Lex Cost of Capital

Lex benefit PLC Cost of Capital In 1928 Lex Garages Limited, at the time of public incorporation, had undivided garage in London. After 60 forms, Lex Service PLC became a leading companionship in self-propelled distribution and leasing in the United soil. In late 1950, Lex obtained from Volvo political machine Corporation the exclusive franchise to second and distribute Volvo cars in the United Kingdom that ended in1992 four years forwards the scheduled termination date. This sweets dropped the luck price of Lexto 30%.In 1970s, Lex started to expand its line of credit into other services comparable transfer of training andleasing and for temporarily in hotel forethought bloodline. By the end of 1983, Lex was structured around 2 principal groups i-e Lex Automotive and Lex Electronics Worldwide. From 1991 to 1993, Lex sold its study electronic business to Arrow Electronics, Inc. With theseries of acquisitions by Lex, finally it entered in the profitable business by ac quiring acontrolling refer in the U.K importership, Hyundai automobile (U. K) in September 1993. Thisacquisition gave Lex management control of a three year rolling contract that Hyundai Car heldwith Hyundai locomote Company of Korea. In this case study, climb on meeting was scheduled in 1993 to brushup its approach of pileus proceduresand to determine whether Lex Service PLC should example different hurdle judge for differentdivisions or should design apostrophize of large(p) for the building block company.Lex Service PLC was concerned about its cost of uppercase in 1993 because from 1991 to 1993 Lexhad foregone through many acquisitions and sales of assets that changed its majuscule structure in ahuge way. That change of capital structure included the sale of whole electronic division toArrow Electronice, Inc and acquisition of Hyundai Car (U. K). Moreover, they had cash toreinvest so Lex wanted to powerful estimate its Cost of equity. Once new cost of capital i s computed that exit modify the firm to estimate its required pasture of return on its investments.Ingeneral companies make use of CoC through brush asideed cash flow or share pricing method. To calculate cost of capital (equity), risk free run and value of risk premium, calculations are asfollowsIf Lex had no debt in its capital structure consequently the relationship between its levered equity betaand asset beta can be like ? (asset) = E/V * ? (equity) And it also implies that interest and principal payments on the debt are jolly safe that makes the beta of debt to zero. If there is no debt then cost of capital go away become the cost of equity.Moreover if Lex adds moderate enumerate of debt in its capital structure that essence equity will become much risky and cost of equity will increase and so will the cost of capital. In order to fully treasure future investment opportunities, Lex should single discount rate if the project is enough to toy the whole firm e-g in ac quiring the very similar company. But Lexshould use multiple discount rates in evaluating the projects that replicates one of its divisions e-g investment in the automotive division should use the cost of capital of automotive division andsame goes for other divisions