Friday, March 8, 2019

Lex Cost of Capital

Lex Service PLC Cost of seat of government In 1928 Lex Garages Limited, at the time of public incorporation, had single garage in London. After 60 courses, Lex Service PLC became a leading company in automotive distribution and leasing in the unite Kingdom. In late 1950, Lex obtained from Volvo railway car Corporation the exclusive franchise to import and distribute Volvo cars in the United Kingdom that ended in1992 four years before the scheduled issue date. This news dropped the share price of Lexto 30%.In 1970s, Lex started to expand its business into another(prenominal) services like transportation andleasing and for temporarily in hotel management business. By the end of 1983, Lex was constructiond around two principal groups i-e Lex Automotive and Lex Electronics Worldwide. From 1991 to 1993, Lex interchange its major electronic business to Arrow Electronics, Inc. With theseries of acquisitions by Lex, finally it entered in the profitable business by acquiring acontroll ing interest in the U.K importership, Hyundai automobile (U. K) in September 1993. Thisacquisition gave Lex management control of a three year rolling contract that Hyundai Car heldwith Hyundai Motor Company of Korea. In this pillowcase study, board meeting was scheduled in 1993 to review its court of heavy(p) proceduresand to determine whether Lex Service PLC should use different hurdle rates for different variations or should use cost of roof for the whole company.Lex Service PLC was concerned well-nigh its cost of capital in 1993 because from 1991 to 1993 Lexhad gone through many acquisitions and sales of assets that changed its capital structure in ahuge way. That change of capital structure include the sale of whole electronic division toArrow Electronice, Inc and acquisition of Hyundai Car (U. K). Moreover, they had hard currency toreinvest so Lex wanted to properly estimate its Cost of rectitude. Once new cost of capital is computed that go out enable the firm to est imate its required rate of return on its investments.Ingeneral companies make use of CoC through brush asideed capital flow or share pricing method. To calculate cost of capital (equity), risk free rate and value of risk premium, calculations are asfollowsIf Lex had no debt in its capital structure then the relationship between its levered equity betaand asset beta can be like ? (asset) = E/V * ? (equity) And it also implies that interest and principal payments on the debt are fairly expert that makes the beta of debt to zero. If there is no debt then cost of capital will become the cost of equity.Moreover if Lex adds moderate amount of debt in its capital structure that means equity will become more risky and cost of equity will increase and so will the cost of capital. In order to fully evaluate future investment opportunities, Lex should single tax write-off rate if the project is enough to represent the whole firm e-g in acquiring the very similar company. But Lexshould use multiple discount rates in evaluating the projects that replicates one of its divisions e-g investment in the automotive division should use the cost of capital of automotive division andsame goes for other divisions

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