University of Greenwich: FINA1082 Coursework - Finance Analysis Report

This report analyzes the financial performance of Duronic PLC, a UK-based radio manufacturer, as part of a Principles of Finance coursework assignment. The analysis begins with the calculation of the Weighted Average Cost of Capital (WACC), considering the cost of equity, preference shares, and debt, ultimately determining the most appropriate cost of capital for evaluating a potential project. The report then calculates the Net Present Value (NPV) of the project at different discount rates, assessing its viability based on positive NPV outcomes. Furthermore, the report extends to the valuation of Walmart Inc. and Sysco Corp. using the Dividend Discount Model (DDM), determining their intrinsic values and providing recommendations for buying or selling the stocks based on the comparison of intrinsic values to current market prices. The report concludes with a discussion of stakeholder conflicts, dividend policies, and the Modigliani and Miller dividend policy theory, offering insights into corporate finance and investment decisions.

Running head: REPORT 0
PRINCIPLE OF FINANCE
MARCH 11, 2020
STUDENT DETAILS:

REPORT 1
Contents
Answer one:.................................................................................................................................................2
1. Calculation of average cost of capital for evaluation of project of Duronic plc. –...........................2
2. Calculation of Net present value @ 5.16% -....................................................................................3
3. Calculation of Net present value @6% -..........................................................................................4
Answer two:................................................................................................................................................5
1. Calculation of intrinsic value of Walmart Inc. and Sysco Corp. -....................................................5
2. Valuation and assumption of dividend discount model –.................................................................8
3. Suggestions for buying or selling –..................................................................................................9
Answer three:............................................................................................................................................10
References.................................................................................................................................................14
Appendix...................................................................................................................................................16

REPORT 2
Answer one:
1. Calculation of average cost of capital for evaluation of project of Duronic plc. –
Calculation of Weighted average cost of capital (WACC) -
Particulars Rate
Market
value
Market
value
weight WACC
Cost of equity (Ke) 4.70% 150 0.47 2.23%
cost of preference shares (Kp) 5.81% 128.65 0.41 2.36%
Cost of debt (Kd) 4.80% 37.8 0.12 0.57%
Weighted average cost of
capital (WACC) 316.45 1.00 5.16%
Working note:
Calculation of cost of equity –
P0 = D1 / r-g
r = (D1/P0) + g
r = (0.2222/6) + 0.01
r = 4.70%
Calculation of dividend growth rate –
Dividend growth rate = (0.22-0.12)/10
Dividend growth rate = 1%

REPORT 3
Calculation of preference shares-
Cost of preference shares (Kp) = Annual preference Dividend/market price per share
Cost of preference shares (Kp) = 0.09/1.55
Cost of preference shares (Kp) = 5.81%
Calculation of cost of debt -
Cost of debt (Kd) = Interest rate (1-tax)
Cost of debt (Kd) = 6% (1 - .20)
Cost of debt (Kd) = 4.80%
As per the view of CEO, the weighted average cost of capital should be 6%. On the other hand,
as per the view of project manager, the weighted average cost of capital should be 5.16%. It is
found that most appropriate cost of capital is 5.16%.The reason is that the company's WACC can
be used to estimate the expected costs for all of its financing. The high weighted average cost of
capital (high WACC) is normally the sign of higher risk related to the functions of company
(Khan, Javaid and Khan, 2018). The investor tends to need the additional return to
counterbalance additional risks. On the other hand, the concept behind making investment in the
undervalued stock is that price of the stock is more likely to increase over the period because this
is being sold for below worth (Santandrea, et. al, 2017). The project using less cost of capital will
be less risky. In this way, the most appropriate cost of capital is 5.16%.
2. Calculation of Net present value @ 5.16% - (Refer appendix 1)
From the calculation, it is found that net present value of company is $293.12. It is positive net
present value. The company should accept this project. The project having positive net present

REPORT 4
value will be viable. The project having negative net present value will not be beneficial for the
company. In the calculation of Net present value, the consultation fee is not included because it
is sunk cost (Kumar, Sharma and Tewari, 2015). On the other hand, the company also considered
inflation rate 2.1% in the amount of sales as well as indirect expenses excluding sunk and fixed
cost (Shu, Zeithammer and Payne, 2016). Additionally, the company used Straight line method
for the depreciation.
3. Calculation of Net present value @ 6% - (Refer appendix 2)
While taking cost of capital 6%, then it is found that NPV would be $281.57. The cost of capital
5.16% would be more appropriate because it will have high NPV in comparison of the cost of
capital 6% (Lewellen and Lewellen, 2016). In this situation, company should choose the
investment having cost of capital @5.16%. This investment would be viable for the company.

REPORT 5
Answer two:
1. Calculation of intrinsic value of Walmart Inc. and Sysco Corp. -
Walmart INC.: Calculation of Intrinsic value by dividend discount model -
calculation of intrinsic value of each of the two stocks as
per dividend discount model -
Dividend Discount Model
Dividend expected 2.10
Growth rate 1%
Discount rate 3%
Intrinsic Value 105.00
Share Price 93.93
undervalued
Working note:
Calculation of growth rate –
Growth rate formula ROE * retention ratio
Growth rate 1%
Calculation of ROE -
ROE

REPORT 6
ROE = Net income/ shareholder's
equity
ROE 10%
Calculation of retention ratio = ( 2.28 – 2.08)/2.28
(EPS -DPS)/EPS 9%
Calculation of cost of capital -
Cost of capital = (Dividend expected/current share price) + Growth rate
= (2.1/93.93) + .01
= 3%
Sysco Corp: Calculation of intrinsic value of each of the two stocks as per dividend
discount model -
Working note:
Dividend Discount Model
Dividend expected 2.07
Growth rate 35%
Discount rate 38%
Intrinsic Value 69.00
Share Price 69.62
Overvalued

REPORT 7
Calculation of growth rate –
Growth rate = ROE* Retention ratio
= .38 *.53
= 35%
Calculation of ROE –
ROE = Net income/ shareholder's equity
= 1674271/2502603
= 67%
Calculation of retention ratio –
Retention ratio = (EPS-DPS)/EPS
= (3.24 – 1.53)/3.24
= 53%
Calculation of discount rate -
Cost of capital = (Dividend expected/current share price) + Growth rate
= (2.07/69.62) + 0.35
= 38%
2. Valuation and assumption of dividend discount model –
The DDM (dividend discount model) is considered as the quantitative method to value the
stock’s price of company based on assumption that the current fair price of the stock is equal to
sum of all future dividends of the entity. It can see that the main difference related to the
valuation method is based on the discounting method of the cash flows of company. The stocks

REPORT 8
are finally worth no more than what this would render investor in future dividend along with
current dividend. It is stated by the financial theory that the value of the stocks is worth all of
upcoming cash flows expected to be made by an entity, discounted by the proper risk adjusted
rate. As per the dividend discount model, the dividend is considered as cash flow that is returned
to company’s shareholders. It is essential to know the concept of time value of money (TVM) as
well as discounting. According to the dividend discount model (DDM), one can calculate the
value of dividend payment that someone thinks the stock would throw-off in the periods ahead.
The dividend discount model states that –
P0 = D1
r
Here, P0 = price in year zero, having no dividend growth
D1 = payment of future dividend
r = Discount rate
Further, the dividend discount model is has various assumptions. As per the above discussion in
relation to the assumptions, there are also assumptions in relation to the growth rate, rate of tax
as well as rate of interest. Most of the factors are beyond regulation of the investor. This factor
too reduce the model’s validity. The assumption that the growth rate in dividend has to be
endless over the period is very critical assumption to be, particularly provided the volatility of
earning (Porter and South-Winter, 2017).

REPORT 9
3. Suggestions for buying or selling –
From the above calculation, it is found that the intrinsic value of Walmart Inc. is $105. It can see
that current share price is $93.93. It is evident that the market price can be meaningfully lower or
higher in comparison of intrinsic value of the stocks. The intrinsic value of shares is more than
the current share price. In this way, the shares are undervalued. In this way, the undervalued
stocks are described as the stock that are selling at the price suggestively below what is assumed
to be the intrinsic value. Therefore, the undervalued shares should be purchased. The reason is
that purchase the undervalued stock means the risk of losing money is decreased, also in the
condition when the company is not doing well.
Further, it is found that intrinsic value of Sysco Corp is $69. On the other hand, the current share
price of the company is $69.62. It means the shares are overvalued. It can see that the overvalued
shares should be sold. The reason is that the overvalued stock is likely to experience the price
reduction and return to the level that better reflects the financial position of company (Kumar,
Sharma and Tewari, 2015).

REPORT 10
Answer three:
The confliction between stakeholders as well as managers is biggest issue to be considered in
entity. The analysts does not consider the dividend policies to address the agency issue between
minority shareholders and managers. As per the substitute model, the cash dividend can be
considered as alternative of legal security of the investor. The organisations are likely to
discharge higher dividend at the time of disorganization of legal security of the shareholders. The
quality of governance is enhanced while the minority shareholders influence the managers for
making payment of cash dividend. Though, while dividend is used in different governance
mechanism, then the constant role of dividend will be reduced.
The theories based on dividend policies were argued to explain the validation in relation to
dividend payment by the corporation. The top-level management of the companies have different
views in between payment of dividend or reinvestment of the profit on business. Even those
companies that make payment of dividend do nt seem to have stationary formula to determine
the pay-out ratio. Abel (2018) explained that the dividend is periodic payment to equity
shareholders that together with capital gain is return for making investment in the stock of
company. Further, Mishan (2015) claimed that this is not easy to render empirical test on the rate
of return as well as dividend allocation policy. Hypothetically, the companies having high
dividend pay out also get high rate of return. For explaining the main arguments in relation to the
payment of dividend by companies, it is essential to understand the Modigliani and Merton
Miller dividend policy theory.

REPORT 11
Franco Modigliani and Merton Miller proposed MM approach in 1961. It is advised by them that
the capital profit as well as dividend is equal while the investors consider return on investment. It
is evident that the earning is direct result of the investment policy of corporation. It can have
influence on the corporate values. Therefore, the MM approach states that if investor knows the
decision related to investment considered by the company, then the investors are not required to
take dividend policy related decisions. It is also stated by the theory that the investor needs to
keep own cash inflow irrespective of whether the stock pays dividend or not. Modigliani and
Miller claimed the dividend distribution to the shareholder as irrelevant as stock’s prices reduces
because of the allocation of the dividend. It is implied by MM theory that the cost of debt is
equivalent to cost of equity. Additionally, the cost of capital is not influenced by leverage.
According to this theory, there is no flotation or transaction cost. In addition, there is also no
influence of investor on share’s market value. Furthermore, this theory also assumes that the tax
is not exist in relation to the investment policy. It also state that the company does not change
their investment policy. No changes have been made in risk as well as the return in relation to
upcoming financing.
The assumptions of MM approach are not rationally solid. For this reason, this approach is
criticized. The assumption of no tax and no floating cost is impossible in the present world.
However, the external as well as internal financing are not same. In this way, the MM approach
of dividend policy is the stimulating as well as remarkable theory for the share’s valuation. These
famous methods believe in the irrelevancy of dividend. However, the policy su ers fromff
different significant restrictions. Therefore, this is critiqued related to the assumptions. Further,
Modigliani and Miller raised questions in 1960. They asked that whether the corporations
allocate dividend consistently at the premium over those with niggardly pay-out (Zolfani,