Financial Management: Capital Structure and Cost of Capital

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1. Capital Structure and Cost of Capital:...............................................................3
(a) Assessment of WACC based on Market Value and Book Value for Kadlex Plc:............5
(b) Kadlex Plc revised cost of capital after proposed changes with finance director proposal:. 6
(c) Critical analysis of integrating new capital:......................................................................6
(d) Effect of Short-termism on Agency Problem and Bankruptcy:........................................7
Question 3. Calculation as accordance of investment appraisal techniques..........................7
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
.......................................................................................................................................................14

INTRODUCTION
This is defined as a type of technique that is related to process of planning, organising
and managing monetary activities in a better manner (Guess and Ma, 2015). Basically, it makes
focus on ratios and debts as well as this helps in an effective portfolio management. In addition,
this is necessary for all forms of business to manage their monetary resources whether it is small
or large. The project report is based on different calculation which are done as accordance of
given data. Such as in computation of equity financing is done as well as in the further part of
report various forms of investment appraisal techniques are implemented in order to choose
investment effectively.
MAIN BODY
Question 1. Capital Structure and Cost of Capital:
The capital structure is the specific combination of debt and equity that a company
provides to fund its activities and development as a whole. Debt consists of bond issues or loans,
whereas equity can take the form of common stock, preferred stock. On the balance sheet,
equities and debts can be found. Corporate assets are bought with this debt and equity, which are
also mentioned on the balance sheet. In order to compare capital structure of companies, analysts
computes and apply debt to equity ratio. By help of this ratio, it becomes easier to understand
about actual number of debts taken during a particular time period.
Assess the growth (g):
Years Pence
1st 21
2nd 23
3rd 25
4th 27
5th 28
S0 x ( 1 + g )n = Sn

= 21 * ( 1 + g ) 4 = 28
= ( 1 + g ) 4 = 28 / 21
= ( 1 + g ) 4 = 1.3333
= ( 1 + g ) = ( 1.3333 ) 0.25
g = ( 1 ) - ( 1.0757 ) = 0.0757 or 7.57 %
Here, in the above formula "g" corresponds to percentages, n denotes years, while S0 is a first-
dividend, and Sn means a divided spread in previous year.
Calculation of for each one funding source's rate:
Irredeemable Bonds' cost or Debt's cost:
Kdir = [i x (1 – t )] x (Po / Pn)
Kdir = ([0.10*(1-0.30)])*(100/107) = 0.0654 or 6.54%
Here, Kdir Cost of Irredeemable Bonds
i interest amount on debt
t Corporate tax's rate
P0 Initial bond price