Financial Management: WACC Calculation and Investment Appraisal Techniques

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1........................................................................................................................................3
(a) Calculate the book value and market value of cost of capital (WACC) for Kadlex Plc........3
(b) After proposed changes recalculate the cost of capital of business and reflect the change...6
(c) Critically discussed the organization by integrating a sensible level of gearing into their
capital structure and minimise (WACC)......................................................................................7
(e) Evaluate the effect of short termism on bankruptcy and find the agency problem in a
company.......................................................................................................................................7
Question 3 .......................................................................................................................................8
(a) Calculate by using following investment appraisal techniques and recommend that how it
economically feasible to acquire new machine...........................................................................8
(b) Critically evaluate the benefits as well as limitation of different investment appraisal
techniques..................................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES .............................................................................................................................15

INTRODUCTION
Financial management is the process of planning, managing, controlling and directing
various financial activities which help the managers to maximise the productivity as well as
profitability of the company (Bagh, 2016). They also implement various accounting principle in
order to manage their financial resources. Every organization should financially managed and
ensure that business able to perform their operational activities. This assessment based on 1st and
3rd question which is about the WAAC of the company at book or market value. In addition, it
includes the different investment appraisal technique which is used to calculate that investment
in the new machinery is suitable for the company or not.
MAIN BODY
Question 1
(a) Calculate the book value and market value of cost of capital (WACC) for Kadlex Plc
Every organization should manage their capital structure which is the combination of
equity or debt. It is used by the business to fund their activities and ensure that each activity
performed well to achieve their goals & objectives. Equity generated through issuing shares and
debt is the loans (Banerjee and et. al., 2016). Further it incudes the bonds, preference shares, etc.
In Kadlex Plc, finance director analyse that WACC of the company is very less so they planned
to issue more debts from market. So management need to identify the change in the WACC and
its calculation are as follow:
Calculation of Growth:
From 1st to 5th year growth of the company are 21, 23, 25, 27 and 28p respectively. It
further calculation mentioned below:
Formula:
Sn = S0*(1+g)n
28 = 21 * (1 + g)4
28 / 21 = (1 + g)4
1.33 = (1 + g)4
(1.33)0.25= (1 + g)
g = 1 – 1.0757
= 0.0757 or 7.57%

Here,
Sn = Last dividend
S0 = First dividend
n = Number of years
g = growth
Calculation of growth rate for the securities:
Cost of irredeemable bonds:
Formula:
Kd = [ j * (1 – CT) ] * (Po / Pn)
Kd = [ 0.10 * (1 – 0.30)] * (100 / 107)
= 0.0654
= 6.54 %
Here:
Kd = Cost of Irredeemable Bonds
j = Rate of interest on bonds
CT = Rate of Corporate tax rate
P0 = Initial Price
Pn = Current Price
Cost of preference share:
Formula for calculations: Kp= (j)/Pf
= 7 / 75
= 0.0933 or 9.33%
Here, Kp = Total cost of Preference Shares
j = Dividend on preference shares
Pf = Current [rice of preference share excluding dividend
Cots of equities:
Formula:
Ke = [Sn * (1 + g) + g ) / P0
Ke = [28 * (1 + 0.075 ) + 0.075] / 2.65
= (28 * 1.15) / 2.65
=12.15 %