Introduction:

Lex Service is one of the largest multinational companies. In order to identify the different rates in
different divisions in which 340 million pounds are generated from sales and other assets, 132.5
million pounds were used to pay for the purchase of new equipment for automobile and leasing
instrument. Discounted cash flow analysis is used to identify the worth of investment with the
appropriate rate of return.
Lex Service experienced a significant increase in its business lines from 1991 to 1993 (counting the
sale of an entire Electronic division). It now holds a different arrangement of benefits as compared
to the year 1991.Apparently, administration imagines that beta of the organization has changed,
with a subsequent impact on the expense of capital of the firm. Once figured, the new cost of
capital will enable the company to assess the required return on investments that reproduce the
firm as the whole.
Answer 1:
Lex Service PLC cost of capital in 1993:

Lex Service PLC is concerned for its cost of capital for two noteworthy reasons:

1. Following on different resources transfers, Lex had arranged for the impressive measure of
money, which the company was seen to reinvest in new businesses. For this reason, the company
is required to exact evaluations of its expense of capital and each of its divisions' expense of capital
to assess speculations and boost capital budgeting decisions.
2. Secondly, the company was a significant holder of property, and resources were not required
for operating purposes some of which were needed to be discarded within the year. For this
reason, the company is required to proper discount rate with a specific end goal to value
adequately such assets.

Role of cost of capital:

The cost of capital plays an important role in the analysis of capital budgeting model. It helps to
cover the cost of invested funds by using an appropriate cost of capital. It has importance in
making the financial decision to evaluate the return on the investment in the company.
Estimation of cost of capital
In general, estimation of the cost of capital (or of their divisions' cost of capital when the risk
profile differs):

 Give organizations an approach for their expense of financing.

 (2) Act as a measure to be minimized to locate their most ideal capital structure, and
 (3) COC can be utilized as an obstacle rate for speculation decisions. In capital budgeting
undertakings are in reality assessed either by discounting future money streams to the present
by the obstacle rate, in order to determine the net present value of the venture, with a positive
NPV the project is worth to take, or by computing the internal rate of return (IRR) on the task
and comparing this to the obstacle rate if the IRR surpasses the obstacle rate, the task would
move ahead or it would be accepted.

Answer 2:
WACC is calculated as 11.25% by estimating the risk-free rate of 3.7% as U.S Treasury Bond,
which ensures the risk-free return of 3.7%, Market premium is estimated as 9%, and cost of equity
is given as 12.4%.