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## Cost of Capital

Question 1 Depicting project NPV:

 Cost of Capital 8% Year Revenue Cost Cash flow Discount rate Discounted cash flow 0 (7,000,000) (7,000,000) 1 (7,000,000) 1 (2,000,000) (2,000,000) 0.93 (1,851,852) 2 12,000,000 (2,000,000) 10,000,000 0.86 8,573,388 Net present value (NPV) (278,464)

The overall reason behind choosing the NPV is mainly to detect time factor of the overall future cash flows conducted by the organisation. In addition, use of net present value mainly allows organisations to detect the overall viability of the investments and how much it could add value to the firm. However, the calculation of the NPV mainly depicts a negative value of (278,464), which makes the company reject the overall project. In this context, Brigham & Ehrhardt (2013) stated that companies with the help on NPV valuation are mainly able to discount the future cash flows and detect actual viability of the organisation.

NPV Calculation:

 Cost of capital 10% Business A Business B Year Cash flow Discount rate Discounted cash flow Cash flow Discount rate Discounted cash flow 0 \$                                                           (60,000) 1 (60,000) \$                         (60,000) 1 (60,000) 1 \$                                                              50,000 0.909090909 45,455 \$                            10,000 0.909090909 9,091 2 \$                                                              30,000 0.826446281 24,793 \$                            20,000 0.826446281 16,529 3 \$                                                              20,000 0.751314801 15,026 \$                            80,000 0.751314801 60,105 Net present value 25,274 Net present value 25,725
 Cost of Capital 10% Business A Business B Year Cash flow Cash flow 0 \$ (60,000) \$    (60,000) 1 \$ 50,000 \$    10,000 2 \$    30,000 \$    20,000 3 \$  20,000 \$     80,000 IRR 37% 26%

The overall IRR and NPV of Business A is mainly adequate than Business B, which could increase profitability of the organisation. Furthermore, IRR of Business A is mainly higher, which depicts its return generation capacity that is higher than Business B. Burger, Kaufman, & Atkinson (2015) mentioned that when NPV of the business options is relatively same then IRR is mainly evaluated, as it helps in depicting the actual return generation capacity of the investment. Therefore, seeing the IRR and NPV Grey and John is mainly advised to select Business A for the investment purpose.

The evaluation of both the business portrays a viable income and an increment in the availability of funds could mainly help in adoption both businesses. The NPV and IRR of both businesses are relatively adequate for investment purposes and investment in both the project simultaneously could allow the company attain higher return from investment (Dudin et al., 2014).

Calculation of the Payback period:

 Year Project A Project B Cash Flow Cumulative cash flow Cash flow Cumulative cash flow 0 \$                                                         (200,000) \$                       (200,000) \$                       (180,000) \$                       (180,000) 1 \$                                                              76,000 \$                       (124,000) \$                           60,000 \$                       (120,000) 2 \$                                                              76,000 \$                         (48,000) \$                           64,000 \$                         (56,000) 3 \$                                                              76,000 \$                            28,000 \$                           72,000 \$                            16,000 4 \$                                                              76,000 \$                         104,000 \$                           80,000 \$                            96,000 5 \$                                                              76,000 \$                         180,000 \$                           90,000 \$                         186,000 Payback period 2.63 years 2.78 years

Stating whether project’s payback period meet company’s laid down criteria:

The payback period of both the project is relatively at 2.63 and 2.78 years, which is relatively lower than the specified 3 year payback period of the company.

 Option 1 Project Investment NPV PI Buy a Duplex apartment near campus \$50,000 \$22,500 1.45
 Option 2 Project Investment NPV PI Buy a collection of old comics books \$ 5,000 \$ 1,000 1.2 Start a small moving business \$ 25,000 \$ 10,000 1.4 Buy a new car for your business \$ 20,000 \$ 10,000 1.5 Total Investment \$ 50,000 \$ 21,000 1.42

From the evaluation of above two tables, Option 1 is mainly chosen, as the most viable investment option. This option mainly allows the organisation to increase their probability and generate higher revenue from investment. Both NPV and PI of option 1 are relatively higher than option 2, which could be used by the company to increase its return from investment. Therefore, investment in Duplex apartment is the most viable option that is been presented (Finkler, Smith, Calabrese & Purtell, 2016).

 Option 1 Option 2 Year Revenue Cost Cash inflow Revenue Cost Cash inflow 1 5000 0 5000 0 -20000 2 5000 0 5000 1 10000 3 10000 -20000 -10000 2 10000 4 10000 0 10000 3 10000 5 10000 0 10000 4 10000 NPV \$12,242.68 5 10000 NPV \$13,521.55

From the evaluation of above NPV valuation, replacement of old machine from new machine could be more viable, as its NPV is relatively higher. Therefore, it could be beneficial for the company to replace the current machine with the new machine to attain a higher return from investment and increase its firm value.

a) Depicting the expected return for two shares:

 Share X Share Y Probability Er returns Probability Er returns 0.2 0.02 10% 0.1 0.008 8% 0.4 0.06 15% 0.3 0.036 12% 0.3 0.054 18% 0.5 0.075 15% 0.1 0.02 20% 0.1 0.019 19% Expected return 15.40% Expected return 13.80%

b) Providing relative recommendation to Antec Corporation:

From the evaluation of above table, expected return of Share X is relatively identified at 15.40%, which is higher than 13.80% that is provide by Share Y. Therefore, Antec Corporation could invest in Share X, as it might increase the overall return from investment.

i) Providing recommendations:

As per theoretically knowledge Standard Deviation is denoted by the risk involved in investment and therefore it is advisable to select projects, which has the least standard deviation. Therefore, Project X will mainly be chosen, as it has the least standard deviation from investment.

ii) Depicting whether opinions changes if coefficient is used:

 Project Coefficient NPV Standard deviation X 0.74 122,000 90,000 Y 0.53 225,000 120,000

The incorporation of coefficient measure mainly depicted the investment, which has the least risk from investment. According to coefficient Project Y is mainly chosen, as it has the least risk.

iii) Mentioning about the measure that could help in understanding the situation:

Use of Coefficient might help in depicting the overall viable option, which could help in depicting adequate investment opportunity with least risk.

Question 7:

 Risk free return 4% Beta 0.8 Market return 14% Er Rf + Beta * (Rm- Rf) Er 4% + 0.8 * (14% - 4%) Er 12% Expected return 11%

The expected return is relatively lower than Er, which indicates that investment in mutual fund is relatively viable.

Stating source of financing cost:

 Cost of  Debt = (1+(1000-N)/n) / ((N+1000) / 2) = (1+(1000-950)/10) / ((95+1000) / 2) = (1+(1000-950)/10) / ((95+1000) / 2) = 105 / 975 = 10.8% Cost of Debt After tax = 10.8 * (1-0.6) = 10.8 * 0.4 = 6.4
 Cost of Preferred stock =  Dp / Np =  11 / (100-4) =  11 / 96 =  11.5%
 Cost of common stock = (D1 / P0) = (6 / 80) + 6% = 0.075 + 6% = 13.5%
 New Cost of common stock = (D1 / P0) = (6 / (80-4-4)) + 6% = 0.0833 + 6% = 14.3%

Evaluating weighted average cost of the firm:

 Capital Weight Cost of capital WACC Long term debt 40% 6.4% 2.6% Common Equity 45% 13.5% 6.1% Preferred  stock 15% 11.4% 1.7% Total 10.3%

Mentioning about viability of the investment opportunity:

Option D will mainly be chosen for the investment, as it has the highest return from investment and increase the overall profitability of the company. Thus, the investment of 600,000 mainly needs capital of 375,000, as 225,000 are obtained from retained earnings.

Mentioning about the influential factors that affect capital structure of the company, while depicting the financial and non-financial factors:

Some factors have relative influence on the capital structure of companies, which are depicted as follows.

Financial Factors:

The use of cash flow and equity financing could be used to depict adequate capital structure of an organisation. The overall financial factors depict an effective design that increases the overall operational capability of an organisation (Hill et al., 2013).

## Investment Options

Non-Financial factors:

Emergency preparation and economic conditions are mainly identified as the overall non-financial factors, which allow organisation to evaluate its capital structure. Therefore, using the factors companies are mainly able to increase their performance and generate revenue from investment (Jiraporn, Jiraporn, Boeprasert & Chang, 2014).

 Sales Probability Fixed cost Variable cost PBT \$250,000 0.1 125000 100000 \$25,000 \$375,000 0.6 125000 150000 \$100,000 \$500,000 0.3 125000 200000 \$175,000 Number of shares Per share value Capital ordinary shares 30,000 \$10 \$300,000
 Equity ratio Debt ratio Interest Interest payments Number of shares 80% 20% 10% 6000 24,000 60% 40% 11% 13200 18,000 40% 60% 12% 21600 12,000
 Particulars Amount Sales \$             375,000 Fixed cost \$             125,000 Variable cost \$             150,000 Interest cost (Debt 20%) \$                 6,000 PBT \$               94,000 Tax (40%) \$               37,600 PAT \$               56,400 EPS 2.35
 Particulars Amount Sales \$                  375,000 Fixed cost \$                  125,000 Variable cost \$                  150,000 Interest cost (Debt 40%) \$                    13,200 PBT \$                    86,800 Tax (40%) \$                    34,720 PAT \$                    52,080 EPS 2.89
 Particulars Amount Sales \$          375,000 Fixed cost \$          125,000 Variable cost \$          150,000 Interest cost (Debt 60%) \$            21,600 PBT \$            78,400 Tax (40%) \$            31,360 PAT \$            47,040 EPS 3.92

b) Mentioning optimal capital structure of maximum EPS:

 Equity ratio Debt ratio EPS 40% 60% 3.92

The overall debt to equity ratio is relatively at 60:40, which makes the EPS at 3.92. Therefore, the use of above depicted capital structure could eventually allow the organisation to attain higher income from their investment.

Question 11:

a) Loan proposal dollar cost:

 ASB Bank Westpac Bank

The loan provided from Westpac Bank could be used as the loan options, where it provides a dollar cost of 100,000 that is relatively lower than ASB Bank.

 Option 1 Value Credit sales 2,550,000 Interest cost 34,931.51 account receivables 40 Credit sales per day 8,732.88 Overdraft rate 10% Credit sales Next year 3,187,500 Estimated borrowing amount 3,187,500 Accounts receivables 349,315 Annual cost 47000 Total cost 365,750
 Option 2 Values Credit sales 2,550,000 account receivables 35 Interest 12% Accounts Receivable 305,651 Credit sales per day 8,732.88 Credit sales Next year 3,187,500 Interest cost 306,000.00 Administration fees 41,437.5 Estimated borrowing amount 2,550,000 Total cost 347,437.50

The overall evaluation of the above options could mainly help in identifying the adequate measure, which could help in reducing total costs incurred by Waste Co. The option 2 is mainly identified, as the overall viable approach, which allows the company to attain less cost from operations. The use of options 2, could mainly helps in reducing cash outflow, which might help in improving its financial position (Jiraporn, Jiraporn, Boeprasert, & Chang, 2014).

i) Depicting whether car buying or leasing can be done:

The NPV related to leasing the car is relatively higher than the NPV for purchasing the car. Therefore, the courier firm could use lease option to improve its overall profitability and attain higher revenue from investment.

ii) Depicting the common motivation for leasing:

Companies with the help of leasing are mainly able to reduce capital blockage and increase its ability to attain higher profitability. Moreover, leasing measure allow organisation to acquire different assets without adequate investment and capital blockage (Petty et al., 2015).

iii) Conflicts arise with leases and why:

The main problems or conflict that could be identified from lease is the trust that needs to be conducted to the lessee. The risk of fraud and over usage conducted by the lessee is the major conflict or problems, which might arise between the lessee and lesser. The overall usage of the equipments could mainly accelerate problems in the machine, which mainly shortens its life span (Renz, 2016).

a) Mentioning the reason why underwriters want securities under priced before new security offering:

## Machine Replacement

The main reason that could be identified why underwriters wants securities under priced is because of the demand increment, which could be conducted before the IPO initiation. The underwriters mainly aim to attain maximum of the investors, which needs attractive pricing that needs to be conducted to increase the turn up in the auction day. Furthermore, the financial institutions mainly need IPO at discounted prices for increasing the overall return from investment. Therefore, the underwriters with the help of reduced prices are mainly able to attract the requited investors, which could make the IPO auction a success (Sheffet et al., 2014).

b) Depicting factors encircling total costs of an IPO:

The type of costs, which could be included in the IPO are mentioned as follows.

• Cost of under pricing
• Expenses such as SEC filing fees, legal fees, and other expenses

a) Mentioning the process, where capital can be raised from financial market and financial institutions:

Being the chief financial controller of Gaga Enterprise raising the money from financial market is identified to be more suitable than raising capital from financial institutions. The overall funds could be raised from preferred or common stock and bonds, which might be conducted from both financial market and financial institutions. However, the capital raised from the financial market could only allow the company to attain its actual market value and increase the raised capital. The collection of funds from the financial institution company’s ability to detect its actual value could be reduced, as the financial institutions will buy shares or bonds at the rate, which deemed them fit and adequate. Furthermore, the company could only chose the option, which reflects the least interest, as it reduces the overall cash outflow of the company (Swanson, Territo & Taylor, 2016).

b) Mentioning the options that might help in attain higher income after tax income for the first year:

Promissory note could mainly allows Reston Inc to reduce the overall cash outflow and taxable income. The promissory note is mainly identified, as the interest payment capital, which could be tax deductable and might allow the company to attain higher retained income. Whereas, the use of dividends could not allow Reston Inc to attain additional benefits, as not tax benefits are provided from dividends payments. Therefore, it could be understood that use of promissory note by the company could mainly help in increasing retained earnings after tax.

Reference:

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Burger, R. H., Kaufman, P. T., & Atkinson, A. L. (2015). Disturbingly weak: The current state of financial management education in library and information science curricula. Journal of Education for Library and Information Science, 56(3), 190.

Dudin, M. N., Lyasnikov, N. V., Yahyaev, M. A., & Kuznecov, A. V. E. (2014). The organization approaches peculiarities of an industrial enterprises financial management.

Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for public, health, and not-for-profit organizations. CQ Press.

Hill, M. D., Kelly, G. W., Lockhart, G. B., & Ness, R. A. (2013). Determinants and effects of corporate lobbying. Financial Management, 42(4), 931-957.

Jiraporn, P., Jiraporn, N., Boeprasert, A., & Chang, K. (2014). Does corporate social responsibility (CSR) improve credit ratings? Evidence from geographic identification. Financial Management, 43(3), 505-531.

McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies. ABC-CLIO.

Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.

Renz, D. O. (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

Sheffet, A. J., Flaxman, L., Tom, M., Hughes, S. E., Longbottom, M. E., Howard, V. J., ... & Brott, T. G. (2014). Financial management of a large multisite randomized clinical trial. International Journal of Stroke, 9(6), 811-813.

Swanson, C. R., Territo, L., & Taylor, R. W. (2016). Police administration: Structures, processes, and behavior. Prentice Hall.

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