Evaluation of Capital Structure, Principles of Corporate Governance, NPV and IRR Calculation, Incorporating Risk in Investment Appraisal

exam

Contents
Question No 1..................................................................................................................................3
Evaluation of company’s capital structure which consist of equity shares and bonds:..........3
Question No 2..................................................................................................................................4
a) Main principles of corporate governance along with critical evaluation of reason for
development of corporate governance codes:........................................................................4
b) Critical discussion on need of stakeholder’s approach and related factors which entity need
to consider when they appraise their corporate strategies:.....................................................5
Question No 3..................................................................................................................................6
a) Calculation of NPV of the project along with recommendation on selection thereof:......6
b) Calculation of IRR of Project A:........................................................................................7
c) Evaluation of strength and weakness of IRR:....................................................................8
d) Discuss the ways of incorporating risk into investment appraisal process:.......................9
Question No 4................................................................................................................................10
a) Main methods available to assist managers while dealing with capacity utilisation:......10
b) Calculation of optimal product mix and sales mix plan:..................................................11
REFERENCES..............................................................................................................................13

Question No 1
Evaluation of company’s capital structure which consist of equity shares and bonds:
The capital structure is the mix of funds from several sources. The equity share holders' fund,
preference share capital, and long-term external obligations make up a company's capital. The
following elements are considered while determining the source and amount of capital:
 Control: The capital structure should be structured so that existing shareholders retain a
majority stake.
 Risk: A company's capital structure should be constructed such that its financial risk does
not exceed a reasonable level.
 Price: The overall cost of capital remains low.
 Because it is impossible to fulfil all three goals at the same time in practise, a financial
manager must strike a balance between them.
However, a company's goal is to maximise its value, and this is the primary consideration for
determining the best capital structure. The choice on capital structure refers to the types of
financing (which sources to tap), their real requirements (the amount to be financed), and their
relative proportions (mix) in overall capitalisation. The weight of debt and equity in the capital
structure will determine the total cost of capital and the firm's value. As a result, capital structure
is important in optimising company value and lowering total capital costs. When funds are
needed to finance investments, the capital structure must be considered. A need for cash
develops a new capital structure since a choice about the amount and types of funding must be
made.
A firm's financial risk, control over the company, and cost of capital are frequently balanced
by obtaining funds from a variety of sources rather than from a single source. As a result, the
weighted average cost of various sources of finance will equal the cost of total capital.
The overall cost of capital (WACC) is a term that refers to the cost of various sources of
capital, as discussed above. A company's WACC is determined by its capital structure. It
compares a single source of capital's cost of capital to its fraction of overall capital. Thus, the
weighted average cost of capital is the sum of the individual after-tax charges of the firm's capital

structure. That is, the after-tax cost of each debt and equity instrument is computed separately
and then combined together to arrive at a single total cost of capital.
The WACC of the company is decreased based on the capital structure it uses and the
expectations of its shareholders and stakeholders. The capital structure, which consists of
equities and bonds, will expose the company to moderate risk. However, the overall cost of the
organisation is decreased as a result of the capital structure adjustment.
Question No 2
a) Main principles of corporate governance along with critical evaluation of reason for
development of corporate governance codes:
The core principles of good corporate governance are being mentioned below: -
 Accountability:
Accountability refers to the company's accountability for its actions and potential actions.
Accountability is critical in the workplace because it makes work responsible and ensures
that it is completed effectively and efficiently. Corporate governance is the responsibility
of the organization's top management since it is closely tied to performance and
discipline.
 Responsibility:
The board of directors is in charge of acting or taking action on behalf of the corporation.
As a result, they have complete duty and authority to make key decisions on behalf of the
firm in order to strengthen the company's market position. They are fully responsible for
overseeing the company's management, including appointing higher-level management
employees and monitoring the performance of the company's middle and lower-level
divisions. Accountability is linked to responsibility, and the two are linked both directly
and indirectly. Because the shareholders are the owners of the firm and have put their
money in it, the board of directors is responsible to them.
 Transparency:
Transparency simply refers to an organization's readiness to offer comprehensive and
accurate information to its shareholders and other stakeholders. It is critical for a
company to disclose material facts that affect the company's success, and all of the