FINANCIAL ANALYSIS

Financial Analysis: Bevan Industries PLC



Financial Analysis: Bevan Industries PLC

Introduction

This assignment is based on the financial analysis of Bevan Industries PLC, in which we will discuss the cost of capital and the capital structure of the company in a broad context. We will provide answers to five key questions that will revolve around the capital structure of the company and its implications. The assignment will start off with finding the cost of capital, new financing requirements, the cost of capital under three proposed options of financing, and the advantages and disadvantages of each method. We will ultimately assess the bank's advice in the context so analyze why it is in the best interest of the company.

It should be remembered that debt, equity and retained earnings are the primary sources of funding in any corporate scenario. The cost of capital is based on finding the cost of each method of funding in a way that the company finds an optimal combination for the funds.

Determining Bevan Industries' Current Cost of Capital

The cost of capital is critical for assessing the future worth of a project. Companies are concerned with implementing or undertaking projects with net present value greater than zero so that it increases to the value or wealth of shareholders. Companies need to pursue only the investment options whose NPV is positive or greater than zero. Hence, before undertaking any project, it is assumed that the NPV has to be calculated. The basic aim of the cost of capital is to determine how a company will raise money, and how it will realize gains from substantial returns from each source of funds.

Data Available:

Payment for Inventory = £30m worth of commercial papers

Interest paid on CPP= 6%

Value issues = £25m, traded at 102p

Tax rate = 28%

Loan (Debt) Taken from Bank = £100, 5 yr loan facility

Interest paid on Loan = 4%

Market Capitalization = £160m

Beta for 20m 50p shares traded = 0.75

Future requirement of Working Capital = will fall by £15m

Other investments including special bonuses to employees = £75m

Underwriting facility = £100m bond priced at 6%

Offer for rights issuance = £100m

The formula for the cost of debt capital is as follows:

(Interest Expense x (1 - Tax Rate)Amount of Debt - Debt Acquisition Fees + Premium on Debt - Discount on Debt

= (0.04*100) x (1-0.28)

(100m-30m+25m-25m)

= 3.28

70

= 0.0468 % 0f the total debt

= £4.68m

In this case, our cost of capital without considering additional sources of funds wills be worth of £4.68 m.

New Financing Requirements Considering Repayment of Outstanding Balance of Bank Debt

The repayment of the outstanding balance to the bank debt means an additional expenditure for the company that will alter its financing requirements. Obviously, with greater uses of funds, the sources of funds would have to be increased in order to meet the company's financial requirements.

Types of Funding

Amount of Funding

Percentage Cost

Dollar Cost

Debt

£100,000,00

4.68%

£4.68m

Preferred Stock

£75,000,00

75%

£75,00,000

Totals

£175,000,00

79.68%

£583,000,00

Cost of Capital under Three Proposed options of Financing

Option 1: Bank Debt

Our cost of capital in case of taking a loan from the ...