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Capital Structure of ENCANA
Capital Structure of ENCANA
Capital Structure of ENCANA
The capital structure of ENCANA can be determined by deciding the load of value and
obligation to add up to the capital. Market estimation of value can be dictated by increasing
the latest number of offers (854.9 million basic offers at the finish of 2005) and stock cost
($56.75 on January 31, 2006).
= 854.9 * 56.75
= $48515.575
The complete estimation of obligation (present moment and long haul obligation) toward the
finish of 2005 was $8054 million. The momentary advance will be included in my
computation since I assumed that ENCANA will continue taking a momentary advance in
future to run its normal tasks what's more, this obligation will likewise bear an expense.
1 = 0.1423 + 0.8577
It implies the capital of ENCANA comprise of 14.23% of the obligation, and 85.77% of the
value. This structure was determined on the latest information and I can expect that
ENCANA was working its capacities with the capital comprises of this structure.
Cost on Debt:
Long term debts (bonds, other long term debts, deferred taxes)
Short term debts (accounts payable, other accruals, income tax payable, short term
obligations)
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But we will take only those debts which are coming from investors and other financial
institutions for operating ENCANA’s projects and these debts are:
Short-term obligations
Publicity traded (Bonds)
Other long term debt
Transient advances are likewise included while figuring WACC on the grounds that we
expect that ENCANA will continue taking momentary advance in future to run its normal
activities and this obligation additionally bear an expense.
Interest on publicity traded = total interest payable for the year – (interest on
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Average Cost on Debt = w olt * rolt + wplt * rd + wst * rst
= 6.505 %
By this rate about $524 million intrigues is paid by the organization on its obligations, yet as
indicated by law intrigue cost is Duty excluded, and WACC is determined for future gauging
for tasks. So as to ascertain WACC, we will take rate of interest after tax.
Rate of tax can be calculated by dividing interest expense over net earnings before tax.
T = 1260/4089
T = 30.81%
Average cost on debt after tax = rd-at = 6.505 (1- T) = 6.505 (1- 30.81%)
rd-at = 4.50 %
Cost on Equity
1. CAPM
2. Dividend growth model
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By CAPM
rs = r* + RPm (b)
RPm = rm – r*
= 13.9-4.
= 9.7
Beta = 1.27
rs = 16.519 %
Rs = (D1/ Po – F) + g
Where:
F = Floatation Cost
Averse growth from past data:
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Average Growth
rs = (Do (1+ g) / Po – F) + g
rs = 0.325108/53.9125 +0.1611
rs = 16.713%
WACC
The WACC equation is the cost of each capital component multiplied by its
Where,
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = Total Capital = E + D
E/V = we = percentage of financing by equity
By putting Values:
= 854.9 * 56.75
= $48515.575 million
= 48515.575+ 8054
= $56596.575 Million
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WACC = wd * rd + we * re
= 0.6404 + 14.2436
= 14.884%
RECOMMENDATIONS
In view of the discoveries, I suggest 14.884% is the fitting Expense of Capital for EnCana
Organization. The reasons as following:-
1. CAMP model is the most fitting technique on assessing the expense of value;
2. New capital use is prescribed to utilize the obligation in light of the fact that
the expense of obligation is lower than the value one;
3. The new obligation will build the estimation of the firm;
4. The new issue of regular stock isn't fitting, because of the floatation cost and
data asymmetry, or flagging;
5. The organization will attempt to put resources into the task which is requiring
a higher return.
Submitted By:
Sumit Sourav(18031)
2018-20
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