# 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...........................................................................................................................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

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

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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