Financial Management Report: Cost of Capital and WACC for Boohoo PLC

This report provides a comprehensive analysis of the financial management of Boohoo Group PLC, focusing on the estimation of its cost of capital and the calculation of its Weighted Average Cost of Capital (WACC). The report begins with an introduction to financial management and its importance in determining a company's financial stability. The main body of the report delves into the different sources of finance utilized by Boohoo Group PLC, including interest-bearing loans, borrowings, and equity shares. The WACC is calculated using both the Capital Asset Pricing Model (CAPM) and the Dividend Discount Model (DDM) to determine the cost of equity. The report highlights the assumptions and limitations associated with each method. The report concludes by summarizing the key findings and emphasizing the significance of financial management and the concept of capital in assessing a company's risk profile and business activities. The report also references the annual report of Boohoo Group PLC and other sources to support its analysis.

Financial Management Report

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Different sources of finance...................................................................................................3
WACC....................................................................................................................................3
CONCLUSION..........................................................................................................................5
REFERENCES...........................................................................................................................6

INTRODUCTION
Financial management accounts for the effectively handling the financial resources
of the organization which helps in determining the risk and financial stability of the company.
In this report, Boohoo group plc is taken as an organization. This report provides an insight
about the estimation of the cost of capital of the company along with certain assumptions and
limitations associated with it.
MAIN BODY
Different sources of finance
With reference to the annual report of the organization, the company makes use of
the interest-bearing loans and borrowing for both short term and long term in the form of the
secured bank loan (Jhoansyah, 2021). In addition to this, the company has issued equity
shares in order to acquire the funds for meeting business requirements.
WACC
Amount in £’000
Interest on debt 390
Total Debt 13135
Tax rate 19%
Cost of debt After tax = 390*(1-19%) / 13135
= 2.4%
Cost of equity using CAPM
model
Risk free rate 1.10
Market risk premium (ERP) 7.8
Beta 1.60
Cost of equity = Risk free rate +[β x ERP]
= 1.10 + [1.60 * 7.8]
= 13.58%
Cost of equity using DDM
Dividend 3400
Net income 72883
Dividend payout ratio = 3400/72883 = 4.67%
Dividend per share 0.29
Shareholder’s equity 327935
Return on equity = 72883 / 327935 = 22.22%
Growth rate = (1- 4.67%) * 22.22%
= 21.1%
Dividend per Share in Next
Period
= 0.29 * (1+ 21.1%)
= 0.35
Current market price 318.6

Cost of equity = 21.29%
Computation of WACC under CAPM
Securities Amount Cost Weight Cost * weight
Equity capital 11680 22.22% 0.47 22.22% * 0.47
= 0.104
Secured loan 13135 2.4% 0.53 2.4% * 0.53 =
0.012
Total 24815 WACC =
11.67%
Computation of WACC under DDM
Securities Amount Cost Weight Cost * weight
Equity capital 11680 21.29% 0.47 21.29% * 0.47
= 0.10
Secured loan 13135 2.4% 0.53 2.4% * 0.53 =
0.0127
Total 24815 WACC =
11.27%
It is essential to note that lower the WACC higher will be the market value and vice-
versa. It is basically the average of the cost of equity and debt. As given above, the cost of
capital is more or less the same under both the situations (ANNUAL REPORT AND
ACCOUNTS. 2020). And as the debt is less risky in comparison to return required to be given
to the investors. But the company is having more proportion of the debt in comparison to
equity.
Assumptions:
The risk-free rate is based upon the industry average and reflects the wield of the
equivalent maturity. The beta defines the company’s sensitivity to the systematic risk and the
investors are risk averse and thus, it is necessary to reduce their risks (CAPM – assumptions,
limitations and SML. 2020). Another assumption is that the investor makes an investment
based upon the risk and return which is measured by variance and the portfolio returns. All
the investors are having the similar expectations in regard to the risk and return because if the
expectations are different then estimates of mean and variance results into different forecasts.
One of the important assumptions of CAPM is that the investors are having free access to all
the information which is not so in the real world which is regarded as market inefficient.
Limitations:

The major limitation of DDM is that it is only applicable to the mature, stable
companies which have a proven record of paying dividend. It is full of lot of assumptions
regarding dividend, growth rate and tax rates. It is not applicable to large shareholders as they
have high stake with some degree of control to influence dividend policy (Dividend Discount
Model: Disadvantages. 2020). In respect to CAPM, the investors are risk averse and rational
individuals and prefers less risk and more wealth. Also, the purchase and sales transaction
can be taken for an infinitely divisible unit. It also has an assumption that there is a perfect
competition and no individual investor is having the potential to influence the price with no
cost of transaction involved. In addition to this, the personal income tax is considered to be
zero and investors can lend or borrow at riskless rates.
CONCLUSION
It can be concluded from the above, that the financial management and the concept
of capital plays an important role in determining the level of risk the company is undertaken
in respect to carrying out its business activities. the various approaches for determining cost
of equity and the relevance of WACC to the company. In addition, the assumptions and
limitations of the methods has a great impact over the accuracy.

REFERENCES
Books and Journals
Jhoansyah, D., 2021. Analyze Return on Equity and Weighted Average Cost of Capital
Linkages to Firm Value. Almana: Jurnal Manajemen dan Bisnis. 5(1), pp.1-6.
Online
ANNUAL REPORT AND ACCOUNTS. 2020. [Online]. Available Through:<
https://www.boohooplc.com/sites/boohoo-corp/files/all-documents/result-centre/
2020/boohoo-com-plc-annual-report-2020-hyperlink.pdf>.
CAPM – assumptions, limitations and SML. 2020. [Online]. Available Through:<
https://alphabetaprep.com/cfa-level-1/portfolio-management/capm-assumption-
limitions/>.
Dividend Discount Model: Disadvantages. 2020. [Online]. Available Through:<
https://www.managementstudyguide.com/disadvantages-of-dividend-discount-
model.htm>.