Case 13: Royal Mail

1.What is going on with Hillary Hunt and Royal Mail? Highlight the relevant background information and the key issues facing Royal Mail.

2.Take the view of Kyle Brooks and explain his estimate in Exhibit 6 (Include a breakdown of his calculation). Explain what assumptions he made and why you think those choices were made. What do you think of his analysis?

3.Complete the table below: Calculate the market value capital structure weights (You can use the book values as a substitute for the market value of debt). Calculate the cost of equity and cost of debt. (Calculate the YTM: given the bond price of 106 for the ten year annual bond, with a coupon rate of 4.375%, given in Exhibit 6). Calculate the Weighted Average Cost of Capital.

Capital Sources

Value

Percentage

Total Debt (Book Value)

Equity (Market Value)

Cost of Debt

Yield on Royal Mail Bond

Yield of BBB Debt

Cost of Debt Estimate

Cost of Equity

Risk-Free Rate

Beta

Market Risk Premium

CAPM Cost of Equity

Weighted Average Cost of Capital

Tax Rate

WACC

4.Complete the table below and calculate the WACC for the Comparable Firms given in Exhibit 9, utilize the Corporate Bond rates given in Exhibit 8. Reflect on the WACC of Royal Mail in relation to the comparison data. What can you conclude?

Tax Rate

Risk-Free Rate

Market Risk Premium

National Grid

SevernTrent

Tesco

United Utilities

Vodafone

Debt / Value

Credit Rating

Cost of Debt

Beta

Cost of Equity

WACC