Cost of Equity and Weighted Average Cost of Capital

Cost of equity can be calculated under different assumptions. Therefore, it is necessary to estimate Unilever PLC equities under the assumption of free cash flow. As a consequence, the cost of equity is comprised by operating profit, net income, and factual turnovers. According to the annual financial report for 2014, the operating profit of the company is 7, 980 million, the net profit is 5, 515 million, and the revenues are 48, 436 million. In sum it is 61, 931 million euros (Unilever 2014). A free cash flow of the company is 3, 1 billion what means that the cost of equities is considerable, especially regarding its turnovers. Assuming that a net income is a central indicator for cost of equities estimation, it should be noted that the company is facing certain losses and declining. Unilever PLC, however, is a public enterprise, therefore, a free cash flow is a determining factor for equites’ costs.

Concerning the weighted average cost of the capital, it is necessary to note that it heavily depends on current debts and taxation of the corporation. Thus, it is necessary to use a standard formula for its calculation, which is the following: WACC = (E/V x Re) + [(D/V x Rd) x (1-Tc)]. Then, WACC = (61, 931/71, 831 x 47,5%)+ [(9, 900/71, 831 x 16%) x (1 – 0, 282)] = 41 + 1. 5796 = 42.5796. The enterprise it striving for less proactive tax rates even though taxation does not influence the weighted cost of the capital substantially. At the same time, the company keeps increasing its loans. However, it does not have to be regarded as a negative tendency since Unilever PLC is planning to enter several newly opened markets. Therefore, the firm needs some additional capital for the further growth.

Cash Flow for the Firm and Equity

It is important to calculate the cash flow of the firm under the assumption of the best and most regular taxation period. The best taxation period reflects a potential progress of the company and its maturity from the perspective of the corporate cash flow. In other words, this option determines how the company operates. Hence, the cash flow with the best taxation is the following. Operation income is multiplied by a difference between 1 and the tax rate, and then it is necessary to subtract capital expenditures, depreciation, and change in noncash working capital (Damodaran 2006). Therefore, a cash flow for the firm can be calculated as follows: 7, 980 – (1 – 0.282) – 1, 440 – 1, 432 – 8 = 5, 099. 288. The corporation considers 26% tax rate to be the best and most effective, therefore, in such case cash flow for the firm will be 7, 980 – (1 – 0.26) – 1, 440 – 1, 432 – 8 = 5, 099.26 (Unilever 2014).

Talking about cash flow for the equity, it is essential to mention that it can be calculated under the assumption of the net income only. It can be explained by the fact that Unilever PLC is a public company so that an influence of dividends is explicit regarding the performance of the enterprise. In other words, net income is a determinant of dividend value as long as these options are mutually related. Personal incomes of every single shareholder directly depend on the net income of the company. That is why the following formula should be utilized. Cash flow for the equity is equal to net income minus capital expenditures and depreciation, change in noncash working capital, and plus new debt subtracted by debt payment (Damodaran 2006). As a result, cash flow for the equity is the following: 5, 515 – (1, 400 – 1,432) – 8 + (9, 900 – 9, 659) = 5, 740.

Future Cash Flows

There are a wide range of assumptions, under which a future cash flow can be estimated. However, the majority of sources, especially Damodaran (2002), admit that the rate of potential growth in calculating future value should be considered, because cash flow and size of the company are directly correlated. With regard to the contemporary state of the corporation, Unilever PLC’s growth rate keeps decreasing, therefore, factually estimated growth rate cannot exceed 1%. Thus, future cash flow can be calculated as follows. As long as the investment in the current project is equal to 341, and new investments are expected to grow by 1%, the new investments will comprise 344. 41. As a consequence, current returns on investments, which are equal to 5, 190, will accordingly grow to 5, 241. 9 (Unilever 2014). In fact, it is the company’s new earnings calculation formula. However, since it is a forecast, the result should generate a margin of the future growth of Unilever PLC. Thus, a cash flow for the next year is expected to be approximately 341 x 5, 190 + 344, 41 x 5, 241.9 = 3, 575, 152. 8, which is quite likely from the perspective of the current free cash flow of Unilever PLC. Such small growth can be explained by the fact that the company is finishing its current growth stage and, thus, mobilizing its resources for the next step, ensuring that the current investments are not capitalized for the growth purposes. Still, it is necessary to calculate a future cash flow under the assumption that the firm’s growth rate is 5%. As a result, 341 x 5, 190 + 358. 05 x 5, 449. 5 = 3, 720, 983. 5. Actually, it is a desirable growth for the enterprise regarding its current stage of development. However, obtaining such cash flow requires a longer period of time and capitalization of investments. Hence, this scenario depends on the stock value of Unilever PLC.

Value of Available Options

Speaking about obtained options of Unilever PLC, it is important to pay attention to its stock value, especially with the consideration of the company’s turnovers. Net income does not play an independent role in this case. Even though it is not related with the stock value directly, the revenues depend on the company’s value of stock. It can be explained by the fact that Unilever PLC is a public company so that it relies heavily on its stock market (Geddes 2002). There are numerous ways to compare the options of the company, but the following method is relatively simple as it determines a value of one share for total revenues. A current volume of Unilever PLC is 1, 953, 310 with a bid price of 41 euros per share. It is necessary to note that initial public offering contains brokerage commission, thus a stock value has to be estimated at its lowest margin. Taking this point into account, volume relates to the share price as 1, 953, 310 / 41 while total revenues relate to X. Therefore, 1, 953, 310 / 41 = 48, 436 / X so that X= is equal 1. 01 (Unilever 2014).

Still, stock value can be assumed under cash flow for equity since they are directly correlated. Needless to say, this aspect refers to the internal perspective of the company and demonstrates the influence of stock value in terms of the company’s capital. By the same token, this relation can be calculated as follows: 1, 953, 310 / 41 while cash flow for the equity relates to Y. Hence, Y = 41 x 5740 / 1, 953, 310 = 0. 12. It is pivotal to note that in terms of the current cash flow for equity, such proportion is quite normal but not sufficient, because cash flow is evidently becoming redundant. In other words, a cycling of such capital is able to render a higher stock value.

Cost of Distress

However, it is not applicable to Unilever PLC since the company keeps decreasing its net debt and increases total revenues. Therefore, the investments are capitalized in order to mobilize the company before entering newly opened markets. On the contrary, the growth rate of the company has considerably decreased in recent years. The operating profit increases, because the company stays in its comparatively stable size. Taking all these points into consideration, the worst outcome for Unilever PLC is a null net profit (Jostarndt 2006). This outcome is unlikely to occur because of the wide range of reasons. One of them is to prevent that the corporation from reaching a bottom line of a break-even margin. Therefore, negative earnings should not occur because of the positive financial tendency company experiences.

Provided that the company is under a threat to face a major decline, it is still able to trade publically its entire volume of stocks. Needless to say, it will face substantial changes in revenues, stock value, and hierarchy of the company. However, the firm will remain in the business and will not go bankrupt. Unilever PLC has a sufficient capacity to restore itself after the disaster, therefore, the calculation of distress is not necessary in this case, despite the fact that the company will have to be reinvested and relisted at its stock markets. It is not a current concern of the management. Yet, the intensive competition with the companies of the same industry should be given an account.

Value of the Firm in Comparison with The Competitors

As long as the majority of Unilever PLC competitors are also public companies, its value should be calculated under the assumption of stock market value. That is why this value can be calculated by multiplying a number of outstanding shares by a price per share. Therefore, the market value of the company is the following: 3.025 billion of outstanding shares multiplied by a bid price, which is equal to 41 (NYSE 2015). As a result, the market value of Unilever PLC is 124. 025 billion. At the same time, The Procter & Gamble Co. trades its share at bid price of 84.53 euros per share. Since the number of outstanding shares is 2.701 billion the market value of P&G is 228. 31 billion. As for Nestle AG, its bid price per share is 75.9 and a number of outstanding shares is 3.168 billion. Hence, its market value is 240.45 billion. Eventually, Reckitt Benckiser Group obtains 3. 589 billion of outstanding shares with 82.153 bid price per share. Hence, its market value is 294. 847 billion.

It is becoming increasingly apparent that Unilever PLC obtains the lowest market value among its key competitors. It is necessary to note, however, that Unilever PLC is relatively new company and should probably not be compared to such corporations as The Procter & Gamble Co. and Nestle AG as they operate on the international market for quite a long period of time now. That is why, Unilever PLC has to focus on its dynamic growth and increase its stock market price, which is an international indicator of success. As it has been already mentioned, the company is planning to enter newly opened markets. It will give the firm an opportunity to obtain a larger market share, which will reflect on its stock value.

The Firm Value and Value of Equities

With regard to the fact that Unilever PLC is a public company, the value of the company can be equalized with its equities since they are a crucial aspect of any publically-owned corporation. In other words, equities are determinants of the company’s capacity to grow and produce cash flows. In the same way, equities distinguish net profit, which remains after divided for taxation, returns on investment, debts and other obligatory options are deducted from the total revenue. To return to the subject of the company’s public ownership, it is important to mention that the value of the company can be determined by its stock market value as long as a number of potentially purchasable shares and prices per share can address company’s size, net profit, total capital, and etc. Although, it is essential to differentiate firm value and value of equities of Unilever PLC since they refer to different attributes.

To be more precise, the value of the firm is usually calculated under the assumption of its liabilities and total assets because it is a determinant of the company’s cash liquidity. In this particular case, however, Unilever PLC value depends on its stock market value because potential investors and private shareholders estimate the profitability of the company by a price of initial public offering. It is to be noted that initial public offering is a total starting price for one share. The potential shareholders are often oriented by the IPO price. As for the value of equity, it is related to dividends since they increase as equity value grows. However, there is no direct connection. At the same time, it is quite evident that a stock price grows only when the company grows and its revenue increases, as well as other factors like rebranding and new product introduction. Consequently, the firm value and value of equities are similar and are equal to the current market value of Unilever PLC.

Conclusion

All in all, this paper has lingered upon calculations and discussion of numerous financial and corporate aspects of Unilever PLC. The central aspects of the report are cash flow and equities since they are the key determinants of the company’s growth. That is why it is worth mentioning that Unilever PLC is on the verge of entering newly opened markets. However, the corporation is currently experiences a decline as its growth rates and related options comparatively decrease. Besides that, the paper has paid attention to peculiarities of the company’s ownership type. Since Unilever PLC is a public enterprise, its success depends on its stock market value. Hence, the report has given an account to potential implications and contextualized them in terms of the calculations and discussion of particular aspects of Unilever PLC. Finally, for the company to be successful in its future operations, it is recommended to focus on the forecasting and planning the stock price growth.