Corporate finance Essay Example | Topics and Well Written Essays - 2000 words - 1

Corporate finance - Essay Example It was also able to maintain total dividend per share at the level of 33.00p. Even in the turbulent market scenario, it managed to increase its sale of life and pensions by 11 percent. Total life and pensions sale became 36,283 million pounds. Sale of general insurance also increased. (Aviva Plc. 2009; Annual Report of 2008) a) Weighted average cost of capital: Cost of capital to a firm is generally defined as the opportunity costs of investors for making their investment in the firm. When an investor invests his fund in a particular firm, he actually looses other opportunities of investing his funds in other securities having risks equivalent to risks of the security of the firm he is actually investing his fund in. hence, if a firm fails to earn a return on capital at least equal to its weighted average cost of capital (WACC), it actually destroys its value. If a firm manages to earn a return that is greater than its weighted average cost of capital, it becomes successful to create value. On the other hand, if it manages to earn a return exactly equal to its weighted average cost of capital, then it neither loose nor create any value. WACC can be defined as the rate that a firm is expected pay for financing its asset. It is actually the minimum level of return that a company needs to earn on its exist ing asset base for satisfying its creditors, its owners, as well other providers of capital.( (Miles and Ezzell, 1980; â€Å"Weighted average Cost of Capital†) The weight of equity can be defined as the ratio of market capitalization to the market value of the firm and the weight of debt can be defined as the ratio of market value of debt to the market value of the firm. Total market value of firm is generally measured by summing total market value of equity and total market value of debt. (Miles and Ezzell, 1980; Fama, 1970; Fama, 1991) Cost of equity is generally treated as the return that the