CORPORATE FINANCE

Corporate Finance



Corporate Finance

Capital Gearing

Income Gearing =

Gearing For KINGFISHER

 

2009

2008

2007

2006

2005

 

 

 

 

 

 

Long Term Debt

4146

3742

4511

4346

4034

 

 

 

 

 

 

Shareholders' funds

10506

9380

9006

7945

6516

 

 

 

 

 

 

Capital Gearing

39.46%

39.89%

50.09%

54.70%

61.91%

 

 

 

 

 

 

Operating Profit

2090

2178

1704

2169

1850

 

 

 

 

 

 

Interest paid on loan

216

241

235

258

227

 

 

 

 

 

 

Income Gearing

9.68

9.04

7.25

8.41

8.15

Gearing For Sainsbury:

 

2009

2008

2007

2006

2005

 

 

 

 

 

 

Long Term Debt

2090

2178

1704

2169

1850

 

 

 

 

 

Shareholder's funds

4349

3886

4374

5704

5003

 

 

 

 

 

 

Capital Gearing

48.06%

56.05%

38.96%

38.03%

36.98%

 

 

 

 

 

 

 

 

 

 

 

 

Operation Profit

520

229

-167

656

674

 

 

 

 

 

 

Interest paid on loan

107

155

127

85

105

 

 

 

 

 

 

 

 

 

 

 

 

Income Gearing

4.86

1.48

-1.31

7.72

6.42

Comparison of Capital Gearing of Kingfisher and Sainsbury over the last 5 year

Looking at the above graph, KINGFISHER seems to maintain current debt level around 39 % and looks more stable while Sainsbury performed badly in year 2007 and increased its debt level in 2008.Sainsubury would look forward to consolidate its debt position in the coming years to have more stability in its capital structure.

Comparison of Income Gearing

Looking at the graph above, Kingfisher has higher and more stable income gearing and hence, it has better ability to serve its liabilities. That is reflected in KINGFISHER's A+ bond ranking by S &P. While Sainsbury had more volatile earnings equipping in the last 5 years and it will try to increase its operating earnings and optimise the liability levels to have better earnings equipping.

WACC of KINGFISHER

Equity

Number of Shares outstanding=

7870 .24 m

Current Market cost per share=

460.25 p

Number of Warrants Outstanding=

0

Current Market cost per Warrant=

0

Current Beta =

 0.7221

Risk free Rate =

 4.61 %

Market Return =

 14.36 %

Market return is calculated founded upon the FTSE 100 index return over the last 20 years.

FTSE Index on 14/12/2009

6397

FTSE Index on 14/12/1987

1652

Market Return

14.36%

Debt

Book Value of Debt =

5553

Interest total cost on Debt=

216

Average Maturity =

8.77

Pre-tax Cost of Debt=

5.31 %

Tax Rate =

30%

Book worth of Convertible Debt=

0

Interest total cost on Convertible=

0

Maturity of Convertible Bond=

0

Market worth of Convertible=

0

Debt worth of functioning leases=

147

Preferred Stock

Number of Preferred Shares=

0

Cost of Debt of KINGFISHER

Cost of liability = risk free rate + default spread

As, the S&P rating for KINGFISHER bond is A+ and interest coverage for KINGFISHER is around 9 , according to Damodarn (1998), default spread of KINGFISHER will be approximately equal to 0.7

Risk free rate = 4.61% 5year UK Government bond

So, cost of Debt

Kd = 4.61 + 0.7 = 5.31 %

Estimated Market Value of the debt of KINGFISHER:

PV of annuity of interest expense + PV of book value of debt discount at r = 5.31 % and n = 8.33 +liability worth of operating leases = 5014 + 147 = 5161 m pounds

Cost of Equity

Ke = Rf + ß (Rm - Rf) = 4.61 + 0.7221 (14.36 - 4.61)

= 11.65 %

Market value of Equity

=spectacular shares x share price

= 7870.24 * 460.25

= 36222.8 m pounds

WACC for KINGFISHER

) + Kd (1-t)

= 11.65 (36222.8/41236) +5.31 (0.7) (5161/41236)

= 10.23 + 0.46

= 10.7 %

WACC of Sainsbury

Equity

Number of Shares outstanding=

1742.05 m

Current Market cost per share=

425.5 p

Number of Warrants Outstanding=

0

Current Market cost per Warrant=

0

Current Beta =

 1.21

Risk free Rate =

 4.61 %

Market Return =

 14.36 %

Market come back is calculated founded upon the FTSE 100 index come back over the last 20 years.

FTSE 100 Index on 14/12/2009

6397

FTSE 100 catalogue on 14/12/1987

1652

Market Return

14.36%

Debt

Book Value of Debt =

2463

Interest total cost on Debt=

107

Average Maturity =

15.13

Pre-tax Cost of Debt=

5.61 %

Tax Rate =

30%

Book worth of Convertible Debt=

0

Interest total cost on Convertible=

0

Maturity of Convertible Bond=

0

Market worth of Convertible=

0

Debt value of functioning leases=

 51

Preferred Stock

Number of favoured Shares=

0

Cost ...