roma’s Industry is 1.3 (Preferred stocks are considered as debt financing)
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
*All values given in ‘000 $.
Other Information:
PAT = 320
EBIDTA=428
Rf= 5%
Rm= 15 %
Geared Beta of Aroma’s Industry is 1.3
(
Profit Margin and Market Share of Aroma Corporation are constantly declining for last 3 years and various options are being discussed at board level for getting into a new venture with a fresh Brand Name and better product Quality and shut down the operations in existing name.
A competitor has also offered to acquire operations of Aroma Corporation.
On the other hand, a group of investors still believe that company has potential to grow due to its old customer base which are quite satisfied by the offered services and are ready to inject more debt in the company.
Analyst to CFO has gathered below information to be used in strategic Planning.
Cost of Debt = 18%
Tax Rate = 25%
For coming 5 Years there isn’t any chance of growth in Market share and profit but after 5 years a constant growth of 9 % is expected.
Future Cashflow for a period of 5 Years:
|
Yrs. |
Cash Flows |
|
1 |
106 |
|
2 |
121 |
|
3 |
100 |
|
4 |
112 |
|
5- Terminal |
100 |
CEO has advised to have a concrete information about company’s value and a suggestion of using various range of company’s value is given by Finance director.
Required:
You, as a Financial strategist will be leading the presentation in next Board meeting and you are required to calculate Value of Aroma Corporation with following methods:
Asset Based Valuation
Earning Based Valuation
Cashflow Based Valuation
You are also expected to explain silent features of these 3 methods.
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