FINANCIAL CALCULATIONS Essay Example

Question 1

  1. Quantify Bent Ltd’s debt ratio before and after the capital restructuring.

Debt ratio

Debt ratio

Equity ((0.35/0/65*650,000)

1,000,000

Total capital

1,555,000

Total capital

1,450,000

Quantify Bent Ltd’s WACC before and after the capital restructuring

FINANCIAL CALCULATIONS

(855000/155500+700000/1555000(0.7)=0.37

WACC={10000000/1450000(10%)+(450,000/1450000(0.7)=0.29

Best discounting rate.

The company should use WACC after since, it depict a low cost of capital with a higher value which minimise investment risk to the company.

Question 2

We use debt to equity ratio to determine the market value of the existing capital structure

Capital structure

Debt to equity ratio

B. existing Weighted Average Cost of capital

0.053799

D/V(0.7)

0.323404

0.377204

breaking points in the Marginal Cost of Capital (MCC) scheduleC.

Marginal Cost Of Capital Worksheet

Target Capital Structure:

Percentages

Long-term Debt

Preferred Stock

Common Equity

Summary of Financing Information:

Common Stock Current Market Price

Per-Share Common Stock Proceeds

Current Common Stock Dividend (Do)

Constant Growth Rate (g)

Retained Earnings

Per-Share Preferred Stock Proceeds

Preferred Stock Dividend

Marginal Tax Rate

Before Tax

Principal

Interest Rate

After-tax Cost

Preferred Stock: Amount

Dividend ($)

After-tax Cost

Internal Equity: Amount

External Equity:

Dividend ($)

After-tax Cost

Marginal cost of capital schedule

Amount of

Financing

Remaining

Lowest Cost

Available

Amount of

Financing

Supports an

Increment

Lowest Cost

After-tax

Marginal Cost

Available

Increment of

Break Point

Financing

of Capital

Preferred

Preferred

Preferred

Preferred

Preferred

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Kr 0.0091

New Financing and Project to be accepted

Range of financing

Source of capital

cost of capital

Weighted cost

0-1500000

Preference Shares

Ordinary Shares

Debentures

Retained earning

0.007917

Weighted average cost

1000000-1400000

Preference Shares

Ordinary Shares

Debentures

Retained earning

Weighted average cost

1000000-1300000

Preference Shares

Ordinary Shares

Debentures

Retained earning

Weighted average cost

The closest whole percentage point the missing internal rates of return

Project Identification

Project cost

Estimated Annual Cash (Millions)

Estimated life in years

Internal rate of return

Projects should be accepted

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New Financing

The company must make a consideration of venturing in project H due to the fact that the internal rate of return on the project depict a low cost of equity capital which implies that the business shall realize utmost returns in the venture alternative.

Would happen if Projects A, C and F were unavailable

Project Identification

Project cost

Estimated Annual Cash (Millions)

Estimated life in years

Internal rate of return

The project alternative to be considered is therefore project G which will have the least cost of capital of 10%

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New Financing

Assumption

Them assumption made in the above investment alternative is that an investor is risk averse and the investment will year the positive returns within the stipulated time frame, which implies that no external factors shall affect the performance of the investment. An investor is rational and thus there is no information asymmetric

(CAPM) equation to determine Zebra Ltd’s cost of equity

CAPM = (Risk free rate of return+ Beta (premium)

CAPM= {7.5+1.2(12.3-7.5) =5.76%

Question three

The 10% cost of capital is in appropriate since, the discounting table provides that an investment analysis shall employ the present value interest factor (P.V.IF 10%) in determining the present value of the cash flow. The procedure Employed by B in appraising the investment viability is faced with the following discrepancy; net present value hasn’t followed the normal procedure of working the net present value since, the NPV of the project shall be the summation of present value then adding the scrap value and then less the initial capital. The cash flow is determined first then discounts the cash flow in order to get the present value; the depreciation tax shield is included in the net cash flow. All of the above mentioned factors in appraising an investment viability using the net present value approach are not followed by B and consequently, the investment decision concluded shall be misleading.