Cost of Capital for Hubbard Computer (PVT) LTD.
COST OF CAPITAL FOR HUBBARD COMPUTER LTD
By
Course
Professor’s name
Institution
Location of institution
Date
Table of Content
Cost of Capital for Hubbard Computer (PVT) LTD........................................................................1
Introduction..................................................................................................................................3
Question 1....................................................................................................................................3
Book value and debt value of equity.......................................................................................3
Question 2....................................................................................................................................3
Estimate the Cost of Equity.....................................................................................................3
Most Recent Stock Price..........................................................................................................4
Market Value of Equity or Market Capitalization...................................................................4
Number of Outstanding Shares................................................................................................5
Recent Annual dividend...........................................................................................................5
Is it possible to use the dividend discount model in this case?................................................5
Beta for Harvey Norman.........................................................................................................5
Yield of Government Debt.......................................................................................................6
Using the historical market risk premium, what is the cost of equity for Harvey Norman
using the CAPM?.....................................................................................................................6
Question 3....................................................................................................................................7
Calculation cost of debts..........................................................................................................7
Question 4....................................................................................................................................7
Weighted Average Cost of Capital...........................................................................................7
Question 5....................................................................................................................................8
You used Harvey Norman as a pure play company to estimate the cost of capital for HCL.
Are there any potential problems with this approach in this situation?...................................8
Conclusion...................................................................................................................................9
References..................................................................................................................................10
Introduction
According to the data, the group operates fourteen stores. This firm is privately held, which
means it is financed by its owner. The company's last 12 months revenues totaled 9.7 million
AUD. Hubbard Computer Ltd, on the other hand, is a private company whose shares are not
listed on the ASX securities exchange, nor are the proper debt books kept. Shipping takes 15
days to a maximum of 30 days. The major venture offered here is to assess the cost of capital via
pure play. Every day, Bob chooses Hubbard as his emblem. Accounts are established and debited
on a semiannual or annual basis.
Question 1
Book value and debt value of equity
E book cost is the quantity of loans, while equity is the quantity indicated on the organization's
balance sheet.
Question 2
Estimate the Cost of Equity
The cost of equity is the price paid for containing funds inside the agency's operations.
Shareholders are the company's true owners who accept a specified amount of return on their
investment. The return they seek from the corporation in exchange for their investment within
the business strategy is known as the cost of equity.
Cost of equity = risk-free rate of return + Beta * (market rate of return minus risk-free rate of
return)
According to the equation, the risk-free rate of return is the payback price for risk-free
investments.
For example, treasury. The beta of an asset is calculated using a regression at the agency's stock
charge to determine its risk level. The marketplace return price is the average fee in the market.
From the equation, risk-free rate of return is the go back price paid on hazard free investments.
The marketplace return price is the average fee of the market, frequently assumed to be 11% to
12%. In frame, an enterprise with a higher beta of an asset pays greater to achieve.
We shall employ the Treasury stable charge of maturity for 5 years as the agency's interest-free
fee. As a result, the current Treasury consistent majority charge yields an interest-free rate of
2.48%.
The enterprise’s The beta of an asset is the sensitive return to the firm, and it is computed based
on market share and the return to the shareholder over the long run. It represents the risk to the
organization's returns. Harvey Norman's beta is 0.7465. The marketplace premium, as supplied to
us, may be estimated using the information that ranges from 4% to 6%. That is the gap between
the rate of market return and the employer's cost of returning. Regarding this mission paper,
Therefore,
Cost of Equity = 1.75% + 0.7465 * 4.5%
= 5.11%
Most Recent Stock Price
The current stock price is obtained from the Harvey Norman stability sheet. The current stock
listing fee for the share’s amounts to AUD 316 million.
Market Value of Equity or Market Capitalization
The marketplace fee for an organization's stock, also known as market capitalization, is the total
fee paid by traders to the business. Consequently, utilizing yearly report data, we can calculate
Harvey Norman's market capitalization. Market capitalization is the number of shares multiplied
by the price per share. Market capitalization = (basic + diluted) * price = (1113 + 1114) * 0.40 =
2227 * 0.40 = 890.8 million AUD.
Number of Outstanding Shares
extremely good shares =total wide variety of shares
From the facts furnished Harvey Norman is having 1113 AUD Million stocks during the year in
the 12 months 2023.
Recent Annual dividend
Divide the most recent yearly dividend per share by the whole stock portfolio (simple = diluted
percentage). For example, 449 divided by (1113+1114) produces 0.2016, which is 20.16 cents.
Thus, the employer's annual dividend is 20 cents.
Is it possible to use the dividend discount model in this case?
The pure play technique is an approach for estimating an employer's beta coefficient. HCL's
stock is not publicly traded. It is also used to determine the cost of capital for a project that is
distinct from the corporation's core business. As a result, we may apply this model to estimate
the charge % in each period. Because HCL is not publicly traded, pure play companies do not
benefit from established brand names and consumer bases. This means it sells to its own
customers. To determine the percentage charge, utilize the procedure outlined in this record.
Dividend discount model: 5.12 = 100/X - 14.30 = 5.11.
As a result of the aforesaid calculations, we can estimate the equity fee to be 5.11.
Beta for Harvey Norman
with a view to estimate the beta coefficient of HCL we want to discover beta coefficient of HVN
by reassigning returns on its inventory to the returns at the relevant stock index.
Unleveled beta of HVN = equity /1+ DEHVN * (1-Tax rate of HVN)
wherein, tax price = 30%
DEHVN = Total Liability/Legal Shares=1399/2790=0.5
Beta coefficient (equity) =0.18
Beta for HVN = 0.18 = 0.17/ (1+0.5) *(1-0.3)
Yield of Government Debt
The yield on government debt, sometimes known as risk-free investment bonds, may not be
constant. The yield on government bonds rose with the length of the financing period. The
average price used to calculate the yield on government money debt is 1.75%.
Using the historical market risk premium, what is the cost of equity for Harvey
Norman using the CAPM?
cost of equity = risk-free rate of return + Beta * (expected return of market – Risk Free Return of
Return)
consequently, cost of equity = 1.75% + .7465 * 4.5%
= 5.11%
Question 3
Calculation cost of debts
To determine the real cost of debt, we average the numerous loans and add the interest fee. The
enterprise's interest expense is $33327.22 million, with a total debt of $561947 million.
Question 4
Weighted Average Cost of Capital
The weighted average price of capital is the amount that an organization is expected to pay
directly to all of its security holders in order to fund its assets (Modigliani and Miller, 1958).
Using these records, we can easily estimate how much interest a corporation is paying to
conserve capital for the smooth operation of the business in the long run. We should be able to
easily illustrate the weighted average price of capital of the corporation using the method
provided (Cuthbert & Magni, 2016).
Weighted average cost of capital.
WACC is calculated as equity/(equity + debt) * cost of equity + debt/(equity + debt) * debt price
(1-tax rate).
2556860/2,556,860+290000000*5.13 + 290000000/2,556,860+290000000*5.94/1-.30 26.3169+
5.88= 8.41.
Question 5
You used Harvey Norman as a pure play company to estimate the cost of capital
for HCL. Are there any potential problems with this approach in this situation?
The pure play methodology is a method for estimating the beta coefficient of a company whose
shares are not publicly traded on the securities stock exchange. HCL's statistics are compiled
using a pure play technique, with Harvey Norman serving as the consulting agency (Mawih,
2015). Harvey Norman is a publicly traded company that has been conducting business in
Australia. Because it is a very lengthy term. Bob employed the pure play strategy to finish the
appraisal of its proportion charges and fees for the employer's debts. The following
considerations are considered while selecting Harvey Norman as a consulting organization.
Harvey Norman is a listed company that is involved in electronic business at the same time.
. Unlisted firms cannot be compared to listed corporations since the agency must follow a
number of laws and regulations in order to function correctly. Capital costs are the total price of
all stock and money owed to the agency. Harvey Norman has made various long-term loans and
borrowings depending on market pricing and eBook values. The market charge amount is used in
the stability sheet, whilst the book cost is used in the notes of account; hence, these two sets of
data have caused a misunderstanding of the HCL's cost of capital calculations. Harvey Norman is
an indexed company, therefore the data derived from the once-a-year record are price sensitive.
Conclusion
During this project for a financial and business institution, I learned about several issues relating
to the cost of capital of the HCL constrained owned by BOB. With the assistance of the records
provided. I understand the different Pure play method, in which Harvey Norman was hired as a
consulting organization for HCL. Several calculations were performed to calculate the
corporation's cost of capital and market capitalization. I reviewed all of the important figures
provided in the company's annual report and measured several changes. occurred in the capital
structure of the organization for knowledge HCL Cost of Equity and money owing by HCL.
Finally, I'd like to state that an annual document is a complete set of data that depicts a
corporation's capital structure and other corporate governance functions in a recognizable
manner.
References
1. WACC for Harvey Norman Holdings Limited (DB:HNN) ([Link])
2. Chen, M., Deng, J., & Zhao, X. (2018). Business model innovation and firm
performance: The mediating role of strategic agility. Industrial Marketing Management,
70, 174-188.
[Link]
Commerce_Development_on_Traditional_Retail_Industry_Under_the_Backgroun
d_o
3. Damodaran, A. (2022). Investment valuation (4th ed.). Wiley. Equity Asset Valuation, 4th
Edition | Wiley
4. Graham, B. M., & Harvey, D. B. (2001). The intelligent investor (Rev. ed.).
HarperCollins.
[Link]
5. Kothari, S. P., & Watts, R. L. (2007). Accounting theory (4th ed.). McGraw-Hill Irwin.
[Link]
6. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporate finance and the
theory of investment. American Economic Review, 48(3), 632-658. The Cost of Capital,
Corporation Finance, and the Theory of Investment: Reply on JSTOR
7. PwC. (2023). Global technology and innovation trends
2023. [Link]
8. Home ([Link])
Search ([Link])
Reports & Announcements – Harvey Norman Holdings
9. HVN Appendix 4D 31 December 2023_FINAL FOR PROPOSED RELEASE
[Link] ([Link])
Harvey Norman Holdings Ltd (HVN) Discount Rate - WACC & Cost of Equity - Alpha
Spread
[Link]
q=Cost+of+Equity+of+Harvey+Norman&qs=n&form=QBRE&sp=-
1&lq=0&pq=cost+of+equity+of+harvey+norman&sc=11-
31&sk=&cvid=417BC42ED04B4D47AFD0EAD9AA621376&ghsh=0&ghacc=0&ghpl=
10. Yahoo Finance – stock market live, quotes, business & finance news
