Business Finance: NPV, IRR, WACC, Dividend Payment and Right Issue

UGB 223 Business
Finance

Contents
INTRODUCTION...........................................................................................................................3
QUESTION 2..................................................................................................................................3
a) Compute NPV and suggest which project should be accepted...............................................3
b) Calculate IRR and on the basis of this which project should be accepted..............................4
c) If the cost of capital increase to 20 % in year 5, then does the changes would be advisable..4
QUESTION 3..................................................................................................................................5
Calculate the following:...............................................................................................................5
a) the theoretical ex-rights price per share...................................................................................5
b) net cash raised.........................................................................................................................6
c) Value of rights.........................................................................................................................6
d) Discuss the pros and cons of right issue..................................................................................7
QUESTION 4..................................................................................................................................8
a) Compute the weighted average cost of capital (WACC) using the market weightings..........8
b) Critically discuss whether the company is integration a sensible level of capital structure
and can minimise the WACC......................................................................................................8
QUESTION 6..................................................................................................................................9
The size of the annual dividend to return to its shareholders for the factors which needs to be
considered....................................................................................................................................9
The practical issues that need to be considered when deciding on the size of the dividend
payment........................................................................................................................................9
b) Calculate the three options....................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
The report discusses about the comparison of two projects of better plc and measure the net
present value and internal rate of return of the given data which helps the company to choose one
of the best project among the two exclusive projects of better plc (Alexander and Dakos, 2020).
Also it advises the company to change its cost of capital if it maximise by 20% in next 5 years.
In another question they find the ex-rights price per share. Net cash raised and the value of rights
for the hanging valley plc along with the merits and demerits of right issue. In last question, it
calculates the fair price and new price of the planet plc. Also, it identifies the issue related to the
dividend growth model of valuing shares.
QUESTION 2
a) Compute NPV and suggest which project should be accepted.
Year Net Cash inflow (in Millions) PV factor @ 12%
Discounted cash
inflow
Year 1 40 0.892 35.68
Year 2 50 0.797 39.85
Year 3 60 0.711 42.66
Year 4 60 0.635 38.1
Year 5 80 0.567 45.36
Cash inflow of discounted factor 202.65
NPV = Total cash inflow – Total cash outflow
= 202.65 – 150
= 52.65
Project B
Year Net Cash flow (in Millions) PV factor @ 12%
Discounted cash
flow
Year 1 80 0.892 71.36
Year 2 80 0.797 63.76

Year 3 50 0.711 35.55
Year 4 40 0.635 25.4
Year 5 30 0.567 17.01
Cash Flow 213.08
NPV = Total cash inflow – Total cash outflow
= 213.08 – 152
= 61.08
Analysis: According to the calculations, both projects are advantageous and deliver good returns
on investment. When the NPV approach is applied to both projects, it is discovered that project
A is more sustainable than project B because it provides a higher return for a lower investment.
b) Calculate IRR and on the basis of this which project should be accepted.
Period Inflows PV @ 14% Cash Flow PV @ 18% Cash Flow
0 275,000 1 -275,000 1 -275,000
1 72,500 0.88 63,800 0.85 61,625
2 72,500 0.77 55,825 0.72 52,200
3 72,500 0.68 49,300 0.61 44,225
4 72,500 0.61 44,225 0.52 37,700
5 72,500 0.54 39,150 0.44 31,900
6 72,500 0.48 34,800 0.37 26,825
Residual value
at the end 41,250 0.48 19,800 0.37 15,263
Net Present Value 31,900 -5,262
c) If the cost of capital increase to 20 % in year 5, then does the changes would be advisable.
Years Inflows PV @ 12% Discounted Cash
Flow