QUESTION 1
a. Explain the meaning of weighted average cost of capital (WACC) in Corporate Finance. Why is WACC used as hurdle rate for investment appraisal projects?
b. Consider the following financial statements of UK listed Vodafone Group Plc for the FY2017 (in £ millions).
| Profit & Loss Statement | FY2017 |
| Revenue | 47631 |
| Cost of sales | -34576 |
| Gross profit | 13055 |
| Selling and distribution expenses | -4349 |
| Administrative expenses | -6080 |
| Other operating expenses/income | 1099 |
| Operating profit | 3725 |
| Other non-operating expenses/income | 473 |
| Financing costs | -1406 |
| Profit/(loss) before taxation | 2792 |
| Income tax expense | -4764 |
| (Loss)/profit for the financial year from continuing operations | -1972 |
| (Loss)/profit for the financial year from discontinued operations | -4107 |
| (Loss)/profit for the financial year | -6079 |
| Consolidated Balance Sheet | FY2017 | Consolidated Balance Sheet | FY2017 | |
| Non-current assets | Equity | |||
| Intangible assets | 46220 | Shareholders' funds | 72,200 | |
| Property, plant and equipment | 30,204 | Non-controlling interests | 1,519 | |
| Other non-current assets | 35523 | Total Equity | 73,719 | |
| Total Non-current assets | 1,11,947 | Non-current liabilities | ||
| Current assets | Long-term borrowings | 34,523 | ||
| Inventory | 576 | Other non-current liabilities | 4053 | |
| Trade and other receivables | 9,861 | Total Non-current liabilities | 38,576 | |
| Cash and cash equivalents | 8,835 | Current liabilities | ||
| Other current assets | 23465 | Short-term borrowings | 12,051 | |
| Total Current assets | 42,737 | Trade and other payables | 16,834 | |
| Other non-current liabilities | 13504 | |||
| Total Current liabilities | 42,389 |
Using the financial statements of Vodafone Group Plc., determine the following:
i. Effective cost of debt for the business.
ii. Cost of equity if the beta of Vodafone Group Plc is 0.59, Rf in the UK is 2% and market risk premium in the UK is 5.8%.
iii. Capital structure in terms of debt and equity as %age of total capital invested.
iv. Weighted average cost of capital (WACC) for Vodafone Group Plc.
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