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Financial Decision Making Solution Assignment (Doc)

   

Added on  2021-01-02

15 Pages1919 Words165 Views
FINANCIAL DECISIONMAKING

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Presenting numerical analysis about impact of capital structure................................................1Representing graph without tax..................................................................................................2Proposition of Risk free debt.......................................................................................................6Proposition of risky debt ............................................................................................................8Examining problems which impact on financing decision of X firm value.............................10CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................12

INTRODUCTIONCapital structure could be referred to as method which had been adopted for financing itsoperations and growth with implication of various sources of finance. In simple words, it couldbe justified by segregating its specific cash flow in two components such as debt and equity. Thecapital structure could be termed as optimal when debt and equity proportion would be givingoutput in lowest WACC (Weighted average cost of capital) of organization. It could be justifying by mix of financial securities which is applicable for financing theparticular organization. The main objective is to increase firm's valuation along with expectedwealth of shareholders. The present report is giving brief understanding about firm X’s capitalstructure as it has huge requirement of $100000 which is expecting net cash flow of $40000. Inthe same series, it is also justifying problems which could impact on financing decisions onvaluation of firm.Presenting numerical analysis about impact of capital structureThe irrelevance of capital structure proposition had been developed from MillerModigliani. It has various assumptions such as absence of bankruptcy and tax cost. Along withalterations in capital structure, WACC must be constant. If there is no change or advantage withincrement of debt as it would not be influencing stock price where capital structure would beconsidered as irrelevant (Arrow, 2017). Trade off theory with context of leverage hasassumptions that leverage would not be benefited in specified capital structure. It also helps inrecognising benefits of tax with reference to payments of interests. It does not make informationasymmetric as investors could lend or borrow at similar rate. In the same series, it is consideredas fixed investment policy through organization.1

Representing graph without tax100.00%DebtEquity10.00%90.00%DebtEquity2

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