FIN303 Financial Management Tutor-Marked Assignment July 2018

This is a Financial Management Tutor-Marked Assignment for FIN303 course covering topics such as loan data, weighted average cost of capital, computation of operating cash flows, changes in net working capital, net present value, annual dividend, capital structure, and more.

FIN303
Financial Management
Tutor-Marked Assignment
July 2018 Presentation

TABLE OF CONTENTS
Question 1..................................................................................................................................4
Part A.....................................................................................................................................4
Part B......................................................................................................................................4
Part C......................................................................................................................................4
Part D.....................................................................................................................................4
Question 2..................................................................................................................................5
Part A.....................................................................................................................................5
(i)........................................................................................................................................5
(ii).......................................................................................................................................5
Part B......................................................................................................................................6
(i)........................................................................................................................................6
(ii).......................................................................................................................................6
(iii)......................................................................................................................................6
(iv)......................................................................................................................................7
Question 3..................................................................................................................................7
Part A.....................................................................................................................................7
(i)........................................................................................................................................7
(ii).......................................................................................................................................8
(iii)......................................................................................................................................8
(iv)......................................................................................................................................8
(v).......................................................................................................................................8
Part B......................................................................................................................................9
(i)........................................................................................................................................9
(ii).......................................................................................................................................9
(iii)......................................................................................................................................9

(iv)....................................................................................................................................10
(v).....................................................................................................................................10
References................................................................................................................................11

QUESTION 1
Loan Data
Original Principal $ 800,000.00
Loan Term (Years) 30
Annual Interest Rate 3.60%
Number of payments per Year 12
Payments per Year $3,637.16
Part A
Formula Amount
(i) Interest paid on the
first month of 25th
Year $598.33
Part B
Formula Amount
(ii) Total Interest paid during the total
life of the Loan
(Payments per
month*Loan
term*No. of
payment per
year)
$ 509,378.61
Part C
Formula Amount
(iii) Present Value of Loan Payments Loan amount
(1/(1+rate of
interest)^no. of
years
$1,144,209.01
Part D
Answer in Part C shows that if an individual has $800,000 for the purpose of investment, then
they can earn interest of ($1,144,209.01-$800,000), i.e. $344,209 in 30 years, however, if the

same amount is borrowed then interest cost will be $ 509,378.61. This factor shows that
interest earnings are lower than interest cost.
QUESTION 2
Part A
(i)
Computation of Weighted Average Cost of Capital
Particulars Cost
Market
Value (In
Billions)
Weighte
d
average
cost of
Capital
Cost of Equity as per CAPM (Rf + Beta(Rm-Rf)
Cost Market
Value (In
Billions)
Weighted
average
cost of
Capital
Cost of Debt 23.00% 6.00 15.33%
Formula Kd* weight of debt +Ke *Weight of
equity
6.40% 3.00 2.13%
Total 9.00 17.47%
Kd: Cost of debt
Ke: Cost of equity (Ward and Forker, 2017)
This WACC is suitable for the discounting of the project as Good Inc. is a conglomerate with
businesses their base is suitable for computation of WACC of T. Holdings as a whole.
(ii)
Computation of Weighted Average Cost of Capital
Particulars Cost
Market
Value (In
Billions)
Weighted
average
cost of
Capital
Cost of Equity as per CAPM (Rf + Beta(Rm-Rf) 17.00% 6.00 11.33%
Cost of Debt 6.40% 3.00 2.13%
Formula Kd* weight of debt +Ke *Weight of equity
Total 9.00 13.47%
Kd: Cost of debt

Ke: Cost of equity
This WACC is suitable for the discounting of the project as Bad Inc. is a pureplay and
proposed project is solely based on telecommunication project. Therefore, consideration of
base of Bad Inc. is more viable.
Part B
(i)
Computation of Operating Cash Flows for first 5 Years (In Millions)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Sales Revenue $800.00 $ 960.00 $1,152.00 $1,382.40 $1,658.88
Variable Cost $240.00 $ 288.00 $345.60 $414.72 $497.66
Contribution $560.00 $ 672.00 $806.40 $967.68 $ 1,161.22
Fixed Cost $80.00 $ 80.00 $80.00 $80.00 $80.00
Depreciation $60.00 $ 60.00 $60.00 $60.00 $60.00
Advisory Fees to S Corp $2.00 $ 2.20 $ 2.42 $ 2.66
EBIT $420.00 $ 532.00 $666.40 $827.68 $ 1,021.22
Interest $240.00 $ 240.00 $240.00 $240.00 $240.00
EBT $180.00 $ 292.00 $426.40 $587.68 $781.22
Taxes @ 20% $36.00 $ 58.40 $85.28 $117.54 $156.24
EAT $144.00 $ 233.60 $341.12 $470.14 $624.97
Depreciation $60.00 $ 60.00 $60.00 $60.00 $60.00
Increase in Working
Capital $80.00 $ 16.00 $19.20 $23.04 $27.65
Operating Cash Flows $124.00 $ 277.60 $381.92 $507.10 $657.32
(ii)
Computation of Changes in Net Working Capital for the First 5 Years
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Opening Working Capital $- $ 80.00 $96.00 $115.20 $138.24
Net Working Capital Associated $80.00 $ 96.00 $115.20 $138.24 $165.89
Increase in Working Capital $80.00 $ 16.00 $19.20 $23.04 $27.65
(iii)
Computation of Net Present Value from assets for the First 5 Years
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total
Operating Cash Flows $124.00
$
277.60 $381.92
$507.1
0 $657.32 $1,947.95
Salvage Value at the end $- $- $- $-
$300.00
$300.00

of 5th Year
Total Operating Cash
Flows $124.00
$
277.60 $381.92
$507.1
0 $957.32 $2,247.95
Discounting Factor @
13.47% 0.881 0.777 0.684 0.603 0.532
Discounted Operating
Cash Flows $109.28
$
215.60 $261.41
$305.9
0 $508.93 $1,401.12
Total Initial Investment $600.00 $- $- $- $- $600.00
Net Present Value $801.12
(iv)
By considering the positive net present value of the project, the company is recommended to
select the project as it is profitable for the group. Net present value shows the financial
feasibility of the project and the project over the year will provide net cash flow of $800
million (Petty, Titman, Keown, Martin, Martin & Burrow, 2015). Apart from this, the
company will be able to enhance their operations in the Asia Pacific region to make a viable
investment for the available excessive money. In addition to this, the proposed investment
will improvise their product portfolio.
QUESTION 3
Part A
(i)
Computation of Annual Dividend received by Maureen under firm's Capital
Structure
Particulars Amount
Earnings Before Interest and Taxes $28,000.00
Interest $-
Earnings Before Taxes $28,000.00
Taxes $-
Earnings After Taxes $28,000.00
Preference Dividend $-
Earnings available for Equity Share Holders $28,000.00
Number of Outstanding Equity Shares $ 5,000.00
Earnings per Share $5.60
Dividend Payout Ratio 100%
Dividend per Share $5.60
Number of shares held by Maureen 100
Dividend Received by Maureen $560.00

(ii)
Computation of Number of Shares Repurchased under the Planned restructuring
Particulars Amount
Number of 6% Annual Coupon 10-year Bonds 150
Face Value of Bonds $1000
The amount received by selling bonds $150000
Current Market Price of Equity shares $60
Number of Equity Shares Repurchased 2500
(iii)
Computation of Annual Dividend received by Maureen under firm's Planned
Capital Structure
Particulars Amount
Earnings Before Interest and Taxes $ 28,000.00
Interest $ 9,000.00
Earnings Before Taxes $ 19,000.00
Taxes $ -
Earnings After Taxes $ 19,000.00
Preference Dividend $ -
Earnings available for Equity Share Holders $ 19,000.00
Number of Outstanding Equity Shares 2500
Earnings per Share $ 7.60
Dividend Payout Ratio 100%
Dividend per Share $ 7.60
Number of shares held by Maureen 100
Dividend Received by Maureen $ 760.00
(iv)
CF (levered) = CF (unlevered) + t*interest
=$ 19,000.00+ (.0*9000)
=$19,000.00
(v)
Yes, the selected capital structure is more optimum it is because Maureen is able to stabilise
their financial cost with the introduction of debt in the capital structure (Karadag, 2015).
Further, the cost of equity is comparatively lower than the cost of debt. Therefore, she is able
to earn a higher dividend on the retained shares.

Part B
(i)
Computation of Annual Dividend received by Maureen under firm's Capital
Structure
Particulars Amount
Earnings Before Interest and Taxes $28,000.00
Interest $-
Earnings Before Taxes $28,000.00
Taxes $5,600.00
Earnings After Taxes $22,400.00
Preference Dividend $-
Earnings available for Equity Share Holders $22,400.00
Number of Outstanding Equity Shares $5,000.00
Earnings per Share $4.48
Dividend Payout Ratio 100%
Dividend per Share $4.48
Number of shares held by Maureen 100
Dividend Received by Maureen $448.00
(ii)
Computation of Number of Shares Repurchased under the Planned restructuring
Particulars Amount
Number of 6% Annual Coupon 10-year Bonds 150
Face Value of Bonds $1000
The amount received by selling bonds $150000
Current Market Price of Equity shares $60
Number of Equity Shares Repurchased 2500
(iii)
Computation of Annual Dividend received by Maureen under firm's Planned
Capital Structure
Particulars Amount
Earnings Before Interest and Taxes $ 28,000.00
Interest $ 9,000.00
Earnings Before Taxes $ 19,000.00
Taxes $ 3,800.00
Earnings After Taxes $ 15,200.00

Preference Dividend $ -
Earnings available for Equity Share Holders $ 15,200.00
Number of Outstanding Equity Shares 2500
Earnings per Share $ 6.08
Dividend Payout Ratio 100%
Dividend per Share $ 6.08
Number of shares held by Maureen 100
Dividend Received by Maureen $ 608.00
(iv)
CF (levered) = CF (unlevered) + t*interest
=$ 15,200.00+ (.2*9000)
=$17,000.00
(v)
Even with the consideration of tax the selected capital structure is optimum, it is because
Maureen is able to stabilise their financial cost and take benefit of tax shield on interest as it
is chargeable expense (Finkler, Smith, Calabrese and Purtell, 2016). Further, the cost of
equity is comparatively lower than the cost of debt. Therefore, she is able to earn a higher
dividend on the retained shares.

REFERENCES
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial
management for public, health, and not-for-profit organizations. CQ Press.
Karadag, H., (2015). Financial management challenges in small and medium-sized
enterprises: A strategic management approach. EMAJ: Emerging Markets
Journal, 5(1), pp.26-40.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. & Burrow, M.,
(2015). Financial management: Principles and applications. Pearson Higher
Education AU.
Ward, A.M. & Forker, J., 2017. Financial management effectiveness and board gender
diversity in member-governed, community financial institutions. Journal of business
ethics, 141(2), pp.351-366.