Financial Performance Measurement Essay Example | Topics and Well Written Essays - 1500 words

Financial Performance Measurement - Essay Example The cost of capital aspect is usually a main area of focus. The reason for cost of capital to be taken care of seriously is to ensure that the capital used does not exceed the expected returns from activities of the organization. There is also need to ensure that the cheapest type of capital is used to finance the company. The company therefore considers the cost of each type of capital to compute a general cost of capital referred to as weighted average cost of capital. This incorporates costs such as cost of equity and also cost of debt. The weighted average cost of capital method allocates weights to each component cost of capital. This weighted average cost of capital is usually the rate of return that the company should not operate under in order to be operating at a safe point. Weighted average cost of capital is the best measure of a company's cost of capital. Its measure gives weights to the components of a company's capital structure. Usually shareholder's equity and debt create a company's capital (Brealey, & Richard 2000p.66-67). The company's share price as in the financial times is recorded as 876.50 being the last price. This represents an increase in the company's share price as compared to last one week by 2.2%. 876.50 being the last share price also represent a decrease in share price as compared to 3 months earlier. ... EQ = This represents the shareholder's equity and equity equivalents TC = This represents the total capital RRR = This is the required rate of return, usually cost of equity capital D = This represents debt capital K = This represents the cost of debt capital TR = This represents the tax rate Using the figures of the group company the British Associates Foods plc the shareholder's equity for the year 2005 = 3,696,000 This is at required rate of return of 12% The group's debt as at 17/09/05 was at the tune of 150,000,000. This debt was at a cost of 10% Therefore the weighted cost of capital can be computed as follows: - Total capital = Equity capital + debt Therefore Equity capital = 3,696,000,000 Debt = 150,000,000 Total capital = 3,746,000,000 Therefore WACC = 3,696,000,000 x 12% + 150,000,000 10% (1.28%) 3,746,000,000 3,746,000,000 Note: the tax rate = 28% WACC 0.118 + 0.02 WACC 0.138 = 13.8% Therefore the WACC = 13.8% The company's share price as in the financial times is recorded as 876.50 being the last price. This represents an increase in the company's share price as compared to last one week by 2.2%. 876.50 being the last share price also represent a decrease in share price as compared to 3 months earlier. At the earlier three months the share price was 5.4% higher than the current share price of 876.50. Six months ago, the company's share prices are recorded to have been 16.4% higher than 876.50. This represents a large fall in the company's share price. Upto these six months ago, the trend seems to be moving in the same direction as that of the sector. A difference in the trend of the company's share prices emerges when the comparison of the