Essays on Company's Market Value Capital Structure Assignment

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The paper "Company’ s Market Value Capital Structure" is a wonderful example of an assignment on finance and accounting. The flotation cost is deducted from the cost of equity (Ke) of the business in determining the intrinsic value of a share and consequently, the approach above is immaterial because it will have an upshot on the real worth of the company’ s intrinsic value. C 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 $0.00 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 {19.2-1.76/$19.2-0.5}=0.94 Ordinary Shares 1.76(0.99)/15.4)+10}=0.12 Debentures 12.5+(204-200/7 years/404/2}=0.07 Retained earning (1.75/19.21)=0.09 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 The growth rate is computed by taking the square root of dividends last paid divided by forecasted dividend and Lessing one from the result. Growth rate= 1-n√ (Do/D1} F Assuming that the company maintains this optimum market value capital structure calculates the breaking points associated with each source of capital. Column1 Column2 Column3 Column4 Column5 Column6 Column7                                     Kp 0.94                         Ks 0.12                         Kd 0.07                                       Kr 0.009                                                                                               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 0.3 0.9 0.3   Ordinary Shares 0.2 0.1 0.0   Debentures 0.4 0.1 0.0   Retained earnings 0.1 0.1 0.0   Weighted average cost   0.1           1000000-1200000 Preference Shares 0.3 0.9 0.3   Ordinary Shares 0.2 0.1 0.0   Debentures 0.4 0.1 0.0   Retained earnings 0.1 0.1 0.0   Weighted average cost   0.1           1000000-1200000 Preference Shares 0.3 0.9 0.3   Ordinary Shares 0.2 0.1 0.0   Debentures 0.4 0.1 0.0   Retained earnings 0.1 0.1 0.0   Weighted average cost   0.1 H Calculate the WACC for each range of total new financing. Range of financing Source of capital Weighted cost 0-1000000 Weighted average cost 9.2% 1000000-1200000 Weighted average cost 9.4% 1000000-1200000 Weighted average cost 12% 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 $400,000.0 $82,650.0 $ 6.00 15% B $200,000.0 $52,840.0 $ 5.00 15% C $800,000.0 $163,400.0 $ 7.00 14% D $500,000.0 $115,240.0 $ 6.00 13% E $300,000.0 $61,600.0 $ 7.00 12% F $500,000.0 $158,120.0 $4.00 11% G $500,000.0 $131,270.0 $5.00 11% Company’ s weighted marginal cost of capital (WMCC) function and IOS. Column1 Column2 Column3 Column4 Column5 Column6 Column7               15                     Kp 0.94     14                   Ks 0.12       14                 Kd 0.07         13                           12 Kr 0.009                         11                           10 400 200 300 400 500       New Financing         Which, if any, of the available investments would you recommend the firm accept? The business must undertake an investment F in view of the fact that, the internal rate of return is the same as the cost of equity which is implies that the business will generate utmost returns in this investment alternative. 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 0.94     14                   Ks 0.12       14                 Kd 0.07         13                           12 Kr 0.009                         11                           10 400 200 300 400 500       New Financing         The growth in the level of leverage to 60% debt and 2% preference may lead to a reduction in the value of the company due to the fact that an increase in the cost of capital as observed above. Which capital structure - the original one or this one - seems better?

Why The optimal capital structure from the above analysis is the original one due to the fact that it portrays a low cost of capital with a high worth that is optimal in terms of debt and equity of the Question 2 PART A Scatter graph Visually fit a cost line to the scatter diagram Estimate the variable and fixed components of the department’ s cost behavior pattern using the visually fit cost line Regression line (Y0= bX+a) bX is the variable cost per unit while (a) is the fixed cost and hence a regression equation is derived as follows.

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