Financial Management Study Material

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a) Weighted Average Cost of Capital .........................................................................................1
b) Net present Value ...................................................................................................................2
c) Memo.......................................................................................................................................3
QUESTION 2...................................................................................................................................3
a) Features of activity based costing system relative traditional costing system.........................3
b) Key decisions break even and cost profit volume analysis can be used for making...............4
QUESTION 3...................................................................................................................................5
a) Budgeting as tool used for aiding control and the performance management ........................5
b) Limitations of traditional budgeting. Beyond Budgeting improving the planning system.....6
QUESTION 4 ..................................................................................................................................7
Sources of funds for SMEs..........................................................................................................7
QUESTION 5...................................................................................................................................9
Corporate Social Responsibility including the benefits of stakeholders.....................................9
REFERENCES..............................................................................................................................11

QUESTION 1
a) Weighted Average Cost of Capital
Weighted Average Cost of Capital
Cost of Equity
Dividend Valuation method
Ke (D1/P0)+g
Dividend 0.15
Current Market Price 1.8
Growth 7.50%
Ke = (0.15*1.075/1.8)+0.075
16.46%
Cost of Preference Shares
DVM Preference Shares
Kp D/ P0
Dividend 0.07
Price 1.3
Kp = 0.07/1.3
5.38%
Cost of Debt
DVM for Loan Stock
Kd = I(1 – t)/MV
Interest 10.00%
Market Value 1.5
Kd = 0.10(1-0.25)/1.5
5.00%
Value of Company based
on market prices Capital Weight
Equity 50m * 1.8 = 90 0.78
Preference Share 6m * 1.3 = 7.8 0.07
Debt 12m * 1.5 18 0.16
Total 115.8 1
1

WACC [keVe+KpVp+KdVd]
16.46*0.78 + 5.38*0.07 +
5*0.16
WACC 14.015
Interpretation
Weighted average cost of capital is a method used to calculate the cost of capital where
capital is weighted proportionally. Sources of the capital are equity, preference shares, bonds and
also long term debts used for financing the operations. It shows the cost of financing from
different sources to the company. There are different methods used for measuring the cost of
different securities such as dividend valuation methods, capital asset pricing method and others.
In the present case for calculating the cost of capital, market value of securities is used. Cost of
equity using valuation method is 16.46% which is high(Budhathoki and Rai, 2020). The cost of
preferred stocks is 5.38% and of debt is 5%. These are the costs to company for raising funds
from each of the sources. The WACC of company is 14.015% which is high. Company has to
make the adjustments for reducing the cost of capital of the business.
b) Net present Value
Net Present Value
Cost of Equipment 60000
Scrap Value 6000
Useful Life years 6
Cash Flows
Year Cash Flows
Pv@14.05
% PV of Cash Flows
1 21000 0.8768 18412.98
2 21000 0.7688 16144.65
3 21000 0.6741 14155.77
4 18000 0.5910 10638.77
5 8000 0.5182 4145.85
6 18000 0.4544 8179.01
Sum of Present Value (A) 71677.03
Initial Cost of Investment
(B) 60000
Net Present Value (A – B) 11677.03
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