FINANCIAL ANALYSIS

Financial Analysis

Financial Analysis

TABLE OF CONTENT

EXECUTIVE SUMMARY1

COMPANY INTRODUCTION:2

WEIGHTED AVERAGE COST OF CAPITAL (WACC) :3

VALUE DRIVERS FOR SVA:5

CALCULATION OF SHAREHOLDER VALUE:6

CHANGE IN VALUE DRIVERS OF SVA6

DIFFICULTIES IN APPLYING SVA7

ABC AND SHAREHOLDER VALUE:8

VESTAS DIVIDEND POLICY:10

REFERENCES:13

BIBLIOGRAPHY:15

APPENDIX16

EXECUTIVE SUMMARY

The purpose of this report is to discuss the Vestas (World's No.1 windmill manufacturer) market valuation based on its Annual Report 2009 and financial details published on Thomson One Banker database -Oxford Brookes University.

The report uses various tools such as Weighted Average Cost of Capital (WACC) and Shareholder Value Analysis (SVA) to estimate the market valuation of the company. While calculating the WACC, beta factor was analysed and expected return on Equity was calculated using CAPM model. Based on the available information ,Values for Rappaport value drivers were developed and used in SVA calculation.

This report also covers the Activity Based Costing method (ABC) and states that ABC can be used in the removal of the non-value-added activities, process improvement, or outsourcing and thus increasing the profitability of the company, which can help to maximize shareholder's wealth.

The report discuss about the Vestas dividend policy as the Vesta management has decided not to pay any dividend to shareholder with respect to the performance of financial year 2009 and has the future plans of organic growth in financial year 2010.

COMPANY INTRODUCTION:

Vesta Wind System A/S:

Public Company (www.vesta.com)

Headquarters: Denmark

Incorporated: 1928 as Dansk Staalvindue Industri

Number of Employees: 20,730

Stock Exchange: Copenhagen

Ticker Symbol: VVS

Key Financials:

Sales: 6,640.58 (EUR)

Operating Income:863.60 (EUR) (EUR)

Total Asset: 6,330.32 (EUR)

Total Liabilities: 2,963.49(EUR)

Beta :1.32

EBITDA: 1074

(Thomson One banker, Oxford Brookes University)

Vestas Wind System is the world leader in the design, engineering and manufacturing of 'Wind Mills'. The Group's principal activities are the development, manufacture, sale, marketing and maintenance of wind power systems that use wind energy to generate electricity. The Group operates globally through a network of subsidiaries. This report focuses on the company estimation using various tools such as Weighted average cost of capital (WACC) and shareholder value analysis(SVA).

The report also analyses the activity based costing (ABC) techniques which can be useful for estimation the company's expenses and thereby increases the company's profitability which enhances the shareholder's wealth. This report discuss about the Vesta's dividend policy in the context of financial theory.

WEIGHTED AVERAGE COST OF CAPITAL (WACC) :

WACC influences the calculation of equity value because the cost of financing any debt will reduce the company's nominal value. Valuation of a business using WACC means using the market value of equity not its book value.

Calculating the Vestas equity value takes into account the market capitalisation plus the debt plus the cost of financing that debt. The formula used to calculate WACC is given below:

WACC = D/(D + E) × 1/(1 - t) × i + E/(D + E) × r

where i is the interest rate, r is the required return on equity, D is the amount of debt capital, E is the amount of equity capital and t is the tax rate.

The Vestas WACC calculation is shown in table 1.

Table 1. Calculation of WACC(Appendix-WACC)

For calculation of WACC,

Cost of equity is calculated as per the ...