Reference no: EM133528757 , Length: word count:1500
Case: You are a financial consultant for Pearson plc, a large publishing company. You have been asked to prepare a presentation for dissemination to senior management that highlights the implications of the firm's current capital structure on its long term financial viability.
As part of your presentation, you should consider and make proposals for the raising of different sources of finance. Your presentation should consider the advantages and disadvantages of each of these sources of finance. You should also describe how each of these different sources of finance might help the firm to meets its corporate strategy.
You are required to estimate the weighted average cost of capital (WACC) for Pearson plc over a five year period. Financial information on Pearson plc can be found in their annual report, a link to which is provided attached.
In particular, you should consider the financial statements that are included in the annual report. The notes to these financial statements will also be relevant. Pay particular attention to the following notes:
• Note 6: Net finance costs
• Note 7: Income taxation
• Note 9: Dividends (and for previous years see 5-year summary on p206)
• Note 18: Financial liabilities: Borrowings
• Note 27: Share capital and share premium
In order to calculate Pearson plc's WACC, you will need to use a range of corporate finance models. You should also note the following data:
• risk-free rate 3.5% p.a.
• equity risk premium 5% p.a.
• beta for Pearson: 0.88
Assume that the capital structure of Pearson plc will remain the same as at the 2013 financial year end.
Required:
The annual report for Pearson plc can be accessed via the following link: Apply two methods to calculate Pearson plc's cost of equity.
A) Apply two methods to calculate Pearson plc's cost of debt.
B) Using your results from (A) and (B), calculate Pearson plc's WACC.
C) Evaluate the use of alternative sources of finance. the WACC as an approach to the calculation of the cost of capital.
D) Analyse how each of the sources of finance identified in (D) might help Pearson plc to meet its strategic corporate objectives.
Attachment:- Corporate Finance.rar
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