Financial Management Assignment | Risk and Capital Budgeting

Added on - Nov 2019

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Running head: FINANCIAL MANAGEMENTFinancial managementName of the studentName of the universityAuthor note
1FINANCIAL MANAGEMENTTable of ContentsPart A.........................................................................................................................................2Risk and capital budgeting.........................................................................................................2Part B..........................................................................................................................................4Role of the financial management with regard to the ‘Not-for-profit organization’.................4Reference....................................................................................................................................8
2FINANCIAL MANAGEMENTPart ARisk and capital budgeting(a)Pre-tax costcapital structureDebt40%Preferred equity10%Ordinary shares50%Tax rate of the company = 40%Cost of debt = Yield to maturity = 8.3%Note:The effective annual rate of the debt is taken based on the current market scenario thatis the YTM on debt. However, the historical rate is not considered.Calculation of cost of preference sharesCost of preferred equity10%Face value$70Market value$76Dividend8%Cost of preferred equity = Annual dividend / Market value = ($70*8%)/$76 = 7.37%Calculation of cost of ordinary shares as per CAPMCost of equity = Rf +β(Rm – Rf)Where, Rf = risk free rateΒ= BetaRm = market returnAs per the given question, Rf = 4%, Rm = 11.4% andβ= 1.05Therefore, cost of equity = 4 + 1.05 (11.4 – 4) = 11.77%
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