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WACC - Corporate Finance

   

Added on  2020-01-07

16 Pages4795 Words198 Views
CORPORATE FINANCE

EXECUTIVE SUMMARYThis report is prepared on corporate finance and it is find out that capital structure play avery important role in helping firm in controlling its cost of capital. There are many theoriesrelated to capital structure and same are applied on the firms. It is find out on study thatcomplete dependency on debt and equity create problems for the firm. Hence, there must bebalanced capital structure of the firm. Beta helps in measuring risk and it is find out thatinvestors must also analyze business environment in which firm is operating in order to accessrisk in better way. At end of study, it is identified that WACC must be computed by the firms toaccess average finance cost of the firm.

TABLE OF CONTENTSEXECUTIVE SUMMARY.............................................................................................................1INTRODUCTION...........................................................................................................................3(1) Comparing and contrasting capitals structure of the firms....................................................3AO world plc...............................................................................................................................3(2) Evidence that financial stakeholders in company A and B are concerned about the firmmay face financial distress in future ...........................................................................................5(3) Equity and company risk of company A and B.....................................................................7(4) Estimating weighted average cost of capital for company A and B .....................................8RECOMENDATION AND CONCLUSION..................................................................................9APPENDIX....................................................................................................................................10INDEX OF TABLESTable 1: Ratio analysis of AO world.............................................................................................13Table 2: Ratio analysis of G4S......................................................................................................13Table 3: Cost of equity for AO world ltd.......................................................................................14Table 4: Enterprise value of AO world..........................................................................................14Table 5: WACC of AO world........................................................................................................14Table 6: Cost of equity for G4S.....................................................................................................14Table 7: Enterprise value of G4S...................................................................................................14Table 8: WACC of G4S.................................................................................................................15

INTRODUCTIONCorporate finance is one of the important branch of financial management. In this reportdetail discussion is carried out on capital structure of the firms. Theories of capital structure thatapplies on these firms are identified and discussed in detail in this report. The reasons due towhich changes comes in the firm capital structure are also identified. In the middle part of thereport, ratio analysis is done and ratio of both firms are interpreted for last five years andcomments are done on same. Risk related to investment is measured by using values of beta andanalysis of business environment. On this basis risk related to investment in the firm is accessed.In end part of the report, weighted average cost of capital for the firm by using specific steps andused formula are mentioned clearly.(1) Comparing and contrasting capitals structure of the firmsCapital structure refers to the combination of debt and equity in the firm. In the capitalstructure of the firm there is specific proportion of debt and equity. Capital structure of thecompany is computed by dividing debt by equity. From this, the proportion of debt to equity iscomputed for the firms. Debt equity ratio of the given firms is discussed below.AO world plcYear20122013201420152015-2016Debt equityratio0.320.180.080.080.07It can be seen from the above table that debt equity ratio of the company is decliningconsistently. This reflects that proportion of debt to equity of the firm is declining continuouslywhich is good for the organization. It can be seen from the balance sheet of the firm thatshareholder equity of the firm increased from 9-59 till 2015. This reflects that big plunge isobserved in equity of the firm (Brealey and et.al., 2012). This may happen because firm issuenew shares in the market through further public offer or institutional investors make aninvestment in the company. In contrary to this, debt increase at a very slow pace in the firm. Dueto this reason, debt equity ratio of the company decline which will further reduce the cost of thefirm. In this case, net income approach or theory of the capital structure is applied on the firm.According to the theory propounded by Durand, financial leverage affects capital structure andcost of the firm. Financial leverage refers to the debt that is taken by the firm to invest any asset

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