Lex Cost of Capital

Lex Service PLC&8212 apostrophize of Capital In 1928 Lex Garages Limited, at the time of public incorporation, had case-by-case garage in London. After 60 years, Lex Service PLC became a leading caller-out in self-propelling distribution and leasing in the United Kingdom. In ripe 1950, Lex obtained from Volvo railcar Corporation the exclusive franchise to import and distribute Volvo cars in the United Kingdom that ended in1992 four years before the plan termination date. This news dropped the sh be price of Lexto 30%.In 1970s, Lex started to expand its crease into new(prenominal) services like transportation andleasing and for temporarily in hotel counsel business. By the end of 1983, Lex was organised around two principal groups i-e Lex self-propelling and Lex Electronics Worldwide. From 1991 to 1993, Lex sold its major electronic business to Arrow Electronics, Inc. With theseries of acquisitions by Lex, in the long run it entered in the profitable business by acquiring acontrolling interest in the U.K importership, Hyundai Car (U. K) in September 1993. Thisacquisition gave Lex management control of a tether year rolling contract that Hyundai Car heldwith Hyundai Motor Company of Korea. In this case study, board meeting was scheduled in 1993 to review its apostrophize of outstanding proceduresand to determine whether Lex Service PLC should use different hurdle rate for differentdivisions or should use greet of big(p) for the whole company.Lex Service PLC was come to about its damage of capital in 1993 because from 1991 to 1993 Lexhad gone with many a(prenominal) acquisitions and sales of assets that changed its capital 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 properly calculate its Cost of equity. erstwhile new cost of capital is computed that will enable the u nfluctuating to estimate its required rate of return on its investments.Ingeneral companies make use of CoC through discounted cash flow or share pricing method. To calculate cost of capital (equity), risk free rate and value of risk premium, calculations are asfollowsIf Lex had no debt in its capital structure then the relationship mingled with 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 plumb safe that makes the beta of debt to zero. If there is no debt then cost of capital will become the cost of equity.Moreover if Lex adds moderate amount of debt in its capital structure that means equity will become more unwarranted and cost of equity will increase and so will the cost of capital. In order to fully evaluate future investment opportunities, Lex should single discount rate if the project is enough to represent the whole firm e-g in acquiring the very similar company. But Lexshould use treble 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