Financial Analysis and Capital Budgeting

This assignment delves into the analysis of a company's financial health through ratios like debt-to-asset ratio. It then calculates the cost of equity and after-tax cost of debt to determine the weighted average cost of capital (WACC). Finally, it evaluates a capital budgeting project by calculating the net present value (NPV) using projected cash flows and the WACC discount rate.

Running head: FINANCIAL MANAGEMENT ASSIGNMENT 2
Financial management assignment 2
Name of the student
Name of the university
Author note

1FINANCIAL MANAGEMENT ASSIGNMENT 2
Table of Contents
Question 1..................................................................................................................................2
(a) Pro-forma income statement for the years 2017 – 2021..............................................2
(b) Additional financing required –...................................................................................2
(c) Pro-forma balance sheet for the years 2017 – 2021....................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................3
Question 4..................................................................................................................................3
(a) Calculation for cost of equity......................................................................................3
(b) After tax cost of the debt.............................................................................................3
(c) Weighted average cost of capital (WACC).................................................................3
(d) Net present value.........................................................................................................4
Bibliography...............................................................................................................................5

2FINANCIAL MANAGEMENT ASSIGNMENT 2
Question 1
(a) Pro-forma income statement for the years 2017 – 2021
Particular 2016 2017 2018 2019 2020 2021
Sales revenue 2200 2640 3168
3801.6
0
4561.9
2
5474.3
0
Costs 2055 2428.8
2914.5
6
3497.4
7
4196.9
7
5036.3
6
Depreciation 20 52.2 83.14 118.43 96.48 149.39
EBIT 125 159 170.30 185.70 268.47 288.56
Interest 5 33 39.60 47.52 57.02 68.43
Tax 60 63 65.35 69.09 105.72 110.06
Net income 60 63 65.35 69.09 105.72 110.06
Less: Dividend 36 37.8 39.21 41.45 63.43 66.04
Retained earnings 24 25.2 26.14 27.64 42.29 44.03
(b) Additional financing required –
Year Amount
2017 330
2018 396
2019 475.2
2020 570.24
2021 684.29
(c) Pro-forma balance sheet for the years 2017 – 2021
Particulars 2016 2017 2018 2019 2020 2021
Net working capital 190 290.40 348.48 418.18 501.81 602.17
Fixed asset
Gross fixed asset 350 250.00 527.80 840.66 501.81 975.57
investment in fixed asset 330.00 396.00 475.20 570.24 684.29
Less: accumulated depreciation 100 52.20 83.14 118.43 96.48 149.39
Net fixed asset 250 527.80 840.66
1197.4
3 975.57
1510.4
7
Total net assets 440 818.20
1189.1
4
1615.6
1
1477.3
8
2112.6
4
Liabilities
Long term debt 90 330.00 396.00 475.20 570.24 684.29
Net worth 350 488.20 793.14
1140.4
1 907.14
1428.3
5

3FINANCIAL MANAGEMENT ASSIGNMENT 2
Long term liabilities and net
worth 440 818.20
1189.1
4
1615.6
1
1477.3
8
2112.6
4
[Note – for the purpose of calculating depreciation, it has been assumed that the investment
in fixed asset has been made at the beginning of the year.]
Question 2
As per the given situation, all the additional funds will be raised through debt.
Therefore, the issues those may arise while estimating the external funds are the rate of
interest, repayment period and the debt equity ratio of the company after raising the fund
through borrowing.
Question 3
Debt to net asset ratio
Ratio Formula 2017 2018 2019 2020 2021
Debt to total asset ratio Total liability/total asset
330
818.2
396
1189.1
4
475.2
1615.61
570.24
1477.38
684.29
2112.64
0.40 0.33 0.29 0.39 0.32
From the above table it can be recognized that there is no particular trend of the debt
to total asset ratio. Till the year 2019 it is in decreasing trend and then it is fluctuating.
Generally, a ratio of 0.50 or lower is considered better for any company. However, high ratio
indicates that the company is highly leveraged and involve more risk. As the forecasted debt
to net asset ratio for 2017 to 2021 is below 0.50, the company has a good scope for raising
finance through debt.
Question 4
(a) Calculation for cost of equity
Cost of equity = Rf + β (Rm – Rf)

4FINANCIAL MANAGEMENT ASSIGNMENT 2
Where, Rf = Risk free rate = 4%, β = beta = 1.2 and Rm = market risk premium = 7%
Cost of equity = 4 + 1.2 (7 - 4) = 7.6%
(b) After tax cost of the debt
Interest rate on debt = 10%
Marginal rate of tax = 35%
After tax cost of debt = 10% * (1 – 0.35) = 6.5%
(c) Weighted average cost of capital (WACC)
WACC = WACC = wd (cost of debt after tax) + we (cost of equity)
Where, Wd = Weight of debt = 30%, We = Weight of equity = 70%
= [(1-0.35)*(0.3*10)] + (0.7*7.6) = 7.27%
(d) Net present value
Year Cash inflow (a) DCF @ 10% (b) NPV (a*b)
0 -14000 1 -14000
1 -2663 0.9091 -2420.93
2 1537 0.8246 1267.41
3 6594 0.7513 4954.072
4 10731 0.683 7329.273
5 7246 0.6209 4499.041
6 2946 0.5645 1663.017
500 0.5645 282.25
Total 3574.13

5FINANCIAL MANAGEMENT ASSIGNMENT 2
Bibliography
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user
perspective. Wiley Global Education.