Lex Service PLC--- Cost of Capital
In 1928 Lex Garages Limited, at the time of public incorporation, had single garage in London.After 60 years, Lex Service PLC became a leading company in automotive distribution and leasing in the United Kingdom. In late 1950, Lex obtained from Volvo Car Corporation the exclusive franchise to import and distribute Volvo cars in the United Kingdom that ended in1992 four years before the scheduled termination date. This news dropped the share price of Lexto 30%. In 1970s, Lex started to expand its business into other services like transportation andleasing and for temporarily in hotel management business. By the end of 1983, Lex was structured around two principal groups¶ i-e Lex Automotive and Lex Electronics Worldwide. From 1991 to 1993, Lex sold its major electronic business to Arrow Electronics, Inc. With theseries of acquisitions by Lex, finally it entered in the profitable business by acquiring acontrolling interest in the U.K importership, Hyundai Car (U.K) in September 1993. Thisacquisition gave Lex management control of a three year rolling contract that Hyundai Car heldwith Hyundai Motor Company of Korea.In this case study, board meeting was scheduled in 1993 to review its cost of capital proceduresand to determine whether Lex Service PLC should use different hurdle rates for differentdivisions or should use cost of capital for the whole company.Lex Service PLC was concerned about its cost of capital in 1993 because from 1991 to 1993 Lexhad gone through many acquisitions and sales of assets that changed its capital structure in ahuge way. That change of capital structure included the sale of whole electronic division toArrow Electronice, Inc and acquisition of Hyundai Car (U.K). Moreover, they had cash toreinvest so Lex wanted to properly estimate its Cost of equity. Once new cost of capital is
computed that will enable the firm to estimate its required rate of return on its investments. Ingeneral companies make use...
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