Marketing for Lush

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1. Calculation of WACC :-

▪ Cost of preference shares​:- p iV p Pp r = D

=1.50/10.76

= 13.94%

Where

= the cost of preference shares p r DiVp = the preference share dividend Pp = the preference share price.

▪ Cost of Ordinary shares​:- E f βi(E[Rmkt] f) r = r + − r

= 0.56 + 9.8

= 10.36%

Where

= Cost of Ordinary shares rE

= Risk Free Rate of Return fr = Beta of the Share iβ = The Expected Return on The Market [Rmkt] E

▪ Cost of Debt​:-

5yr risk-free return = 2.255 fr Credit Spread B- = 604bp i.e. 6.04

= + Credit Spread fr = 2.255 + 6.04 = 8.295%

Capital component Cost Of Capital Market Value

Ordinary Shares 10.36 % 14,00000

Preference Shares 13.94 % 6,00000

Debt 8.295 % 16,00000

36,00000

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WACC E E% pP% D(1 c)D% r = r + r + r − T

= 0.1036 (14, 00000/36, 00000) + 0.1394(600000/3600000) + 0.08295 (1-03) (1600000/3600000)

= 0.0403 + 0.02323 + 0.02581

= 0.089

= 8.9%

2. Explanation of the circumstances in which it would be appropriate to use the company's

WACC as the discount rate in evaluating the project.

WACC is the weighted average of the cost of equity and the cost of debt of the company and which is based on the debt and equity proportions in the company’s capital structure.

Investment Decisions By Company:​ ​WACC is generally used for making investment decisions in the company by evaluating their projects. This is divided in to two parts.

Evaluate of Projects with Same Risk:​ When the new projects are of comparable risk like existing projects of the company, it is a suitable target rate to decide the acceptance or rejection of these projects. A company can rationally assume comparable risk when it is taking a new project and use WACC as a hurdle rate to decide whether it should enter into the project or not.

Evaluation of Projects with Different Risk:​ WACC is suitable measure to be used to evaluate a project with the assumptions. The assumptions are ‘same risk’ and ‘same capital structure’.

​Discount Rate in Net Present Value Calculations:​ Net present value (NPV) is generally used method of evaluating projects to decide whether the investment is profitable or not.

WACC is used as discount rate or the hurdle rate for NPV calculations. The free cash flows and values are discounted using theWACC, So the company can easily estimate whether to accept or reject the project .