Lex Case Analysis

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Lex Service underwent significant restructuring from 1991 to 1993. This included exiting the electronics industry and losing an alliance with a major automobile company (Volvo). As a result Lex Service took this opportunity of a sudden influx of capital to fund future growth opportunities. After a series of acquisitions, management feels as though the asset beta of the company has changed as well as the cost of capital to the firm. For the first step, we will calculate the cost of capital before the firm had undergone the restructuring. There are some assumptions that we need to make in order to calculate this. Please see the attached document step 1 for the assumptions. Next we will focus on calculating the betas for the individual product lines after utilizing the capital. This is important because the D/E ratio has obviously changed after using the capital for the various acquisitions. This can be seen on step 2 of the excel spread sheet. One conflict was whether or not to use the book value or market value for the equity value. In this situation, I thought it would be efficient to use market value because as our debt levels change, we need to be cognizant of the market value of our equity as our company grows in size or downsizes. Once we have calculated our D/E ratio we can then use the asset betas from comparable companies included in exhibit 5 to find the beta of equity for each line of business. Step three involves calculating the cost of capital for each line of business. Where the change takes place is the fact that we will be including the beta of equity of each line of business, which has factored in the outstanding debt the company has taken on. This new beta will alter the cost of capital for each business line. Lastly we will need to calculate the weighted average cost of capital for each division pertaining to its size relatively

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