Calculate The Company's Weighted Average Cost Of Capital

Submitted By HarneetDhillon
Words: 1785
Pages: 8
Open Document
Question 1 Calculate the Company’s Weighted Average Cost of Capital

Bank Overdraft

EAR = (1+i/n )^n - 1

(1 + 0.08/12) ^ 12 -1 = 0.0830

Cost of Bank overdraft: = EAR (1-t)

= 0.830 (1-0.30)

= 0.0581

Debentures

Current market price = $309.29

Face value = $300.00

Annual coupon rate = 13.5% ( paid half yearly)

Further flotation cost ( if any) = $1.50

(300* 13.5%) = 40.5/2 = 20.25

Present value of annuity = $20.25

Pmt = $20.25

MP= Pmt * 1 – ( 1)/ (1+i)^n i

20.25 * 1 – 1/ ( 1+ 0.00675)^ 14 0.0675

= $ 179.78

Discount back the face value to 0

= FV….. ( 1+i)^n

= 300.00 = $120.21
(1+0.0675)^14

EAR = (1+6.4084%) ^ 2 -1 = .1323

Cost of debt = EAR ( 1- t ) .1323 ( 1-0.30) = 0.0926

Cost of Preference Shares (Keps) = Dividend Market Price

1.10 = 0.1358024 8.10

Dividend per share= 275000 = $1.10 250000

Cost of Ordinary Share Capital (Keos) = D 0 * ( 1+G) + G MP

Dividend per share ( D0)= 1125000 = 0.15 750000

= 0.15(1+0.06) + 0.06 =0.150857

1.75 Calculation of Weighted Average Cost of Capital

|Long Term Debt |MV |Weight |Cost |WAC |
| | | | | |
|Bank Overdraft |1000000 |0.0474 |0.581 |0.0028 |
|Debentures |4948640 |0.2345 |0.0926 |0.0217 |
|Ordinary Shares |13125000 |0.6221 |0.1508 |0.0938 |
|Preference shares |2025000 |0.096 |0.1358 |0.013 |
| |21098640 | | |0.1313 |

Notes

Debentures = 16000 * 309.29 = 4948640

Ordinary Shares = 7500000* 1.75 = 13125000

Preference share capital = 2500000 * 8.10= 2025000

Growth rate of 6% is assumed from the dividends proceedings of 4 years (in case of ordinary shares.)

Ques 2: Initiative A: Calculate the Net Present Value and Internal Rate of Return for the three alternatives and advise management.

Large plant high demand

[pic]

Large Plant Low Demand

[pic]

Small Plant High Demand

[pic]

Small Plant Low Demand

[pic]

Expanded Plant High Demand

[pic]

Expanded Plant Low Demand

[pic]

In this part of the question management has three alternatives and it will go with the best one. In need to know which is the best one we have to calculate net present values and internal rate of return of all the three alternatives as the initial outlay and cash inflow for the respective periods are given. But as these inflows involve time value of money so we need to discount it to the present value so that we can judge which alternative is the best one. That’s why we calculate net present values and internal rate of returns.
Net present value: it is a capital budgeting technique defined as the present value of the project’s annual net cash flows less the project’s
Show More

Related Documents: Calculate The Company's Weighted Average Cost Of Capital

Financial Management Essay

higher current ratio implying that is more capable of paying its obligations. Although both companies have the ability to pay current debt, financial records show PepsiCo’s shows the likelihood to stay afloat because their short term debt and current portion of long term debt is more than six times greater. Basically, Pepsi is more liquid. According to the financial report, it is noted that Pepsi had a higher Current Ratio than Coca-Cola, in 2008 we see that Coca-Cola might have struggled to pay off…

Words 1534 - Pages 7

Financial Management Research

Financial management article research questions. 1) This articles primary topic or focus is about managing effective disaster recovery. 2) Main conclusions are methods of disaster recovery and making sure that it does not mean potential loss of data. This includes Taking care of fundamentals e.g making sure basic secure backups are in place for data files and software that run the business. Spending a specific amount of money to ensure fundamentals of disaster recovery are taken care of. Be more…

Words 340 - Pages 2

Questions On Financial Management

professor’s discretion. By the way, this syllabus is a compilation and explanation of the rules, so it is a rather serious document. Finally, if you find what you believe to be an error and/or an omission, please notify your professor. FINC 6301 Financial Management Fall 2012 Syllabus FINC 6301 is the core finance course for the MBA program. We will be studying many of the topics covered in the course prerequisite FINC 5308 (or in the six hours of undergraduate finance for which you have already received…

Words 5140 - Pages 21

Financial Management Essay

objective of Financial Management is to maximize shareholders profits (value), accomplish a place between competitive advantages would be another goal of business strategy. A CEO is a person who is responsible achieving this level of his business decided the short or long term vision and predict the best way to accomplish that. I would like to talk about the different between short and long term plan for financial managers Short-term Goals When you're establishing your financial plan, the first…

Words 1235 - Pages 5

Financial Management Essay

[JAYCEE PLC] Financial Management Group 2 BAI LI 2014/12/7 Lecturer: Owen Lewis Number:P143466 Content 1 Introduction 5 1.1Analysing Financial Health using Ratios 5 1.2Assumptions 6 Part 1 1 Financial Ratios And Analysis 7 1.1 Profitablity 7 1.1.1Margin Ratios 7 1.1.2Return Ratios 9 1.1.3Futher Comment 10 1.2Liquidity 11 1.2.1Current Ratios 11 1.2.2Quick Ratios 11 1.1.3Futher Comment 12 1.3 Efficiency 14 1.3.1Fixed Assets Productivity 14 1.3.2Debtors Collection Period 14 1.3.3Creditors Payment…

Words 4636 - Pages 19

Introduction To Financial Management

Chapter 1 Introduction to Financial Management  Forms of Business Organization  Stock Prices and Shareholder Value  Intrinsic Values, Stock Prices, and   Executive Compensation Important Business Trends Conflicts Between Managers, Stockholders, and Bondholders 1-1 Finance Within the Organization 1-2 Forms of Business Organization    Proprietorship Partnership Corporation 1-3 Proprietorships and Partnerships  Advantages  Ease of formation  Subject to few regulations  No…

Words 427 - Pages 2

Financial Management Essay

Scotch whisky, there are two projects to invest, namely rye whisky project and the project of expanding Highland Princess to the Asian and Far Eastern together with the liqueur project under the capital constraint of £400,000. As appointed to the financial consultants, we should make good decision for shareholders to gain more profits in long run. To measure the future investment performance we should consider the cash flow resulting from the actions. 2. Investment appraisal methods: NPV, IRR…

Words 833 - Pages 4

Notes On Financial Management

FINANCIAL MANAGEMENT 5. Measuring Return on Investments 1. What determines the required rate of return on a project? How can we estimate the required rate of return on a project? Determined by the risk of the project Estimated by: If taking a project that does not affect firm’s risk, then use WACC If not, estimate cost of equity (unlevered) (unlevered = without the debt) 2. What are the differences between accounting earnings and cash flows? You shouldn’t use accounting…

Words 4722 - Pages 19

Paper for Financial Management

In 1959 Markowitz did the groundwork for the capital asset pricing theory also known as CAPM. He introduced the notion of mean-variance efficient portfolio. According to him it is optimal for an investor to hold a mean-variance efficient portfolio. The mean-variance efficient portfolio is a portfolio for an investor where he minimizes the portfolio return, given the expected return and maximizes expected return, given the variance. Later Sharpe and Lintner further developed the work of Markowitz…

Words 688 - Pages 3

Essay about Financial Management

questions answered. For example if you answer all 42 I will stop grading at question 33. Understand the pros and cons of maximizing profit as a manager’s goal Know what working capital management is and what it deals with Understand the goal of financial management Have a basic understanding of the financial ratios and what they measure Know how to calculate return on assets, debt to equity, and times interest earned. Know and understand the concepts associated with an annuity. Know how to…

Words 313 - Pages 2