# 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 (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     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         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%       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.