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Essentials of Corporate Management - Essay Example

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Essentials of Corporate Management Table of Contents Overview 3 Valuation of Tomas Cook 3 Net Asset Value 3 Cost of Capital 4 Cost of Equity: 4 Cost of Debt Capital: 5 Weighted Average Cost of Capital (WACC): 6 Dividend Growth Model 7 Value /share using Price Earnings ratio 8 Advise on the purchase of share of rival firm 9 Share Price Tracking 10 Reference 13 Bibliography 13 Overview Thomas Cook Group plc had merged with My Travel Group plc in 19 June 2007…
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Essentials of Corporate Management
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Download file to see previous pages Thomas Cook is one of the largest travel related company providing financial services in many countries both in India and abroad. The study is supported with data in order to get the actual valuation of the company in today’s market. Based on the calculation in terms of net asset value, cost of capital, dividend growth model a proper valuation of the company is to be done so that it can be determined as to whether buying the Thomas Cook Group will be a profitable venture or not. Valuation of Tomas Cook Whenever we value a company it is very important to choose the right financial models. In order to check the comparability of a company it is necessary to find the proper correlation between the revenues and the operating expenses. Net Asset Value Net assts value is the amount the investor receives when selling a share. Net asset value is also known as the NAV. This rise or fall in the NAV reflects the value of the mutual fund in the present market. Rise in the value of the mutual fund leads to a rise in the NAV and vise-versa. Particulars Amt in million pound 30-Sep-10 30-Sep-09 Net Assets 1743 1717 Overvalued assets 50 0 undervalued assets 30 0 Bad debt 7 0 No. of Shares (m) 858 858 NAV 2.00 2.00 Cost of Capital Cost of Equity: Cost of equity capital is generally known as the risk undertaken by the investor in the hope of earning favorable returns. Cost of equity can be found through various models like Capital Asset Pricing Model (CAPM) and Gordon Model. But based on the data provided application of the CAPM is more suitable in the given situation. (Bragg, 2012, p.142) Cost of Debt Capital: A company in its initial period uses a lot of debt in the form of bonds, loans, etc. The calculation of the cost of debt of a company gives an idea to the investor as to the overall rate of interest that the company has to payback for using debt financing. This also shows how risky is a company; thus higher the cost of debt more risky is the company. Particulars Amt. in million pound Interest 7 Face value 100 Redemption value 50 No. of years 1 Cost of debt 19% Cost of Debt = (I + (M-NP)/n) / (M + NP) / 2 (Bragg, 2012, p.142) Where, I = Dollar Return M = Maturity Value NP = Net Proceeds of issue N = years Weighted Average Cost of Capital (WACC): The assets of the company are either financed by debt or equity. Weighted Average Cost of Capita (WACC) show the average cost of financing of a company in a weighted form irrespective of the use of capital. WACC gives the investor a broad idea as to the liability of the company towards the payment of interest per dollar financed. Through the computation of WACC of a company one can determine the opportunities of expansion and scope of merging, etc. It is most appropriate in such like situation as it determines the rate of discount used in cash flow and the amount of risk that is involved to the overall firm. The following WACC gives us the idea that debt of the company being more it has to pay more tax and even the burden of obligation is also on the rise (Pratt, 2003, p.46) Particulars Amt. in million pound Cost of Equity 0.07 Cost of Debt 0.19 Equity 1475.76 Debt 1772 Tax 0.3 WACC 562.09 *Tax assumed to be 30% WACC= E/V*Ke + D/V*Kd (1-Tc) (Pratt, 2003, p.46) Where: Ke = cost of equity Kd = cost of debt E = market value of the firm's equity D = market ...Download file to see next pagesRead More
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