Lab International Inc Case Solution

1. How does each of the two divisions create value for shareholders?

The shareholders’ value is increased if the company’s decision taken regarding the current financing problem is in the best interest of the company. The best interest of the shareholders is the maximum present value of the future cash flows. If the value is substantially high then the decision must be taken in order to provide shareholders maximum benefit. The two divisions must be valued at the market level so that the worth to shareholders can be determined. Exhibit 1 shows the valuation of the Lab research which is one of the divisions of the company. The valuation is done using the discounted cash flows method.

Cost of equity and cost of debt are the major determinant of the valuation of the company which ultimately contributes to the shareholder's value. The cost of equity is estimated by utilizing the capital asset pricing model which comes out to be 5.22%. The cost of debt is around 10% for the Lab Research Division. The weights of equity and debt are determined by using the book value of the debt and equity. The weighted average cost of capital is calculated to be 6.13%. This rate is used to discount the projected cash flows of the company. All the cash inflows and outflows associated with the division are stated in Exhibit 1 for the coming years. The net cash flows are discounted using the subject discount rate. The value comes out to be 37,599 Canadian Dollars which is the value of this division to shareholders.