Business Finance: NPV, IRR, WACC, Rights Issue, Dividend Payment

UGB223 BUSINESS
FINANCE

Table of 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..5
QUESTION 3..................................................................................................................................5
a) The theoretical ex-rights price per share.................................................................................5
b) The net cash raised..................................................................................................................6
c) The value of the rights.............................................................................................................7
d) Critically discuss the advantages and disadvantages of rights issue.......................................8
QUESTION 4..................................................................................................................................8
a) Calculate the weighted average cost of capital (WACC) using the market weightings..........8
b) Critically discuss whether you consider that companies, by integrating a sensible level of
gearing into their capital structure, can minimise their weighted average cost of capital...........9
QUESTION 6..................................................................................................................................9
a) The size of the annual dividend to be paid to shareholders, as well as the practical concerns
to be considered while determining the dividend payment size..................................................9
b) Calculate the three options....................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
In the below report, business finance is explained and analysed with the help of various
factors. Business finance is the term that stated the number of funds acquired by the owner of the
company for fulfilling their needs that including acquiring top-up funds to finance business
management, starting a business, or dealing with the cash crisis faced by the company
(Achleitner and Braun., 2018). The following report consists of four questions; 2, 3, 4, and 6
where every question represents the different ways to implement the business adequately. In
question number 2, Net present value and IRR are calculated; in 3 questions, Theoretical ex-
rights price per share, net cash raised, the value of the rights, and advantages and disadvantages
of rights issue are computed and explained; In question 4, WACC is determined and discussed
and in the last question, size of annual dividend and effect of the three elements on the wealth of
a shareholder are explained.
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
Net Present Value = Total cash inflow – Total cash outflow
= 213.08 – 152
= 61.08
Analysis: By analysing both the net present value, it can be recommended that project B is better
than project A because the higher value of the NPV is referred well for the company. In Project
A and B, the result of NPV is 52.65 and 61.08 respectively which indicates project B is 8.43
more than Project A.
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
Interpretation: According to the calculations of NPV both projects, it is determined that project A
is more sustainable than project B because it offers a higher return for a lower investment.