The weighted average cost of capital of the company. Vagabond plc. - Coursework Example

Only on StudentShare

Extract of sample
The weighted average cost of capital of the company. Vagabond plc.

Increasing level of debts increases the financial risk of a company which eventually increases the cost of equity as well. The weighted average cost of capital of highly geared company is higher as compared to the others.
In the given case study, the company, vagabond plc, is not a highly geared company as against every £ 0.67 worth of debt, the company has £ 1 worth of equity. In order to calculate the weighted average cost of capital of the company, the market value of equity and debt instrument is need to be calculated. The shares of Vagabond plc are currently traded at 36 pence which makes the total market value of the equity to £720 million. In order to calculate the cost of equity (ke) we use the formula as enumerated in table 1. In the mentioned formula Rf is the risk free rate of return where Rm is the current market rate. Rm-Rf represents the market premium. Beta measures the systematic risk (associated with the environment in which the entity operates) of the company in relation to the current market risk.
The company currently has debt through two resources i.e. through bank overdraft and an issuance of redeemable debt bond. For bank overdraft the cost of debt is the rate on which the company pays interest. For the redeemable bond, the cost of debt can be calculated as mentioned in Table 2. Since interest (Coupon x Face value of the debt) is the only cash flow, the IRR of the cash flows is the cost of the debt kd. ...
Download paper

Summary

The weighted average cost of capital of the company is the weighted average of the various sources of finance used by the company. Debt is cheaper than equity finance as it lower risk prone and there is always a tax incentive…
Author : lou56

Related Essays

Petrobras and cost of capital
Petrobras was operating in a higher risk environment due to Brazil’s economic turbulence. The cost of debt for any given company is the cost of raising extra revenue by issuing the debt. Likewise, the cost of equity refers to that extra revenue associated with issue of the equity shares.
...
12 pages (3012 words) Essay
The cost of equity capital and the CAPM
The three most popular methods include: dividend growth model, capital asset pricing model and the arbitrage pricing model. Dividend growth model Organizations utilize the cash generated for two purposes: they either reinvest it in the growth or new projects of the organization or pay some amount as dividend to the common stockholder. The Dividend growth model is based on this premises that a shareholder of the organization will want both dividend as well as capital appreciation while holding the stock. The cost of equity in this case can be given as (Weaver and Weston, 2004, pg.282): Where, R...
4 pages (1004 words) Essay
The Capital Structure Decision and the Cost of Capital
The products include dolls and accessories, vehicles, games, puzzles, as well as play sets. The company’s popular toy brands include the Barbie dolls, Polly Pocket, Little Mommy, Monster High, BabyGear, WWW Wrestling figures, Fisher-Price, CARS, Toy Story, Max Steel, and Batman. The company sells it toy products in physical stores as well as online stores. Based on the module discussions discussed, the nature of the Mattel (http:/finance.yahoo.com/q/bs?s=MAT+Balance+Sheet&annual) company’s toy business operations and its toy clients, it is highly recommended that the capital structure...
4 pages (1004 words) Essay
Company Analysis: Wm Morrison Supermarkets Plc
In addition to these, Morrison is also involved in managing local authority and associate body’s capital spending programmes such as kitchen and bathroom replacement. Auditor’s report: To Auditor’s report are given by a group of auditors who are independent and possess authority to examine the company’s assets and earnings in which ever manner possible. Auditors report presents an opinion about the financial statements encompassing statement of comprehensive income, cash flows, change in equity and notes to financial statement by following the standardized procedures put forward in...
5 pages (1255 words) Coursework
Capital Structure Decision and the Cost of Capital
About These Firms Headquartered in California USA, eBay Inc. is an online auction website that was started in September 2005. You can buy almost anything on eBay, but it has to be legally admissible and not dangerous or restricted items. People bidding for items on eBay can use auction price listings, fixed price format or fixed price format with best offer. Presently eBay operates in around 30 countries. When it went public in September 2008, the price went up to $53.50 from $18.00 on the opening day of the IPO offer. As of 14 February 2012, the stock price of the eBay company (EBAY) was...
5 pages (1255 words) Essay
The Cost of Capital
Richard Brealey (2001) mentions cost of capital represents the interest paid for the borrowed funds. Cost of capital can also include focusing on Capital Asset Pricing Model (Sheridian, Martin & Keown, 2010). The formula determines the appropriate expected return of alternative projects. The cost of capital is the amount that the investor has to pay in order to generate a series of future dividend incomes, return of investments (Sheridian, Martin & Keown, 2010). For example, Geoff Black (2010) reiterated the business earns $1,000,000 in one year. The profits will grow by 2 percent per year,...
4 pages (1004 words) Essay
Cost of Capital
Cost of capital is the minimum returns that a company can give shareholders on their investments and accordingly the company has to earn the minimum returns. If merging happens between one company that has high cash flows and another company that has low internally generated cash flows, then such merger can reduce the cost of capital. Introduction In today’s economic world, mergers and acquisitions (M & A) have become common strategy for growth and diversification of companies. During the 1990s, M & A activities broke all previous records both in terms of the number of such transactions and...
38 pages (9538 words) Dissertation
Got a tricky question? Receive an answer from students like you! Try us!