Langtry Falls Expansion Plan UV7508 Jul. 25, 2018 Langtry Falls Expansion Plan Roxanna Garner had spent a decade transforming Langtry Falls (Langtry) from the small regional equestrian-leather-goods...

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Answered Same DayFeb 24, 2021

Answer To: Langtry Falls Expansion Plan UV7508 Jul. 25, 2018 Langtry Falls Expansion Plan Roxanna Garner had...

Tanmoy answered on Feb 25 2021
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Langtry Falls Expansion Plan
Executive Summary
Langtry is an equestrian leather goods manufacturing and selling company formed by Roxanne Garner. They produce high quality leather fashionable goods which are widely sold both locally and globally. Due to slump in the economy there has been slow down in the luxury industry yet Langtry has maintained a steady year on year growth over the past six years. The owners pl
an to invest in improving the production facilities and enhance the efficiencies of the company. But, he is in a doubt whether this strategy would be approved by the board of directors and would provide them a better return on investment or not.
Hence, they have decided to analyze the financials with the help of weighted average cost of capital to decide which option will be beneficial and optimum which could give them a better return at a lower average cost of capital.
For this we have used different strategies based on (a) low beta using beta from Google finance (b) high beta using beta from Bloomberg.
Analysis
For calculating Langtry’s WACC (Weighted Average cost of capital) the below were the assumptions considered from the case study of Langtry Falls Expansion Plan:
Tax Rate was considered as 35%
Risk Free Rate (Rf) is 2.15%
Market Risk Premium (Rp) is 6%
The Beta that was considered for calculation of WACC was Equity Beta which was derived from Asset Beta.
The formula for Asset Beta is Ba = [Ve/ (Ve + Vd (1-T) * Be]
Where, Ba = Asset Beta
Be = Equity Beta
Ve = market value of company’s share
Vd = market value of company’s debt
((Ve + Vd (1-T)) = after tax market value of company
T = company profit tax rate
The cost of debt is derived by calculating the effective interest rate (Kd). The effective interest rate is derived from the sum of interest on long term debt divided by the long term debt.
Effective Interest Rate (Kd) = Sum of Interest on long term debt / Sum of Long term debt
The Market value of debt (D) is given as 20% therefore the Market value of equity (E) is 100% - 20% = 80%.
Finally, the WACC is calculated with the help of the following formula:
WACC = E/V * Ke + D/V * Kd * (1 – Tax Rate)
Where, E = Market value of equity
D = Market value of Debt
V = Market value of the enterprise
Ke = Cost of Equity
Kd = Cost of Debt
For calculation of Hamada’s beta the below formula was used:
BL = BU * [1 + (1 – T) * (D/E)]
BL = Levered Beta
BU = Unlevered Beta
T = Tax rate
D/E = Debt to equity ratio
We have used Hamada’s beta equation for calculation of beta because it is an in-depth analysis of company’s cost of capital which depicts the financial leverage to the overall business risk. Beta is a metric which shows the riskiness of the system and the company. The Hamada’s beta reflects how the beta of a company changes with the changes in the leverage of the organization. Depending on the beta investors decides whether to make an investment or not. Hence, if the beta coefficient if higher it is a riskier investment.
For calculating the WACC – weighted average cost of capital of the 6 companies we have considered the same methodology which was used to calculate the WACC of Langtry. Then we have done an average of the WACC to determine the industry WACC. This is considered as a standard to compare the WACC of Langtry to determine whether the WACC of Langtry is more or less than the industry average. This will also help to decide the Langtry management whether to go for the expansion plan or not.
Also, since there is two sets of beta available (a) Beta from Google Finance (b) Beta from Bloomberg, we have calculated the Hamada’s beta and the WACC based on the two sets of betas. This will help to determine whether we should go with a higher beta or should limit with a lower beta for investing in a luxurious industry.
Discussion
We have conducted analysis based on two methods:
A. Method I (a) & (b) for calculating Langtry’s weighted average cost of capital based on the Google finance beta and Bloomberg beta.
B. Method II is used to calculate the weighted average cost of capital for all the 6 companies which are based on the Google finance beta and Bloomberg beta.
The...
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