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Strategic Financial Decision Making - Goodway Plc

University: Regent College of London

  • Unit No: 8
  • Level: Undergraduate/College
  • Pages: 12
  • Words: 3000
  • Paper Type: Assignment
  • Course Code:

    Y/508/0487 (RQF)

  • Country: UK
  • Downloads: 0
Question :

Goodway Plc which is a holding company is planning to increase in range of activities undertaken by business and its subsidiaries. The directors of company are inclined to use of discounted cash flow but weighted average cost of capital has not been calculated.

  • Calculation of weighted average cost of capital (WACC) for Goodway Plc
  • Consideration to calculate a suitable cost of capital.
  • Projecting the possibility of using Capital Asset Pricing model (CAPM) for calculation of cost.
  • Conducting a critique on the possibility of issuing more debt for lowering WACC for Goodway Plc.
  • Critical analysis of organic and acquisition growth for the company into an unfamiliar industry.
Answer :
Organization Selected : Goodway Plc.

INTRODUCTION

The development of suitable decision which will be helpful in improving the operational ability as well as better financial administration in organisation. Goodway Plc is a holding corporation which deals in the marketable security the managerial concern is to improve equity and capital structure of firm. Similarly, as to have appropriate development of strategies there will be consideration of various measurement such as cost of capital, CAPM and WACC are the major factors which will be helpful to make proper improvements in business viabilities. Moreover, the directors of this organisation will be suggested as to make satisfactory changes into operations as well as managing financial operations.

TASK 1

Measuring weighted average cost of capital of Goodway Plc

To analyse the weighted average cost of capital there is need to have appropriate estimation of costs implemented in each business operations. However, it brings the appropriate information and details relevant with the debts and equity of the business which will be used in context with improving the capital structure of the firm (Pollanen and et.al., 2017). Similarly, to analyse the cost of capital of Goodway Plc there will be analysis based on various capital treatment as listed below:

Cost of preference share capital::

Particulars

Details

Preferred Stock Price

25

P Shares O/S

8000000

Market Value (P)

200000000

Dividend on preferred stock

11.4

Cost of Preferred Stock

46%

Cost of debt for 3% irredeemable loan stock

Particulars

Details

Face Value of Bond

31.6

Bonds O/S

1400000

Coupon Rate

0.03

Market Price of Bond

100

Coupon

0.948

Market Value

140000000

Maturity (Years)

10

Corporate Tax Rate

0.35

Cost of Debt before tax

74.3%

Cost of Debt after tax

48.30%

Cost of 9% redeemable loan stock:

Particulars

Details

Face Value of Bond

103.26

Bonds O/S

1500000

Coupon Rate

0.09

Market Price of Bond

100

Coupon

9.2934

Market Value

150000000

Maturity (Years)

10

Corporate Tax Rate

0.35

Cost of Debt before tax

42.20%

Cost of Debt after tax

27.43%

Cost of 6% Unsecured loans

Particulars

Details

Face Value of Bond

100

Bonds O/S

2000000

Coupon Rate

0.06

Market Price of Bond

75

Coupon

6

Market Value

150000000

Maturity (Years)

6

Corporate Tax Rate

0.35

Cost of Debt before tax

70.40%

Cost of Debt after tax

45.76%

Bank loan cost:

Bank loan

1540

Interest @ 13%

200.2

Maturity period

6 years

256.6666666667

256.6666666667

Cost of debt before tax

1

Corporate Tax Rate

35.00%

Cost of debt after tax

0.65

Weighted average cost of capital:

weight

After tax

Total weight

v

640000000

Weighted cost of preferred shares

0.3125

0.109375

0.0341796875

Weighted cost of 3% loan stock

0.21875

0.0765625

0.0167480469

Weighted cost of 9% loan stock

0.234375

0.08203125

0.0192260742

Weighted cost of 6% loan stock

0.234375

0.08203125

0.0192260742

Cost of Preferred Stock

45.60%

Cost of 3% debt

74.30%

WACC

8.94%

Cost of 9% debt

42.20%

Cost of 6% debt

70.40%

Interpretation: In relation with measuring the weighted average cost of capital it can be said that there is need to have consideration of cost of equity, cost of debts which in turn will have the effective analysis over the cost of capital. Therefore, the weights of this capital stock of Goodway Plc is 640000000. The weighted cost of preferred shares is 0.3125, weighted cost of 6% loan stock is 0.21875, 9% loan stock as 0.2343 and 6% unsecured stock as 0.2343. However, the corporate tax has been charged over the weighted capital at the rate of 35%. It comprises with the weighted average cost of capital for 8.94%. Evermore, the outcomes are quite favourable and adequate for the development of the entity. Thus, the costs of equity and cost of debts are proper for the business. Moreover, in relation with the costs of debts which are comparatively higher than cost of equity.

TASK 2

Cost of capital as per managing director:

After tax

Total weight

Cost of Preferred Stock

51.56%

0.18046

0.093045176

cost of 3% loan stock debt

19.30%

0.06755

0.01303715

cost of 9% loan stock debt

4.20%

0.0147

0.0006174

cost of 6% unsecured debts debt

14.40%

0.0504

0.0072576

WACC

11.40%

Interpretation: In relation with the managerial decision made by Shilpa Gohal on which she thinks that the costs of debts are needed to be much cheaper than the costs of equity. Therefore, in relation with such assumptions the calculations has been made which in turn will be helpful to the professionals as to have the appropriate determination of the facts However, the cost of equity has been estimated as 51.56% while the total costs of debts are 37.90%. To analyse the weighted average cost of capital, considering all the relevant costs which will be assistive and helpful to the business as to have the most appropriate and adequate analysis over the business operations. Thus, the WACC has been measured as 11.40% which states that the cheaper debts will be helpful in reducing the cost of capital. Therefore, to reduce the costs of capital there wis need to have rise in the costs of debts. Thus, it can be said that the firm is capable of making the payments to it shareholders and bring them the adequate return over their investments. Therefore, the analysis of various factors will be helpful and appropriate as to have development of company policies.

TASK 3

A. Measuring CAPM

To analyse required rate of return over the assets of business the concept Capital assets pricing model will be fruitful for such measurements. However, it will be accurate and effective as it considers the market risk of return, risk free rates and beta value of concerning firm. It enables the managerial professionals in decision making as well as making profitable changes in the asset valuation (Kaufmann, Wagner and Carter, 2017). Moreover, to value the assets of the organisation which will be helpful to the firm in terms of presenting the fruitful returns. Thus, in relation with the managerial decisions made by Mark Darcy the CAPM will be measured as follows:

Particulars

Details

Market risk of return

0.14

Risk free rate

0.05

Market risk premium RM-RF

0.09

BETA

0.78

0.039

Capital Assets Pricing Model

0.35%

Interpretation: On the basis of above analysis it has been determined here that the market risk of return is of 14% risk free rate as 5% on which the market premium will be measured by the professionals as 9%. Thus, it computed as deducting the risk free rate from market risk. Similarly, the beta rate of Goodway Plc is 0.78. Thus, after analysing all the factors the CAPM has been measured as 0.35%. Moreover, it can be said that, the assets of firm will be valued at 0.35%.

B. Measuring the WACC for Noggin Plc:

By considering the balance sheet and the capital structure of Noggin Plc. The following analysis will be based on various operations such as determining the costs of equity and debts which will be helpful in demonstrating the WACC measurements for business (Consigli, Kuhn and Brandimarte, 2017).

Cost of capital:

Particulars

Details

Share Price

3.51

Shares O/S

600000

Market Cap (E)

2106000

Stock Beta

1.51

Risk Free Rate

0.05

(e.g. return on 10 year treasury bonds)

Required Market Return

0.14

Market Risk Premium

0.09

Cost of Equity

18.6%

Debts:

Long term debts

2600000

Tax

0.35

WACC:

Weighted

After tax

Total weight

v

4706000

Weighted cost of equity

0.4475138122

0.1566298343

0.0700940142

Weighted cost of debt

0.5524861878

0.1933701657

0.1068343457

Cost of Equity

18.59%

Cost of debt

0.35%

WACC

17.69%

Interpretation: By considering various analysis and determination of the facts it can be said that the weight of all the capital stock of the firm is 4706000 the weight of equity has been determined as 0.4475, weighted costs of debts is 0.5524 while the costs of equity as 18.59% and the debts as 0.35%. Therefore, the taxes has been levied over the costs is of 35% which brings the favourable outcomes to business such as 17.69% of WACC. Thus, in relation with such outcomes it can be said that, the cost of equity are comparatively higher than the costs of debts. Thus, the costs of debts is on favourable instinct which demonstrates here that the firm is being capable of meeting its debts on the right time.

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