This spreadsheet supports STUDENT analysis of the case "Royal Mail plc: Cost of Capital" (UVA-F-1774).

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Jan. 27, 2017

Exhibit 2
Royal Mail plc: Cost of Capital
Cumulative Weekly Total Stock Returns--Royal Mail and FTSE 100 Index

35%
Cumulative returns

30%
Royal Mail
25% FTSE100
Index

20%

15%

10%

5%

0%

-5%

-10%
3 3 14 4 14 14 4 4 15 5 15
t-1 c-1 b- r-1 n- g- t-1 c-1 b- r-1 n-
Oc De Fe Ap Ju A u Oc De Fe Ap Ju

*** Monthly Return *** *** Cumulative Return ***

FTSE100 Index oyal Mail FTSE100 Index oyal Mail
Oct-13 0% 0%
Oct-13 2% 10% 2% 10%
Oct-13 1% 10% 4% 21%
Oct-13 0% 3% 4% 24%
Nov-13 0% -1% 3% 23%
Nov-13 0% -2% 3% 22%
Nov-13 0% -4% 3% 18%
Nov-13 0% 3% 3% 21%
Dec-13 -1% 7% 1% 28%
Dec-13 -2% -1% -1% 27%
Dec-13 3% 0% 2% 28%
Dec-13 2% -2% 4% 26%
Dec-13 0% 0% 4% 26%
Jan-14 0% 1% 4% 26%
Jan-14 1% 4% 5% 30%
Jan-14 -2% -5% 3% 25%
Jan-14 -2% 4% 1% 29%
Feb-14 1% -2% 1% 28%
Feb-14 1% 1% 3% 29%
Feb-14 3% 1% 5% 29%
Feb-14 0% 0% 5% 29%
Mar-14 -1% -2% 4% 27%
Mar-14 -3% -4% 1% 24%
Mar-14 0% 3% 1% 26%
Mar-14 1% -3% 2% 23%
Mar-14 1% -3% 3% 21%
Apr-14 -2% -10% 1% 11%
Apr-14 1% 3% 2% 14%
Apr-14 1% 2% 3% 16%
Apr-14 2% 4% 5% 20%
May-14 0% 3% 5% 23%
May-14 1% 3% 6% 25%
May-14 -1% -8% 5% 17%
May-14 0% -3% 6% 15%
Jun-14 0% -3% 6% 12%
Jun-14 -1% 0% 5% 12%
Jun-14 1% -3% 5% 9%
Jun-14 -1% 3% 4% 13%
Jun-14 2% -2% 6% 11%
Jul-14 -3% 0% 3% 11%
Jul-14 1% -1% 4% 10%
Jul-14 1% -6% 5% 3%
Jul-14 -2% -3% 3% 0%
Aug-14 -2% 0% 2% 0%
Aug-14 2% 2% 4% 2%
Aug-14 1% 3% 5% 5%
Aug-14 1% -1% 5% 4%
Sep-14 1% -5% 6% 0%
Sep-14 -1% -1% 5% -1%
Sep-14 0% 3% 6% 2%
Sep-14 -3% -8% 3% -6%
Sep-14 -2% -1% 1% -7%
Oct-14 -3% 1% -2% -6%
Oct-14 0% 8% -2% 2%
Oct-14 1% 6% -1% 8%
Oct-14 2% -4% 2% 4%
Nov-14 0% 5% 2% 9%
Nov-14 1% 1% 3% 10%
Nov-14 1% -8% 5% 2%
Nov-14 0% -1% 4% 1%
 Dec-14 0% -3% 4% -2%
Dec-14 -7% -3% -2% -5%
Dec-14 4% 5% 2% 0%
Dec-14 1% 2% 3% 2%
Dec-14 -1% 0% 2% 3%
Jan-15 -1% -1% 1% 2%
Jan-15 1% 2% 2% 4%
Jan-15 4% 2% 6% 7%
Jan-15 -1% -1% 5% 5%
Feb-15 2% 5% 7% 10%
Feb-15 0% -2% 7% 8%
Feb-15 1% -5% 7% 3%
Feb-15 0% -1% 8% 2%
Mar-15 -1% 1% 7% 3%
Mar-15 -2% 1% 5% 4%
Mar-15 4% 4% 9% 8%
Mar-15 -2% -1% 7% 7%
Mar-15 0% 0% 6% 7%
Apr-15 4% 2% 10% 9%
Apr-15 -1% -1% 9% 8%
Apr-15 1% -1% 10% 7%
Apr-15 -1% 6% 9% 13%
May-15 1% 2% 10% 16%
May-15 -1% 1% 8% 17%
May-15 1% 4% 9% 21%
May-15 -1% 4% 9% 25%
Jun-15 -3% -6% 6% 19%
Jun-15 0% 3% 6% 22%
Jun-15 -1% -1% 5% 21%
Jun-15 1% 4% 5% 25%
Jun-15 -2% -1% 3% 24%
Jul-15 1% 2% 4% 26%
Jul-15 2% -1% 6% 25%
Jul-15 -3% 0% 3% 25%

Source: Investing.com
Exhibit 3
Royal Mail plc: Cost of Capital
Royal Mail Unit Volume History (Millions of Units, Period Ending March 31)

2012 2013 2014 2015

Letters
Addressed letters 15,147 13,869 13,342 13,009
Unaddressed letters 3,077 3,258 3,143 3,157
Total 18,224 17,127 16,485 16,166
Growth rate -6.0% -3.7% -1.9%

Parcels
Royal Mail core net 950 994 991 1,015
Parcelforce worldwi 66 70 77 86
Total 1,016 1,064 1,068 1,101
Growth rate 4.7% 0.4% 3.1%

Source: Company annual reports.

Exhibit 4
Royal Mail plc: Cost of Capital
Royal Mail Consolidated Income Statement
(Reported as of the end of March in millions of GBP)

2014 2015

Revenue 9,357 9,328

People costs 5,209 5,230

Distribution and conveyance 1,796 1,764
Infrastructure costs 1,047 1,019
Other operating costs 578 575
Transformation costs 241 145
Earnings before interest a 486 595

Finance costs 71 30
Finance income 4 4
Profit before tax 419 569

Tax 110 138

Profit for the period 309 431

Earnings per share 30.6p 42.8p

Source: Royal Mail Annual Report 2015

Exhibit 5
Royal Mail plc: Cost of Capital
Royal Mail Consolidated Balance Sheet
(Reported as of the end of March in millions of GBP)

2014 2015
Noncurrent assets
Property, plant and equipme 1,989 1,933
Goodwill and intangible asse 392 482
Retirement benefit asset 1,723 3,179
Other noncurrent assets 55 80
4,159 5,674
Current assets
Inventories 22 20
Trade and other receivables 926 949
Cash and current financial a 369 348
1,317 1,317
Total assets 5,476 6,991

Current liabilities
Trade and other payables 1,652 1,668
Financial loans and borrowi 286 290
1,938 1,958
Noncurrent liabilities
Financial loans and borrowi 860 559
Deferred tax liabilities 151 474
Other liabilities 126 154
1,137 1,187
Total equity
Share capital 10 10
Retained earnings 2,332 3,843
Other equity 59 -7
2,401 3,846

Source: Royal Mail Annual Report 2015

Exhibit 6
Royal Mail plc: Cost of Capital
Kyle Brooks's Cost of Capital Analysis

WACC for Royal Mail

Capital Sources Book Valuesercentage
Current Debt 290 6%
Noncurrent Debt 559 12%
Equity 3,846 82%

Cost of Debt
Current Debt 0.900%
Noncurrent Debt 4.375%
Weighted Averag 3.188%

Cost of Equity
Dividend per Shar 21
Price per share 511
Dividend Yield 4.110%

Risk-free Rate 1.551%

Beta 0.65
Market Risk Prem 5.8%
CAPM Cost of Eq 5.321%

Weighted Average Cost of Capital

Tax Rate 20.0%
WACC 3.828%

WACC for Comparable Companies

National Severn United Vodafon
Grid Trent Tesco Utilities e

Debt / Value 45% 47% 41% 50% 29%

Cost of Debt 3.188% 3.188% 3.188% 3.188% 3.188%

Cost of Equity 4.912% 3.653% 7.500% 4.000% 6.957%
WACC 3.853% 3.136% 5.475% 3.281% 5.660%

Source: Case Writer Analysis

Exhibit 7
Royal Mail plc: Cost of Capital
One-Month Interbank Lending Rate and Government Bond Yields (%)

1 Month 5 Year Bond 0 Year Bond

Jan-14 0.47 1.78 2.71
Feb-14 0.47 1.80 2.72
Mar-14 0.47 1.87 2.74
Apr-14 0.47 1.86 2.67
May-14 0.48 1.80 2.57
Jun-14 0.48 1.99 2.67
Jul-14 0.47 1.98 0.62
Aug-14 0.47 1.70 2.37
Sep-14 0.47 1.78 2.43
Oct-14 0.47 1.56 2.25
Nov-14 0.47 1.30 1.93
Dec-14 0.47 1.20 1.76
Jan-15 0.48 0.91 1.34
Feb-15 0.48 1.28 1.79
Mar-15 0.48 1.09 1.58
Apr-15 0.48 1.30 1.84
May-15 0.48 1.26 1.80
Jun-15 0.51 1.46 2.03

Source: Bank of England

Exhibit 8
Royal Mail plc: Cost of Capital
UK Corporate Benchmark Bond Yields for 10-Year Maturity in GBP (July 14, 2015)

Credit Rati Yield

AAA 2.503
AA 2.839
A 3.356
BBB 3.776
BB 4.773
B 5.883

Source: Thomson Reuters and case writer estimates

Exhibit 9
ROYAL MAIL
Financial Data for Comparables (Market Data as of July 14, 2015, Other Data is Most Recent Available)

Company Industry

National Grid Electricity and Gas Utility

Severn Trent Water Utility
Tesco Food Retailer
United Utilities Water Utility
Vodafone Telecommunications

Nationa Severn United Vodafon

l Grid Trent Tesco Utilities e

Price per Share (Pence) 855 2,190 200 900 230

Dividend per Share (Pence 42 80 15 36 16
Shares Outstanding (Milli 3,730 239 8,096 682 26,440
Market Capitalization (Mil 31,892 5,234 16,192 6,138 60,812
Book Equity (Millions) 11,911 1,078 14,715 2,216 70,802
Book Debt (Millions) 25,950 4,622 11,213 6,042 25,362
Beta 0.60 0.79 0.87 0.67 0.86
Credit Rating BBB- BBB+ BB+ BBB+ BBB+

Source: Financial Times

Recent Available)