Lex Service PLC – Cost of Capital Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Lex Service PLC – Cost of Capital Case Solution

Introduction:

Lex Service is one of the largest multinational companies.In order to identify the different rates in different divisions in which 340 million pounds are generated from sales and other assets, 132.5 million pounds were used to pay for the purchase of new equipment for automobile and leasing instrument. Discounted cash flow analysis is used to identify the worth of investment with the appropriate rate of return.

lex service plc case solution

Le xService experienced a significant increase in its business lines from 1991 to 1993 (counting the sale of an entire Electronic division). It now holds a different arrangement of benefits as compared to the year 1991.Apparently, administration imagines that beta of the organization has changed, with a subsequent impact on the expense of capital of the firm.Once figured, the new cost of capital will enable the company to assess the required return on investments that reproduce the firm as the whole.

Answer 1:

Lex Service PLC cost of capital in 1993:

Lex Service PLC is concerned for its cost of capital for two noteworthy reasons:

Following on different resources transfers, Lex had arranged for the impressive measure of money, which the company was seen to reinvest in new businesses. For this reason, the company is required to exact evaluations of its expense of capital and each of its divisions' expense of capital to assess speculations and boost capital budgeting decisions.
Secondly, the company was a significant holder of property, and resources were not required for operating purposes some of which were needed to be discarded within the year.For this reason, the company is required to proper discount rate with a specific end goal to value adequately such assets.

Role of cost of capital:

The cost of capital plays an important role in the analysis of capital budgeting model. It helps to cover the cost of invested funds by using an appropriate cost of capital. It has importance in making the financial decision to evaluate the return on the investment in the company.

Estimation of cost of capital

In general, estimation of the cost of capital (or of their divisions' cost of capital when the risk profile differs):

Give organizations an approach for their expense of financing. (2) Act as a measure to be minimized to locate their most ideal capital structure, and (3) COC can be utilized as an obstacle rate for speculation decisions. In capital budgeting undertakings are in reality assessed either by discounting future money streams to the present by the obstacle rate, in order to determine the net present value of the venture, with a positive NPV the project is worth to take, or by computing the internal rate of return (IRR) on the task and comparing this to the obstacle rate if the IRR surpasses the obstacle rate, the task would move ahead or it would be accepted.

Answer 2:

WACC is calculated as 11.25% by estimating the risk-free rate of 3.7% as U.S Treasury Bond, which ensures the risk-free return of 3.7%, Market premium is estimated as 9%, and cost of equity is given as 12.4%.................

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