Reasons for Difference

2021-05-13 10:43:57
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The calculated beta coefficient is portfolio specific whilst the published beta coefficient is the market coefficient. The calculated beta is thus more reflective of the actual beta value

To find The Required Rate of Return for the Company

The Capital Asset Pricing Model (CAMP)

This method assumes that there exist a perfect marketCost of equity (Ke) is given by:

Ke=Rf+(Rm-Rf)Be

Where, Rf= Risk Free

Rm= Market Return

Be= Equity beta factor.

Cost of Debt (Kd) is given by:

Kd=Rf+(Rm-Rf)BdWhere, Bd= Debt beta factor.

Overall cost of capital is given by:

Rf(Rm-Rf)B0

Where, B0=Overall beta factor.

B0 = Be(ED+E) + Bd(DD+E)

Where E= Market value of Equity

D= Market value of Debt

D+E= Value of the firm.

Using the treasury 10 year bond as a risk free rate.

Treasury 10 year bond risk free rate given at 2.25%

Determine the Growth Rate of the Company EPS

EPS is the Earnings an investor per share. EPS-GR is Earnings per Share growth rate and it is an important figure for valuing the company. When EPS history is compared to stock price history, it will help us determine future movements of the stock price.

EPS is given by:

EPS = MPSP0

Where, MPS =Market Price per Share

P0 = Price of Ordinary Share

Year EPS

2015: 20.76

2014: 17.14

20.76/17.4 Growth multiple

((Growth rate)1- 1) *100 =Annual growth rate

Method(s) used for Capital Budgeting purposes in the chosen company:

a). NPV

It is the difference between the present value of benefits received from a decision and the value of cost of decision.

A financial action plan with the positive net present value will be used to maximize the wealth of the shareholders. With similar magnitude a decision of the negative net present value must reduce the wealth of shareholders as appropriate.

Under this goal, a company will only take decision that results to positive NPV.

NPV of a companys projects are additive in nature.

Given two projects A and B its given by;

NPV(A)+NPV(B)=NPV(A+B) {Principle value additive)

NPV =t=I Ct/(1+k)t C0

Where, Ct= Cash flow in period t

C0= Cash outflow

K= Opportunity cost of capital.

t= Time period.

b). IRR

This is the rate which equates the investments outlay with Present value PV of cash flow received after a period of time.

IRR (r) is given by;

r=C1-C0/C0

r= C1/C0-1

C1/C0=1+r

C0=C1/1+r

IRR (r) = C1/1+ r + C2/(1+r)2 +..Cn/(1+r)n C0

c). Payback

This is the number of years required to recovery investment proposals. (Recover the original cash outlay invested in a project)

Pay back = Initial investment / Annual cash flow

PB = C0/C

C0= Initial investment

C= Annual cashflowd). M.R.R

Technically, a marginal rate of return seems to be the marginal return, similarly the amounts of income per additional item, when divided by marginal cost (costs accruing due to additional items processed). In other words, it remains true that these are the amounts of additional revenue that businesses should expect to earn per additional dollar that it spends on production. By use of use of marginal rate of return, any business is in a position to determine whether or not the operations it undertakes are profitable.

Calculation of M.R.R

First, we get the marginal return, or any additional revenue brought in due to one additional unit of production. In most cases, we find that the marginal return/ marginal revenue is equal or same as the selling price of the item. The company will receive the dollar amount of the price of a particular item in new revenue by producing only that one item. After this we calculate the marginal cost. This is or what the company must spend to process/produce each additional unit. The marginal cost will be inclusive of all the variable expenses that are used in producing that additional unit. This will include extra hours or labor and materials used. Then lastly, to get our marginal rate of return, we work to divide the marginal revenue due by the marginal cost used.

For example, if a product has a price/marginal revenue, of $50, and the marginal cost of production is $10, then it is fine to say that the marginal rate of return should be five ($50/$10)

Formula:

M.R.R is given by;

M.R.R = 3IRR-1

= 3C/C0 -1

Marginal rate of return is therefore a very powerful tool when it is used in decision-making.

Weighted average cost of capital (WACC)

This is the overall or composite expenditure of the capital that a business is currently using. The WACC is calculated through determining the average cost of every capital source in capital structure of the firm.

WACC(ko) = kd( D ) + kp ( P ) + kr ( R ) + ks ( S )

V V V V Zain uses Capital asset pricing model in determining its cost of retained earnings.

The net present value is used in capital budgeting decisions in Zain Company in Kuwait.

Zain capital structure is not optimal. The weighted average capital cost is not at minimum. The reason for the same is due to the fact that Zain is hugely financed by lots of debts.

In relation to current ratio, Zain company was better off at 0.88 compared to industry average which was at 0.84.Again Zain was worse off in terms of debt to equity ratio at 0.45 to 0.39 that of industry average. See the information below for comparison.

As of 30th September 2012 ZainWataniyaVIVA* GCC Telecom Industry Average

Short-Term Debt (USD mn) 948.62 91.08 53.79 635.80

Short-Term Debt/ Total Debt (%) 41.11% 26.02% 44.74% 28.12%

Total Debt (USD mn) 2,307.49 350.08 120.22 2,231.78

Current Ratio (%) 0.88 0.71 0.26 0.84

Net Debt/ EBITDA (%) 0.51 (0.12) 44.83 3.43

Total Debt/ Total Assets (%) 21.64% 6.84% 26.84% 19.15%

Total Debt/ Total Equity (%) 38.82% 12.31% (182.58%) 27.16%

The observation I noticed with my data is that it is not in parity with the actual data.My data have differences with the actual data simply because there is an unavoidable degree of difficulty when it comes to a company's intrinsic value. Because of all the possible variables involved. Such variables include but not limited to value of the intangible assets of the company. It is also true that estimates of the genuine value of a company can vary between analysts. Some analysts use discounted cash flow analysis and further include future earnings in their calculation. However, others will look only at the current liquidation value which is the same as book value. This value is normally shown as on the firms most recent balance sheet. Further to the above, difficulty also arises from the fact that the balance sheet may not be a wholly accurate representation of assets and liabilities of the firm. The reason given is because it is an internal production of the company and may be subject to errors intentionally or otherwise.

Market value is value of the firm calculated from its current stock price. The market value in most occasions does not reflect the actual current value of a company. A tangible reason provided for the same the fact that the market value reflects only supply and demand in the market. It is determined by how willing or not investors are ready to participate in the company's future. In many instances the market value is normally higher than the intrinsic value only if there is strong investment demand. At this instance, the same leads to possible overvaluation. The opposite remains true in case there exists weak investment demand. The result is an undervaluation of the company.

At the moment the Zain Company is way below the task of maximizing shareholders wealth. This is because it is if financed by a lot of debt which should not be the case in maximizing the shareholders wealth

Regional and local demand for telecommunication services and offered solutions continues to be strong. Revenue growth for GCC operators slowed down due to the saturation of domestic environments and dependence on basic and inexpensive broadband services. This can be assessed due to the high penetration rates as witnessed for most GCC countries. Existing players have been aggressively competing in the past few months, in terms of both pricing and value added services, which has negatively impacted operating margins. As a move to counter declining domestic market share and stiff local regulatory requirements, few telecom operators have sprung into fostering a regional presence in the likes of Zain.

REFERENCE

C.D. Lewis (1981) Scientific Inventory Control, Butterwords,

J.J.Glynn (1985) Value for Money Auditing in the Public Sector,prentice-hall.

K.V.Smith(1979) Guide to Capital Management, Mc Graw-Hill

P. Zipkin(2000) Foundations of Inventory Management, Mc Graw-Hill

R. Marris. (1964) The Economic Theory of Managerial Capitalism, macmillan

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