Financial Management Report: Cost of Capital Analysis for Kadlex plc

This report provides a financial analysis of Kadlex plc, focusing on the calculation of the Weighted Average Cost of Capital (WACC) using both book value and market value approaches. It includes detailed tables illustrating the cost of equity, preference shares, and debt, along with the capital structure of the company. The report explores the impact of different capital structures on the cost of capital, including the calculation of weights for each component (equity, debt, and preference shares) based on both book and market values. The analysis aims to determine the optimal capital structure for Kadlex plc, considering the minimization of the cost of capital through the strategic use of gearing. The report also includes references to support the financial analysis.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
Question 1........................................................................................................................................1
a) Calculation of Book Value and Market value cost of Capital (WACC) for Kadlex plc.........1
b) Cost of Capital of company as per the new structure of Kadlex plc......................................5
c) Minimising the cost of capital using gearing in the capital structure.....................................9
REFERENCES..............................................................................................................................10

Question 1
a) Calculation of Book Value and Market value cost of Capital (WACC) for Kadlex plc.
Weighted Average Cost of Capital as per book value and Market Value.
Table 1Weighted Average Cost of Capital
Weighted Average Cost of Capital
As per Book Value
Value Weight Cost Weight*Cost
Value of Equity 20000 44.44% 53.60% 23.82%
Value of BOND 15000 33.33% 7.00% 2.33%
Value of Preference share 10000 22.22% 7.00% 1.56%
Total Capital 45000 100.00% 67.60% 27.71%
As per Market Value
Value Weight Cost Weight*Cost
Value of Equity 20000 44.44% 53.60% 23.82%
Value of BOND 15000 20.97% 7.00% 1.47%
Value of Preference share 10000 9.80% 9.33% 0.91%
Total Capital 45000 100.00% 49.01% 25.01%
Cost of Capital
1

Table 2Cost of equity
Book Value
Market
Value
0 Year 1 Year
Expected dividend 0.28 0.336 0.336
Current stock price 1 2.65
Growth Rate 20.00% 20.00%
Cost of equity
= Expected Dividend
in 1 year ÷ Current
Stock Price + Growth
Rate
Cost of Equity 53.60% 32.68%
Table 3Cost of Preference Share Capital (Kp)
Cost of Preference
Capital
Book Value Market Value
Dividend per share 0.07 0.07
Net proceeds 1 0.75
Cost of Preference
Share Capital 7.00% 9.33%
Table 4Cost of Debt (Kd)
Cost of debt 10.00%
2

After tax debt (1 – 30%)
Cost of debt 7.00%
Table 5Capital Structure of Kadlex as on 31 December 2017
Capital Structure
Book Value Market Value
Current Value of Equity
Number of shares 20000 20000
Price per share 1 2.65
Value of Equity 20000 53000
Current Value of Debt
Number of Bonds 150 150
Price per bond 100 107
Value of BOND 15000 16050
Current Value of
Preference Capital
Number of Preference Shares 10000 10000
Price per share 1 0.75
Value of Preference share 10000 7500
3

Table 6Total Value of Debt and Equity
Total Value of Debt and
Equity
Book Value Market Value
Value of Equity 20000 53000
Value of BOND 15000 16050
Value of Preference share 10000 7500
Total Capital 45000 76550
Table 7Calculation of Weights
Weights
Book Value Market Value
Weight of Equity
Equity 20000 53000
Total Capital 45000 76550
Weight 44.44% 69.24%
Weight of Preference
Capital
Preference Capital 10000 7500
Total Capital 45000 76550
Weight 22.22% 9.80%
Weight of Debt
Debt 15000 16050
Total Capital 45000 76550
Weight 33.33% 20.97%
4

b) Cost of Capital of company as per the new structure of Kadlex plc
5