(a) WACC calculation:

WACC (Weighted Average Cost of Capital) is the minimum return which a company required or produces for its
investors. It is the combination of total cost which includes cost of debt financing and equity financing. It may also
be called as company’s cost of capital as the company pays the cost to finance its assets.

WACC Formula:

WACC = ME / (ME + MD) * Cost of Equity (ke) + MD / (ME +M D) * Cost of Debt (kd) * (1 - Tax Rate)

ME = Market value of equity

MD = Market value of debt
Ke = Cost of equity
Kd = Cost of debt

Using Capital Asset pricing Model the cost of equity can be calculated as following:
*Ke = Rf+(Rm-Rf)b
Where
Rf = Risk free Rate
Rm = Expected Return of the market
Rm-Rf = Market Risk Premium
B = Beta (Beta is the sensitivity of the expected excess asset returns to the expected excess market returns)
Lloyds Banking Group PLC's data is as follows:

Beta = 1.21
Rm- Rf = 6%
Rf = 1.18850000%
Tax rate average of last two years = 28.445%

Ke = Rf+(Rm-Rf)b

Ke = 1.18850000% + (6%)1.21 = 8.4485%

*Cost of debt (kd)= interest expense / Market value of debt

Kd = 3737.97468354 / 111161.612991 = 3.3626%
WACC=ME / (ME + MD)*Cost of Equity+MD / (ME + MD)*Cost of Debt*(1 - Tax rate)
WACC= 0.3412*8.4485%+0.6588*3.3626%*(1 - 28.445%)=4.47%

WACC% for the last four years is as follows:

Dec15 Dec16 Dec17 Dec18
1.74 4.09 0.70 1.03
Explanation:
As discussed earlier that WACC is the minimum required rate of return which a company must produce on its
investments. Lloyds Banking Group PLC's WACC is 4.47% which means that Lloyds must pay average $ 0.047 to its
investors for investing every extra $1. Llyods Return on Invested Capital (ROIC) is 0.00%. It means that the company
is not earning the required return on its invested capital which must be at least equal to WACC. It will be difficult for
the company to grow with the current ROIC situation.
Assumptions:
(b) Debt / Equity Ratio:
It measures the leverage position of the firm as compare to its equity.
Debt / Equity Ratio = Total debt / Total equity (stokeholders fund)
(Current Portion of long term Debt+Long-Term Debt & Capital Lease Obligation)/ Total Stockholders Equity=
(0+118860.759494)/63196.2025316=1.88
Interest Coverage Ratio:
It shows the capacity of the company to pay the interest expense on its debts/ outstanding loans.
Interest Coverage Ratio = EBIT (Earnings before interest and Tax) / Interest Expense
Interest Coverage Ratio = 0/0
Llyods EBIT is showing $0 million and interest expense is also $ 0 million. As the company has no debt
therefore it seems that it will be easy for it to manage its future repayment of loans if required.

Dividend Policy:
i. Dividend payout ratio :
It measures the payment of divided from earnings . it is calculated as follows:
D/P Ratio = Dividends per share / Earnings per share
Llyods current Dividend payout ratio = 0.1544 / 0.2784 = 0.55
If a company pays more divided it means that less portion of earning may be invested for the growth. Llyods
payout ratio for the last five years is
Dec14 Dec15 Dec16 Dec17 Dec18
0.00 1.91 0.98 0.67 0.56

From the above payout ratio, it is evident that the company has different strategy to pay dividends. With
comparison of current dividend which is 0.55 is almost same as the Dec 18. In the last 13 years, the maximum Dividend
Payout Ratio of Lloyds Banking Group PLC was 1.88 and the minimum was 0.55. And the median was 0.78. The low payout ratio
shows the company is going to grow its share price/ earnings.

iii.. From the pattern of divided payments of the company it can be assumed that the variations in
payout ratio depends upon the value of the firm and its growth strategies. We can relate the scenario of the company
with the academic divided policy called the “Gordon theory on divided policy”. This theory stated that the policy of
paying the divided of company will effect its share price and, its rate of return and cost of capital. This is the most
valued theory in computing the value of the firm by using its dividend policy. This theory assume that there is not
debt in the capital structure of the company and all the financing is from the equity. In our case scenario there is no
debt while the current portion of long term debt and lease obligations of long term debt is considered at average of
last two years while computing the Debt to equity ratio. The second assumptions is that there is no extra soure of
finance and the only source will be retained earnings. So this theory is the most suitable for this case study.

(c) Valuation

i. Static valuation multiples

a. Enterprise value multiples:

1. Enterprise value to Sales multiple

Enterprise value to sales multiple is same like price to sales ratio. The difference here is
that the Enterprise value is used here instead of Market capitalization.
Current share price of the Lloyds Banking Group PLC's is $3.28.
EV to Sales = Enterprise Value (Today)/Sales
= 108622.94/ 56131.812
= 1.94
Lloyds Banking Group PLC’s EV to sales ratio for the last five years is:
Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
3.19 3.63 2.06 1.96 1.75

b. Price to Earnings Ratio:

Price to earnings ratio is the most important ratio used in the analysis of company’s
performance. It relates the share price with the Earnings of the company to determine the variations in
the share price with compare to Earning of the firm. It is calculated as follows:
P/E Ratio=Share Price/Earnings per Share
Current share price of the Lloyds Banking Group PLC's is $3.28.

P/E Ratio = Share Price / Earnings per Share (Diluted)

= 3.28 / 0.27237
= 12.04
This ratio measures that how long it will take to earn back the price you pay.
 c. Price to Book value ratio (P/B) Ratio:
This ratio compares the market price of the share with the book value. This ratio is also used by
many financial analysts while performing analysis of the organizations. Normally, the result of this ratio under 1
is considered good price to book value ratio. In our case study the price to book value ratio of the company can
be calculated as follows:
P/B Ratio = Share Price / Book Value per Share
= 3.28 / 3.552
= 0.92
d. Price to Sales Ratio:
Price to sales ratio is another valuation technique for comparison of stock with its fundamental /
historical value. It is widely used ratio while projecting the expected stock returns. This ratio based on the
earning power of the company and provide the results which can be used to evaluate the future trend of the
stock.
P/S ratio in our case study is:
P/S Ratio = Share Price / Revenue per Share
= 3.28 / 3.114
= 1.05

2. Absolute valuation technique:

Free Cash Flow Method:

This is the most important measure while valuation of a company or business. FCF method is free form
the estimates of Depreciation, amortization and other non-cash items. It shows the true liquidity
position of the firm as compare to its earning power. It provided the estimates in long perspective.
It can be calculated in our case study as:
Free Cash Flow = Cash Flow from Operations + Capital Expenditure

= -14059.493 + -4448.10
= -18,508