvaried methods of valuation are described in detail. Some methods like cost of debt before andafter tax and WACC are applied on the firm data and results are interpreted. At end of the report,methods like DCF, PE ratio and EV/EBITDA are applied on the firm data and results areinterpreted.(a)Methods of estimating cost of capital and limitation of computed figuresCost of capital refers to the cost of equity and debt (Dhaliwal and et.al., 2011). Methodsfor computing cost of debt and equity are given below. Cost of debtThere are two approaches that are commonly used for computing cost of debt. One caneither compute cost of debt before and after making tax adjustment. Formula for computing costof debt before tax adjustment is as follows.Kd= Interest/principal*100Table 1Calculation of cost of debt without considering tax for Easy jetInterest11Principal504Cost of debt2%In this formula only principal amount up to which debt is taken and interest are used to computecost of debt. Tax is not considered in calculation. Interpretation and limitation of figuresCost of debt for Easy jet is only 2% when tax is not taken in to consideration. Mainlimitation of this figure is that tax amount is not considered in calculation (Li, 2010). It can beobserved that in income statement after deducting interest Opposite to this there is another approach of calculating cost of debt under which afterconsidering tax cost of debt is computed. Formula for same is explained below.Kd= Principal amount*interest rate*(1-tax rate)
Table 2 Cost of debt without considering tax for Easy jetPrincipal504Interest rate2%Tax rate20%Cost of debt8.8Interpretation and limitation of figuresAfter considering tax cost of debt for the business firm is only 8.8%. It can be said thatafter and before considering tax rate big difference comes in the cost of debt. There is nolimitation of figure because in this tax factor is consider to calculate cost of debt.Cost of equityLike debt there are two methods that are used to compute cost of equity. These twoapproaches are dividend yield method and dividend yield plus growth method (Damodaran,2012). Formula for computing cost of equity by using dividend yield method are given belowKe= DPS/Net proceeds .Table 3 Cos of equity for Easy jetDPS55.2Net proceeds767Ke7%In this formula only dividend per share and net proceeds that are received per share are taken into account. Other method that is used to compute cost of equity is earning yield method. Formulaof this method is given below.Ke= EPS/Net proceeds Table 4 Cost of capital by using earning yield methodEPS139.1Net proceeds767Ke18%Interpretation and limitation of figures
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