The Capital Structure & Dividend Policy Of Royal Mail Plc
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You have to write about the Royal Mail plc and complete the tasks.
You have recently joined an investment bank, based in the UK. As part of its products and services, your organisation analyses and values companies, and offers advice and recommendations to UK and European hedge funds and pension funds.
Your manager has asked you to prepare a report (maximum 4000 words) on an assigned company. In your report, you are required to undertake the following tasks:
Task 1
Present a profile of the Royal Mail. The profile should provide context whilst providing key financial data including the company’s:
• current market capitalization;
• book value of shareholders’ funds including share capital, reserves and any preference shares;
• a brief discussion of why (the above) market and book values differ;
• the main shareholders; identifying those you believe are ‘institutional shareholders’;
• total borrowings;
• debt-to-equity ratio, based on both book values and market values;
• quoted beta;
• competitor information;
• important and/or recent financial news that could be of significance to potential investors and the impact it may have.
Task 2
• Identify the dividend policy (payment pattern) of recent years, discussing anything of significance. Include calculations to illustrate the pattern.
• Using the theories of Modigliani & Miller and others, discuss the capital structure & dividend policy of your assigned company.
• With regard to capital structure, discuss any practical issues facing the company such as taxes, risk, financial slack, types of assets held by the company.
Task 3
• Estimate your assigned company’s cost of equity, cost of debt and cost of capital (WACC), using the capital asset pricing model.
• Critically discuss the variables you use to estimate the cost of capital.
• Discuss your WACC in relation to your comments in Task 2.
Task 4 Part a) Estimate the value of your assigned company’s shares using the shareholder value analysis (SVA) model. To do this you will need to establish the key drivers for the model.
• Explain how you determined the drivers you used, providing justification and a rationale for any adjustment made to the underlying data. For example, you may use historical information but then question your results for reasonableness and amend in the context of the company and its future.
Task 4 Part b)
• The value you have worked out in part (a) differs to the real market value of the equity, critically discuss why this is so, considering the appropriateness of the SVA model as a valuation tool vis-a-vis alternative methods and the efficiency of the capital market.
Task 5
• Identify a recent acquisition (M&A) undertaken by your assigned company commenting on the strategic significance.
• Critically assess the potential sources of synergy between your assigned company and the target company, which may result in additional value for the combined company.
• Based on this, discuss the premium paid for the target company.
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