Vinamilk’s financial analysis

For each business, the demand for capital is one of the very important needs. Capital was formed from a variety of sources. So deciding what funding options, how much percentage to implement business goals, achieve the business goals is extremely important. One of the factors to consider for making decision is the cost of capital. The basic goal of business is to maximize shareholder value, and a company can increase this value by investing in projects that cost more profitable use of capital. In other words, the cost of capital is the expected return on the investment that can be obtained when they invest in stocks of companies compared to the risk they face. The cost of capital is the opportunity cost of using capital.

For the case of Vietnam Milk Joint Stock Company (abbreviated name: Vinamilk, stock code: VNM), the shares that are issued are common share with a par value of VND 10,000 / share (listing date 24/03/2014 on stock exchanges). Therefore, the cost of capital of the company is the cost of common stock. In addition, the capital was formed from two main sources: liabilities and equity. Below was the Vinamilk’s cost of capital in 2011:

• With liabilities, we have debt costs which include:
• Pre-tax cost of debt (Kd):

Kd is calculated on the basis of loan interest or dividend to the amount actually mobilized. The formula of pre – tax cost of debt is:

Kd = Do / (Po – F)

Where:

Kd: Pre-tax cost of debt

Do: dividend at the end of the year 0

Po: share price at the time of release

F: Cost of release (%)

 Pre-tax cost of debt of Vinamilk JSC in 2011:

Kd = (3000 / 4513) x 100% ≈ 66.5%

• After-tax cost of debt:

Calculated on the basis of pre-tax cost of debt with taking into the impact of corporate income tax (t: corporate income tax), the formula is:

After – tax cost of debt = Kd x (1 – t)

We have after – tax cost of debt of Vinamilk JSC (t = 25%) in 2011:

After – tax cost of debt = 66.5% x (1 – 25%) = 49.875%

• For the cost of equity, Vinamilk JSC used following 3 methods to raise equity by retaining profits after tax:
• Method 1: Discounted Cash Flow

 + g

Where:

Ks: Cost of retained earnings

D1: expected dividend divided by the end of the first year

Po: Market share price at the time of release

g: dividend growth (no change)

Below is cost of retained earnings of Vinamilk JSC in 2011:

Ks =  + 25% = 65%

• Method 2: Component Interest rate and risk reward

Ks = Interest rate shares (debt interest medium and long term) + Reward risk (3 – 5%)

Ks of Vinamilk JSC in 2011 is: 35% + 4% = 39%

• Method 3: The CAPM model

Ks = Krf + (Krm – Krf) x β_i

Where:

Krf: Rate of return of the risk-free asset

Krm: Rate of return of assets with medium risk (market portfolio)

βi: risk ratio of company shares

In the case of Vinamilk JSC, we have:

Ks = 11.9% + (14.7% – 11.9%) x 0.75 = 14.7%

• Average Cost of Capital (WACC):

We have the formula for this cost:

WACC = (E/V) x Re + (D/V) x Rd x (1 – t)

Where:

E: Market value of equity

D: Market value of debt

V: Market value of the firm = D + E

Re: Cost of equity

Rd: Cost of debt

Pn: Net value per share issued

Average cost of capital (WACC) of Vinamilk JSC in 2011:

V = D + E = 3,105,466,354,267 + 12,477,205,196,484 = 15,582,671,550,751

Re = 20%; Rd = 25%; T = 25%

• WACC = (E/V) x Re + (D/V) x Rd x (1 – t) = (12,477,205,196,484/15,582,671,550,751) x 20% + (3,105,466,354,267/15,582,671,550,751) x 25% x (1 – 25%) ≈ 17.5 %

Next, the financial analysis of Vinamilk JSC based on financial leverage (still taken in 2011 for analysis) is shown below. We have the formula of financial leverage:

FL (Financial leverage) = 1 + (Total debt) / (Equity)

According to the financial statements of the company Vinamilk JSC, as of 31/12/2011, the company’s total debt and equity are 3,105,466,354,267 12,477,205,196,484 relatively, therefore, the financial leverage of the company in ended fiscal year 2011 was:

FL = 1+  ≈ 1.25

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