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).

Equity= E = No. of shares * Stock price

= 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.

Capital Structure =Total debt / Total capital + Equity / Total capital

Capital Structure = 8054/56596.575 + 48515.575/56596.575

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:

ENCANA’s debt can be divided into two parts:

 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.

Short Term loan

Short Term loan = $1425 Million

Rate of Interest = rst = 3.52%

Amount of Interest = 1425*3.52= $50.16 Million

Long Term Loan

Other long Term Debt = $1278 Million

Rate of Interest = rolt = 5.25% (Assuming Prime Rate is charged)

Amount of Interest = 1278*5.25% = $67.095 Million

Interest on publicity traded = total interest payable for the year – (interest on

other long term debts+ interest on short term debt)

Interest on publicity traded = 524 - (50.16+67.095) = $406.745 Million

Rate of interest on publicly traded = rd =interest/Debt = 406.745/5351 = 7.60%

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 Average Cost on Debt = w olt * rolt + wplt * rd + wst * rst

= 1278/8054*5.25% + 5351/8054*7.605 +1425/8054*3.52%

= 0.833 + 5.049 + 0.622

= 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

We can calculate cost on equity by two methods:

1. CAPM
2. Dividend growth model

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By CAPM

Using SML Equation:

rs = r* + RPm (b)

r* = 4.20 % (Govt. long Term Treasury Bills)

rm = 13.9% (S&P arithmetic average return)

RPm = rm – r*

= 13.9-4.

= 9.7

Beta = 1.27

rs = 4.20 + 9.7 *1.27

rs = 16.519 %

By Dividend growth Model

Rs = (D1/ Po – F) + g
Where:

D1= next year dividend

Po = current price of share in market

F = Floatation Cost
Averse growth from past data:

Year Dividend Per Share Growth %

2002 0.20 (25.00)

2003 0.15 33.33

2004 0.20 40.00

2005 0.28 16.11

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 Average Growth

rs = (Do (1+ g) / Po – F) + g

rs = 0.28 (1+0.1611) / 56.75 (1- 0.05) + 0.1611

rs = 0.325108/53.9125 +0.1611

rs = 16.713%

Average rs = (16.713+16.519)/2 = 16.616%

WACC

The WACC equation is the cost of each capital component multiplied by its

proportional weight and then summing:

WACC = rD (1- Tc )*( D / V )+ rE *( E / V )

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

D/V = wd= percentage of financing by debt

T = corporate tax rate

By putting Values:

Total Equity= E = no of shares * price of shares

= 854.9 * 56.75

= $48515.575 million

Total Capital = Equity + Debt

= 48515.575+ 8054

= $56596.575 Million

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WACC = wd * rd + we * re

= 8054/56596.575 * 4.5 + 48515.575/56596.575 * 16.616

= 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:

Sujata Sharma (18028)

Sumit Sourav(18031)

2018-20

Calcutta Business School

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