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QUESTION 1: Weighted Average Cost of Capital (WACC) for MBS

   

Added on  2021-02-19

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Corporate Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
i. Weighted average cost of capital (WACC) for MBS:..............................................................1
ii. Calculation of Net Present Value (NPV) and Internal Rate of Return (IRR):.........................2
iii. Calculation of net present value (NPV) and internal rate of return (IRR) of the project is
delayed for 12 months:.................................................................................................................3
iv. Recommendation:...................................................................................................................4
QUESTION 2...................................................................................................................................4
PART A...........................................................................................................................................4
i. Usefulness of different ratios for Smart Software Plc..............................................................4
ii. Comments on market value of Smart Software Plc.................................................................5
iii. Explanation regarding reasonable equity value and enterprise value for Future Intelligence
if it is bought by Smart Software Plc:..........................................................................................6
PART B............................................................................................................................................7
i. Definition of economic value and the way in which adjusted book value approach to valuing
assets and liabilities moves book value nearer to economic value..............................................7
ii. Highlighting at the elements in the balance sheet that might require adjusting to arrive at an
economic value:...........................................................................................................................8
PART C............................................................................................................................................9
i. Calculation of EV / EBITDA ratio:..........................................................................................9
iii. Calculation of EV / Sales Ratio:...........................................................................................10
iii. Calculation of Price to earnings ratio...................................................................................10
iv. Calculation of price to cash flow ratio:.................................................................................10
v. Contrast and explanation of results of different market multiple ratios:...............................10
CONCLUSION..............................................................................................................................11
REFERNECES..............................................................................................................................13

INTRODUCTION
Corporate finance can be defined as the funds which are used by business entities for the
purpose of executing all the operational activities in a systematic manner. Main purpose of
utilising it in appropriate manner is to enhance value of the company for its stakeholders such as
shareholders, employees, customers, suppliers and investors (Damodaran, 2016). All the
activities which are related to it range between investment banking and capital investment
decisions. Main aim of this assignment is to develop understanding regarding regarding different
techniques which are used for effective management of corporate finance. This report is
segregated in two different parts. First one is based upon Mobile Battery Solutions Plc and
second section is based upon two companies. These are Smart Software Plc and AstraZeneca Plc.
For the successful completion of the project different topics such as estimation of WACC, NPV,
DCF and IRR, usefulness of PE, price to book, price to cash flow, EV to EBITDA and EV to
sales ratio are covered. Along with this, calculation of EV and different ratio for AstraZeneca Plc
are also aligned under this report.
QUESTION 1
i. Weighted average cost of capital (WACC) for MBS:
WACC regarded as average return rate that an corporation anticipate for compensating
to different investors. Weights used in assessing WACC are specific portion of organisation's
finance source. Typically, a firm is funded by combining borrowing or bonds with equity stocks
(Flannery and Hankins, 2013). Since a business can obtain more financing from one than
another, company measure a weighted average to figure out how costly it is for a business to
generate the resources required to purchase buildings, machinery, and stock. Here are following
steps to compute weighted average cost of capital, as follows:
Step 1:
Calculation of cost of equity:
Equity Beta = 1.2
Rm – Rf = 6.00%
Rf = 1.00%
Re = Rf + (Rm – Rf) = 1% + 6% x 1.2 = 8.20%
1

Step 2:
Calculation of cost of debt:
Kd= Interest Rate ( 1 – tax rate) = 4 x (1 - .20) = 3.20%
Step 3:
WACC:
Proportion Cost (%)
Debt 0.4 3.2 1.28
Equity 0.6 8.2 4.92
WACC: 6.20%
ii. Calculation of Net Present Value (NPV) and Internal Rate of Return (IRR):
NPV: NPV is a easy yet significant instrument that demonstrates the distinction among
future cash-flows ' present value as well as total current investment figure. Through discounting
them at certain rate, present value of company's expected cash-flow is obtained. NPV is an
convenient-to-use and easy-to-understand instrument and is a common money budgeting method
used to assess investment and project appropriateness (Coles, Lemmon and Meschke, 2012). To
make rational investment choices, a thorough knowledge of this idea enables. In brief, NPV is
the substance acquired from the current cash-inflow amounts after deduction of the current
money outflow value. It is a extensive assessment method because the impact of period on cash-
flows is taken into consideration. In order to demonstrate its significance in current context, it
discounts potential future cash-flows.
IRR: Internal return-rate implies to interest rate which is benchmark where net present
value assessed using cash-flows includes positive as well as negative both in respect of any
project or proposal of investment is equal to zero. It is simply applied for evaluation of viability
or efficiency of any investment proposal (Ehrhardt and Brigham, 2016). Where IRR in respect of
any new project is above corporation's required return rate, than such project would be cost
efficient and beneficial for company. Where IRR is is lower than return rate required by
company then, it is advisable to reject such project.
Given Information:
Designing and developing Cost £15m
2

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