Strategic Corporate Finance ASSIGNMENT 2 Essay Example | Topics and Well Written Essays - 2500 words

Strategic Corporate Finance ASSIGNMENT 2 - Essay Example The company had ?1.69 worth net assets per share which has been improved to?1.72 in 2011. b) Cost of Capital The following are the computations in respect of calculating the weighted average cost of capital for Marks & Spencer. The cost of equity of M&S is found to be 4.5% whereas cost of debt is found to be 4%. The overall weighted average cost of capital after accounting for the value of equity and value of debt, is found to be 4.33%. Cost of Equity (CAPM)       Re = Rf + Beta (Risk Premium)          = 0.03 + 0.75 (0.02)       Re = 4.50% Cost of Debt       Rd = Annual Coupon    Current Bond Price          = 5    125       Rd = 4.00% Value of Equity Ve = Current Share Price x No. of Shares outstanding = 3.76 x 1600 = 6016 Value of Debt Vd = Current Bond Price x No. of Bonds Issued = 125 x 2489 = 3111                         100       Weights       Wd = Debt = 3111 = 34.09%    Debt + Equity 3111 + 6016          We = Equi ty = 6016 = 65.91%       Debt + Equity    3111 + 6016       WACC       WACC = [Wd x Rd] + [We x Re]          = [ 34.09% x 4%] + [65.91% x 4.5%]          = 4.33% c) Dividend Growth Model The following is the calculation of theoretical ex-right price by using Gordon’s dividend growth model. ... 7(1+0.02) = 693.6       K – g    0.045 - 0.02       From the above calculations, it can be noted that if the growth rate of dividend is zero, the theoretical ex-right price of the M&S share is around 377 pence. On the other hand, if the dividends are expected to grow at 2%, in that case there will be a massive growth in the share price of M&S such that it is likely to reach at 693 pence which is extremely high. Under the given circumstances, when the current share price id 363 pence, the theoretical ex-right price of 377 pence, seems to be more appropriate than the share price of 693 pence which seems quite optimistic. d) Value per sharing using the price earnings (p/e) ratio The following are the price earnings ratio of Marks & Spencer for the years 2011 and 2012. Price Earnings Ratio    31-Mar-12 11-Jan-13 P/E Ratio = 376 = 11.56923 = 363 = 11.2       32.5             32.5       It can be observed that the Price Earnings ratio of M&S was at 11.56 in the year 2011. However, it reduced to 11.2 in the last year because the share price of the company decreased. If the P/E ratio of retail industry is compared with that of M&S, it can be observed that the P/E ratio of M&S is significantly higher than that of the industry. The retail industry is following a P/E multiple of 8.5 times whereas M&S is having more than 11 times. This shows that the share price of M&S is over-valued as compare to other industry participants. Task 2 Introduction There are various views regarding a particular stock as different market participants look at the stocks with different objectives and views. However, the only thing which is followed by all the investors is the fundamentals (Babu, 2012). Fundamental is the concept in finance which deals with the performance of the company in the given