Essays on Market Value Capital Structure - Financial Calculations Assignment

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The paper "Market Value Capital Structure - Financial Calculations " is an outstanding example of a finance and accounting assignment. The flotation cost is adjusted from the cost of equity of the company in arriving at the intrinsic value of a share and thus the approach above is irrelevant since it will have an effect on the real value of the company’ s intrinsic value. Calculate the after-tax cost of each source of financing Kd={Dividend(net of tax/Market price} Ks={Dividend(1+growth}/value of equity}+growth Growth rate Dividends per share over the past five years Dollar change Percentage change] 2007 $1.00 0 0% 2006 $0.98 $0.02 10% 2005 $0.92 $0.06 35% 2004 $0.83 $0.09 51% 2003 $0.83 $0.01 4%     $0.18 25% Preference Shares 19.21-1.75/$19.21-0.5}=0.933 Ordinary Shares 1.75(0.99)/15.37)+10}=0.11 Debentures 12.5+(204-200/7 years/404/2}=0.065 Retained earnings (1.75/19.21)=0.091 d Discuss an alternative manner to calculate the Cost of Equity Cost of equity is arrived at by adding the value of risk-free rate and the beta then dividing by average market return and less the risk-free rate of return. e Discuss an alternative calculation of the growth factor used in the dividend growth model Growth rate= 1-n(root(Do/d1} It is arrived at by less one form the number of years of dividend paid then taking the square root of dividend last paid divided by current dividend as depicted in the formula above. f Assuming that the company maintains this optimum market value capital structure, calculate the breaking points associated with each source of capital. Column1 Column2 Column3 Column4 Column5 Column6 Column7                                     Kp 0.93                         Ks 0.11                         Kd 0.065                                       Kr 0.0091                                                                                               G Using the breaking points developed to determine each of the ranges of total new financing over which the company’ s WACC remains constant. Range of financing Source of capital Weight cost of capital Weighted cost 0-1000000 Preference Shares 0.32 0.93 0.2976   Ordinary Shares 0.18 0.11 0.0198   Debentures 0.4 0.07 0.028   Retained earnings 0.087 0.091 0.007917   Weighted average cost   9.1%           1000000-1200000 Preference Shares 0.32 0.93 0.2976   Ordinary Shares 0.18 0.11 0.0198   Debentures 0.4 0.07 0.028   Retained earnings 0.087 0.098 0.008526   Weighted average cost   9.3%           1000000-1200000 Preference Shares 0.32 0.93 0.2976   Ordinary Shares 0.18 0.11 0.0198   Debentures 0.4 0.065 0.026   Retained earnings 0.087 0.097 0.008439   Weighted average cost   11% H Calculate the WACC for each range of total new financing. Range of financing Source of capital Weighted cost 0-1000000 Weighted average cost 9.1% 1000000-1200000 Weighted average cost 9.3% 1000000-1200000 Weighted average cost 11% Complete the Investment Opportunities Schedule by estimating the missing Internal Rates of Return           Project Project Estimated Estimated Internal Identification Cost Annual Life Rate     Cash Inflows (in years) of Return A $400,000 $82,650 6 15 B $200,000 $52,840 5 15 C $800,000 $163,400 7 14 D $500,000 $115,240 6 13 E $300,000 $61,600 7 12 F $500,000 $158,120 4 11 G $500,000 $131,270 5 10 I Using your findings above with the Investment Opportunities Schedule (IOS), draw the company’ s weighted marginal cost of capital (WMCC) function and IOS on the same set of total new financing or investment (x-axis) - WACC and IRR (y-axis) axes. Question 2   Column1 Column2 Column3 Column4 Column5 Column6 Column7               15                     Kp 0.93     14                   Ks 0.11       14                 Kd 0.065         13                           12 Kr 0.0091                         11                           10 400 200 300 400 500       New Financing         J Which, if any, of the available investments would you recommend the firm accept? The company should consider taking an investment F since the IIR equals the cost of equity which is an implication that the company will generate maximum returns in this investment option. k Assuming that the specific financing costs do not change what effect would a shift to a more highly levered capital structure consisting of 60 per cent long-term debt, 20 per cent preference capital and 20 per cent ordinary equity have on your findings above?               15                     Kp 0.93     14                   Ks 0.11       14                 Kd 0.065         13                           12 Kr 0.0091                         11                           10 400 200 300 400 500       New Financing         The increase leverage level to 60% debt and 2% preference would to a decline in value of the firm and increase in the cost of capital as observed above. L Which capital structure - the original one or this one - seems better?

Why? In this regards, option one which is the original one is deemed significant since it depict a low cost with a high value which is an optimal capital structure of the firm. Question 2 PART A Scatter graph Visually fit a cost line to the scatter diagram

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