Financial assesment - Aviva PLC Research Paper Example | Topics and Well Written Essays - 4000 words

Financial assesment - Aviva PLC - Research Paper ExampleFirms calculate their cost of truth using several methods, the most popular method being Capital Asset Pricing gravel (CAPM). This method assumes that sectionholders expect a measure of return equivalent to the adventure free rate positive a guess premium, and is expressed as -The current UK T-bill average yield was taken as the risk free rate. The recent T-bill average yield varied from 0.6725% (on Apr 3) to 0.6220% (on Mar 27) as per Financial Times (2009). The draw off of the data is given in the Appendix as Exhibit 6-3. The average of these cardinal figures (0.65%) was considered as the risk free rate.FTSE-100 was considered as the indicator of market return. The data range considered was between Jan 1, 2003 to Jan 1, 2009. The compounded annual harvest-festival rate (CAGR) of FTSE-100 during this period was 2.55%. The relevant FTSE-100 data during this period is given in Table 6-1 of Appendix (Yahoo finance 2, 200 9). It is assumed that this is the rate of return that the market will expect in future.The historical dividend growth rate of Aviva works come forward to 6.20%. The divided payout details are given in Table 6-2 of Appendix (Aviva, 2009). It is expect that this growth rate will continue in future. A total dividend of 33 pence per share was nonrecreational for the year 2008. This amount is expected to be 35.05 pence per share during the year of 2009 using the current dividend growth rate. The share price of Aviva as on January 1, 2009 was 361.84 pence.There is subsThe cost of equity as per this method works out to (0.33 x 1.0620/ 361.84) + 6.20%, i.e., 15.89%.There is substantial difference between the cost of equity calculated using the two methods. Both methods use several assumptions and approximations. Therefore, it was decided to take the arithmetic mean of both these figures for the purpose of calculative the WACC. The arithmetic mean works out to 10.42%.Preference Shares/ D irect Capital InstrumentThe Aviva has issued several types of loanblend instruments at different rates of