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

Financial Performance Measurement - Essay ExampleThe approach of capital aspect is usually a main area of focus. The drive for speak to 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 look at 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 incorpo ordains 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 tend under in order to be operating at a safe point.Weighted average cost of capital is the best measure of a companys cost of capital. Its measure gives weights to the components of a companys capital structure. Usually shareholders equity and debt create a companys capital (Brealey, & Richard 2000p.66-67).The companys share expenditure as in the financial quantify is record as 876.50 being the pull round price. This represents an increase in the companys 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 shareholders equity and equity equivalentsTC=This represents the total capitalRRR=This is the required rate of return, usually cost of equity capitalD=This represents debt capitalK=This represents the cost of debt capitalTR=This represents the tax rateUsing the figures of the group company the British Associates Foods plc the shareholders equity for the year 2005 = 3,696,000This is at required rate of return of 12%The groups debt as at 17/09/05 was at the tune of 150,000,000.This debt was at a cost of 10% thereof the weighted cost of capital can be computed as follows -Total capital = truth capital + debtTherefore Equity capital = 3,696,000,000Debt = 150,000,000Total capital= 3,746,000,000Therefore WACC = 3,696,000,000 x 12% + 150,000,000 10% (1.28%) 3,746,000,0003,746,000,000Note the tax rate = 28%WACC 0.118 + 0.02WACC 0.138= 13.8%Therefore the WACC = 13.8%The companys share price as in the financial times is recorded as 876.50 being the last price. This represents an increase in the companys 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 companys share prices are recorded to have been 16.4% higher than 876.50. This represents a large fall in the companys share price. Upto these six months ago, the trend seems to be moving in the same direction as that of the sector. A difference i n the trend of the companys share prices emerges when the comparison of the