This report provides an analysis of corporate finance, including recommendations for investment projects and forecasting risk. It covers topics such as net present value, payback period, discount rates, and sensitivity analysis.
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Corporate Finance
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Table of Contents INTRODUCTION...........................................................................................................................1 TASK 1............................................................................................................................................1 Multi-chem..................................................................................................................................1 TASK 2............................................................................................................................................3 Tome win Water Company.........................................................................................................3 1. Recommendation on the appropriate discount rate to be used in the appraisal of the new project:.........................................................................................................................................3 2. Forecasting risk of this project:...............................................................................................4 Scenario analysis on the following two scenarios:.....................................................................8 3...................................................................................................................................................9 CONCLUSION................................................................................................................................9 REFERENCES..............................................................................................................................10
INTRODUCTION Corporate finance is separation of finance that conduct different corporate activities with funding sources and take effective investment decision. The main aim of the corporate finance is increasing shareholder value by long and short term financial planning and apply different types of financial strategies(Acharya and Steffen, 2020). This report categorised into two task first one is based on the recommendation to invested in one project and in second task calculate sensitivity and variance analysis. TASK 1 Multi-chem For the analysis of both project calculate NPV, IRR and Pay back period that helps to Multi Chem to select appropriate project for the investment. Net Present value: Project AProject B Net present value method: Net present value method: YearsCash flowsNPVYearsCash flowsNPV 13.713.8113.934.03 24.334.4324.274.37 35.345.4434.614.71 46.016.1144.955.05 56.626.7255.315.41 66.967.0665.635.73 77.577.6775.986.08 87.9886.336.43 1
98.318.4196.957.05 108.99107.367.46 66.6556.32 Net present value = Cash inflow – cash outflow 45.136.32 Project A is beneficial for the Manila plant. Pay Back period: Project A Project B Payback period method: Payback method Purchase for land $2.55 million$15 Development and construction building costs of $13 million$5 plant and equipment of $6 million Sales $48.6 million, increasing 10%45 Costs for goods sold 65%75.00% Fixed costs $11.5 million, increasing 5%5, 5% 2
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Salvage value 20% land sell $ 18.1 million Tax 25%30.00% Investment21.5520 YearsCash flowsYearsCash flows 13.7113.93 24.3324.27 35.3434.61 46.0144.95 56.6255.31 66.9665.63 77.5775.98 87.986.33 99 1010 5.3 years approx 5.5 years approx Investment21.5520 Recommendations As per the analysis of both projects it is recommended that select Project one by the Multi Chem for the investment. According to Payback period in project one, owner recover their investment amount in 5.3 years and from project 2 in 5.5 years. Thus, on the basis of the Pay back period it is recommended that select project one. O the basis of NPV calculation 45.1 from 3
project one and 36.32 from project B. Thus from the overall analysis it is getting that select Project A for the investment. TASK 2 Tome win Water Company 1. Recommendation on the appropriate discount rate to be used in the appraisal of the new project: Given Information: Price Shares Outstanding30000000411230000000 Bond5000000923.384616900000 Equity beta1.3 Rf1.50% Rm11.50% Tax rate30% Cost of EquityRf + (Rm - Rf)*beta1.5 + (11.5 - 1.5) * 1.314.5 Cost of debt8% ( 1- tax)5.6 Computation of WACC: TWC ValueRate Share Capital123000000014.5178350000 Bond46169000005.6258546400 5846900000436896400 WACC =436896400/58469000007.47 Fruity Water 21.0% * (1-.43) + 8% * 0.430.1541or 15.41% 4
Ladybug Drinks 19.70% * (1-.35) + 7.75% * .350.155175or 15.52% Recommendation: Discount rates are based on the various factors and characteristics such as, the marketability of shares and identify the location of project, procedure of development and size & capability of projects owner. At the time of reports filed on SEDAR that can be used for different directions. It is essential to assure about the project of an entity and relies on basis of different sources of its project at the discount rate from different organisations of same scale, step of development and with comparable characteristics(Benlemlih and Bitar, 2018). TWC prepared reports through highly credible sources in which consisting of foreign consultancy firm, experts and many large organisations. An organisation main aspects based on the discount rate of project and calculate their rate of return to attract a major investor and utilised by the entity for identification of the risks of individual project. This has been analysed thatTWC’s WACC is lower than comparable companies. A higherWACC implies that in attempt to generate money a business spends a relatively larger amountwhich means thatbusiness could be risky. While lowerWACC, onother side, implies that the organization cheaply obtains capital. Thus here it is recommended to TWC to take WACC as discounting rate. 2. Forecastingriskofthisproject: Initial Outlay3000000 Life3 years SLM salvage valuenil Sales1250000 units@ 2.15 Variable Costs0.54 Fixed Cost50000 Terminal Value500000 Forecastingriskofthisproject: 5
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Year123 Sales268750026875002687500 Variable Cost675000675000675000 201250020125002012500 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 Profit962500962500962500 Tax @ 30%288750288750288750 Net profit after tax673750673750673750 Depreciation100000010000001000000 Free Cash Flow167375016737501673750 Terminal Value500000 Total Free cash flows167375016737502173750 PVF @ 7.47%0.93050.86580.8056 PV of free cash flows1557411.3714491591751248.79 Total4757819.34 Less: Initial Outlay3000000 NPV1757819.34 Sensitivity analysis for sales price, variable costs, fixed costs and unit sales at ±10%, ±20%, and ±30% from the base case, showing on a graph which variables are most sensitive: Sensitivity analysis 10% increase in , variable costs, fixed costs and unit sales Units1375000 Year123 Sales325187532518753251875 Variable Cost816750816750816750 243512524351252435125 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 6
Profit138512513851251385125 Tax @ 30%415537.5415537.5415537.5 Net profit after tax969587.5969587.5969587.5 Depreciation100000010000001000000 Free Cash Flow196958819695881969588 Terminal Value500000 Total Free cash flows196958819695882469588 PVf @ 7.47%0.93050.86580.8056 Pv of free cash flows183268617053001989586 Total5527572 Less: Initial Outlay3000000 NPV2527572 20% increase in , variable costs, fixed costs and unit sales Units1500000 Year123 Sales387000038700003870000 Variable Cost972000972000972000 289800028980002898000 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 Profit184800018480001848000 Tax @ 30%554400554400554400 Net profit after tax129360012936001293600 Depreciation100000010000001000000 Free Cash Flow229360022936002293600 Terminal Value500000 Total Free cash flows229360022936002793600 PVf @ 7.47%0.93050.86580.8056 Pv of free cash flows213417719858352250622 7
Total6370634 Less: Initial Outlay3000000 NPV3370634 30% increase in , variable costs, fixed costs and unit sales Units1625000 Year123 Sales454187545418754541875 Variable Cost105300010530001053000 348887534888753488875 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 Profit243887524388752438875 Tax @ 30%731662.5731662.5731662.5 Net profit after tax170721317072131707213 Depreciation100000010000001000000 Free Cash Flow270721327072132707213 Terminal Value500000 Total Free cash flows270721327072133207213 PVF @ 7.47%0.93050.86580.8056 PV of free cash flows251904023439472583842 Total7446830 Less: Initial Outlay3000000 NPV4446830 8
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Scenarioanalysisonthefollowingtwoscenarios: Scenario analysis Worst Case: selling 1,000,000 units at a price of $1.85 and variable cost of $0.63 per unit Units1000000 Year123 Sales185000018500001850000 Variable Cost630000630000630000 122000012200001220000 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 Profit170000170000170000 Tax @ 30%510005100051000 Net profit after tax119000119000119000 Depreciation100000010000001000000 Free Cash Flow111900011190001119000 Terminal Value500000 Total Free cash flows111900011190001619000 PVf @ 7.47%0.93050.86580.8056 Pv of free cash flows1041220.806968847.91304323 9
Total3314391.524 Less: Initial Outlay3000000 NPV314391.5243 Best Case: selling 1,550,000 units at a price of $2.25 and variable costs of $0.49 per unit Units1000000 Year123 Sales225000022500002250000 Variable Cost490000490000490000 176000017600001760000 Less: Fixed Costs500005000050000 Less: Depreciation100000010000001000000 Profit710000710000710000 Tax @ 30%213000213000213000 Net profit after tax497000497000497000 Depreciation100000010000001000000 Free Cash Flow149700014970001497000 Terminal Value500000 Total Free cash flows149700014970001997000 PVf @ 7.47%0.93050.86580.8056 Pv of free cash flows139294712961261608853 Total4297926 Less: Initial Outlay3000000 NPV1297926 3. Based on the above sensitivity analysis this has been analysed that in all cases NPV of project is positive by considering WACC of company as discounting rate. Also notable aspect here is that even in worst case NPV is positive thus TWC should invest in this. 10
CONCLUSION As per the above report it has been concluded that corporate finance consist of making capital investment and distribute long term capital. In the task one calculate NPV and payback period to analysis that select project one for the investment. Moreover, as per the sensitivity analysis it is getting that project is not risk so company consider the project easily. 11
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REFERENCES Books and Journals Acharya, V. V. and Steffen, S., 2020. The risk of being a fallen angel and the corporate dash for cash in the midst of COVID.The Review of Corporate Finance Studies.9(3). pp.430- 471. Benlemlih,M.andBitar,M.,2018.Corporatesocialresponsibilityandinvestment efficiency.Journal of Business Ethics.148(3). pp.647-671. Cao,J.,Liang,H.andZhan,X.,2019.Peereffectsofcorporatesocial responsibility.Management Science.65(12). pp.5487-5503. Doidge,C.andet.al,2018.Eclipseofthepubliccorporationoreclipseofthepublic markets?.Journal of Applied Corporate Finance.30(1). pp.8-16. Serafeim, G., 2018. Investors as Stewards of the Commons?.Journal of Applied Corporate Finance.30(2). pp.8-17. 12