This spreadsheet supports STUDENT analysis of the case “Royal Mail plc: Cost of Capital” (UVA-F-1774).

This spreadsheet was prepared by Professor Michael J. Shill. Copyright © 2017 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved.
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Rev. Apr. 3, 2017

Exhibit 2
Royal Mail plc: Cost of Capital
Cumulative Weekly Total Stock Returns--Royal Mail and FTSE100 Index

35%

30%
Royal Mail
FTSE100
25% Index

20%
Cumulative returns

15%

10%

5%

0%

-5%

-10%
Oct-13 Mar-14 Aug-14 Jan-15 Jun-15

*** Monthly Return *** *** Cumulative Return ***

FTSE100 Index Royal Mail FTSE100 Index Royal Mail
Oct-13 0% 0%
Oct-13 2% 10% 2% 10%
Oct-13 1% 10% 4% 21%
Oct-13 0% 3% 4% 24%
Nov-13 0% -1% 3% 23%
Nov-13 0% -2% 3% 22%
Nov-13 0% -4% 3% 18%
Nov-13 0% 3% 3% 21%
Dec-13 -1% 7% 1% 28%
Dec-13 -2% -1% -1% 27%
Dec-13 3% 0% 2% 28%
Dec-13 2% -2% 4% 26%
Dec-13 0% 0% 4% 26%
Jan-14 0% 1% 4% 26%
 Jan-14 1% 4% 5% 30%
Jan-14 -2% -5% 3% 25%
Jan-14 -2% 4% 1% 29%
Feb-14 1% -2% 1% 28%
Feb-14 1% 1% 3% 29%
Feb-14 3% 1% 5% 29%
Feb-14 0% 0% 5% 29%
Mar-14 -1% -2% 4% 27%
Mar-14 -3% -4% 1% 24%
Mar-14 0% 3% 1% 26%
Mar-14 1% -3% 2% 23%
Mar-14 1% -3% 3% 21%
Apr-14 -2% -10% 1% 11%
Apr-14 1% 3% 2% 14%
Apr-14 1% 2% 3% 16%
Apr-14 2% 4% 5% 20%
May-14 0% 3% 5% 23%
May-14 1% 3% 6% 25%
May-14 -1% -8% 5% 17%
May-14 0% -3% 6% 15%
Jun-14 0% -3% 6% 12%
Jun-14 -1% 0% 5% 12%
Jun-14 1% -3% 5% 9%
Jun-14 -1% 3% 4% 13%
Jun-14 2% -2% 6% 11%
Jul-14 -3% 0% 3% 11%
Jul-14 1% -1% 4% 10%
Jul-14 1% -6% 5% 3%
Jul-14 -2% -3% 3% 0%
Aug-14 -2% 0% 2% 0%
Aug-14 2% 2% 4% 2%
Aug-14 1% 3% 5% 5%
Aug-14 1% -1% 5% 4%
Sep-14 1% -5% 6% 0%
Sep-14 -1% -1% 5% -1%
Sep-14 0% 3% 6% 2%
Sep-14 -3% -8% 3% -6%
Sep-14 -2% -1% 1% -7%
Oct-14 -3% 1% -2% -6%
Oct-14 0% 8% -2% 2%
Oct-14 1% 6% -1% 8%
Oct-14 2% -4% 2% 4%
Nov-14 0% 5% 2% 9%
Nov-14 1% 1% 3% 10%
Nov-14 1% -8% 5% 2%
Nov-14 0% -1% 4% 1%
Dec-14 0% -3% 4% -2%
Dec-14 -7% -3% -2% -5%
Dec-14 4% 5% 2% 0%
Dec-14 1% 2% 3% 2%
Dec-14 -1% 0% 2% 3%
Jan-15 -1% -1% 1% 2%
Jan-15 1% 2% 2% 4%
Jan-15 4% 2% 6% 7%
Jan-15 -1% -1% 5% 5%
Feb-15 2% 5% 7% 10%
Feb-15 0% -2% 7% 8%
Feb-15 1% -5% 7% 3%
Feb-15 0% -1% 8% 2%
Mar-15 -1% 1% 7% 3%
Mar-15 -2% 1% 5% 4%
Mar-15 4% 4% 9% 8%
Mar-15 -2% -1% 7% 7%
Mar-15 0% 0% 6% 7%
Apr-15 4% 2% 10% 9%
Apr-15 -1% -1% 9% 8%
Apr-15 1% -1% 10% 7%
Apr-15 -1% 6% 9% 13%
May-15 1% 2% 10% 16%
May-15 -1% 1% 8% 17%
May-15 1% 4% 9% 21%
May-15 -1% 4% 9% 25%
Jun-15 -3% -6% 6% 19%
Jun-15 0% 3% 6% 22%
Jun-15 -1% -1% 5% 21%
Jun-15 1% 4% 5% 25%
Jun-15 -2% -1% 3% 24%
Jul-15 1% 2% 4% 26%
Jul-15 2% -1% 6% 25%
Jul-15 -3% 0% 3% 25%
Source: Investing.com
Exhibit 3
Royal Mail plc: Cost of Capital
Royal Mail Unit Volume History (Millions of units, period ending March 31)

2012 2013 2014 2015

Letters
Addressed letters 15,147 13,869 13,342 13,009
Unaddressed letters 3,077 3,258 3,143 3,157
Total 18,224 17,127 16,485 16,166
Growth rate -6.0% -3.7% -1.9%

Parcels
Royal Mail core network 950 994 991 1,015
Parcelforce Worldwide 66 70 77 86
Total 1,016 1,064 1,068 1,101
Growth rate 4.7% 0.4% 3.1%

Source: Company Annual Reports

Exhibit 4
Royal Mail plc: Cost of Capital
Royal Mail Consolidated Income Statement
(Reported as of the end of March in millions of GBP)

2014 2015

Revenue 9,357 9,328

People costs 5,209 5,230

Distribution and conveyance costs 1,796 1,764
Infrastructure costs 1,047 1,019
Other operating costs 578 575
Transformation costs 241 145
Earnings before interest and tax 486 595

Finance costs 71 30
Finance income 4 4
Profit before tax 419 569
Tax 110 138
Profit for the period 309 431

Earnings per share 30.6p 42.8p

Source: Royal Mail Annual Report 2015

Exhibit 5
Royal Mail plc: Cost of Capital
Royal Mail Consolidated Balance Sheet
(Reported as of the end of March in millions of GBP)

2014 2015
Non-current assets
Property, plant and equipment 1,989 1,933
Goodwill and intangible assets 392 482
Retirement benefit asset 1,723 3,179
Other non-current assets 55 80
4,159 5,674
Current assets
Inventories 22 20
Trade and other receivables 926 949
Cash and current financial assets 369 348
1,317 1,317
Total assets 5,476 6,991

Current liabilities
Trade and other payables 1,652 1,668
Financial loans and borrowing 286 290
1,938 1,958
Non-current liabilities
Financial loans and borrowings 860 559
Deferred tax liabilities 151 474
Other liabilities 126 154
1,137 1,187
Total equity
Share capital 10 10
Retained earnings 2,332 3,843
Other equity 59 -7
2,401 3,846

Source: Royal Mail Annual Report 2015

Exhibit 6
Royal Mail plc: Cost of Capital
Kyle Brooks' Cost of Capital Analysis

WACC for Royal Mail

Capital Sources Book Values Percentage
Current Debt 290 6%
Non-current Debt 559 12%
Equity 3,846 82%

Cost of Debt
Current Debt 0.900% Bono triple A
Non-current Debt 4.375%
Weighted Average 3.188%

Cost of Equity
Dividend per share 21
Price per share 511
Dividend Yield 4.110%

Risk-free Rate 1.551%

Beta 0.65
Market Risk Premium 5.8%
CAPM Cost of Equity 5.321%

Weighted Average Cost of Capital

Tax Rate 20.0%
WACC 3.828%

WACC for Comparable Companies

Severn United
National Grid Trent Tesco Utilities Vodafone

Debt / Value 45% 47% 41% 50% 29%

Cost of Debt 3.188% 3.188% 3.188% 3.188% 3.188%

Cost of Equity 4.912% 3.653% 7.500% 4.000% 6.957%
WACC 3.853% 3.136% 5.475% 3.281% 5.660%

Source: Case Writer Analysis

Exhibit 7
Royal Mail plc: Cost of Capital
One Month Interbank Lending Rate and Government Bond Yields (%)

1 Month 5 Year Bond 10 Year Bond

Jan-14 0.47 1.78 2.71
Feb-14 0.47 1.80 2.72
Mar-14 0.47 1.87 2.74
Apr-14 0.47 1.86 2.67
May-14 0.48 1.80 2.57
Jun-14 0.48 1.99 2.67
Jul-14 0.47 1.98 0.62
Aug-14 0.47 1.70 2.37
Sep-14 0.47 1.78 2.43
Oct-14 0.47 1.56 2.25
Nov-14 0.47 1.30 1.93
Dec-14 0.47 1.20 1.76
Jan-15 0.48 0.91 1.34
Feb-15 0.48 1.28 1.79
Mar-15 0.48 1.09 1.58
Apr-15 0.48 1.30 1.84
May-15 0.48 1.26 1.80
Jun-15 0.51 1.46 2.03

Source: Bank of England

Exhibit 8
Royal Mail plc: Cost of Capital
U.K. Corporate Benchmark Bond Yields for 10 year Maturity in GBP (July 14, 2015)

Credit Rating Yield

AAA 2.503
AA 2.839
A 3.356
BBB 3.776
BB 4.773
B 5.883

Source: Thomson Reuters and case writer estimates

Exhibit 9
ROYAL MAIL
Financial Data for Comparables (Market Data as of July 14, 2015, Other Data is Most Recent Available)

Company Industry

National Grid Electricity and gas utility

Severn Trent Water Utility
Tesco Food Retailer
United Utilities Water Utility
Vodafone Telecommunications

National Severn United

Grid Trent Tesco Utilities Vodafone

Price per Share (Pence) 855 2,190 200 900 230

Dividend per Share (Pence) 42 80 15 36 16
Shares Outstanding (Millions) 3,730 239 8,096 682 26,440
Market Capitalisation (Millions) 31,892 5,234 16,192 6,138 60,812
Book Equity (Millions) 11,911 1,078 14,715 2,216 70,802
Book Debt (Millions) 25,950 4,622 11,213 6,042 25,362
Beta 0.60 0.79 0.87 0.67 0.86
Credit Rating BBB- BBB+ BB+ BBB+ BBB+

Source: Financial Times