Financial Management: Calculation of Cost of Capital and Investment Opportunity Schedule

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Executive Summary
The aim of the project is to understand about the various aspects of the financial management.
The project aims at various kinds of corporate finance factors that influences the cost of capital.
The project aims at calculation of different sources and way of calculating cost of capital. The
different equity financing and the treatment of floatation cost is shown in the assignment. The
project aims at also classifying expenses at the various categories.

2FINANCIAL MANAGEMENT
Table of Contents
Question 1........................................................................................................................................3
Question 2......................................................................................................................................10
Question 3......................................................................................................................................11
Reference.......................................................................................................................................13

3FINANCIAL MANAGEMENT
Question 1
1) The existing market value capital structure of the Highsky Company:
Capital Structure Of the Company
Particulars Amount
Debentures 1,500,000
Equity 2,800,000
Debt/Equity 0.536
Table 1: Capital Structure of the Company
2) The floatation cost is the cost spent by the company when the company offers shares or
securities in the market to the public. Floatation cost arises from services like the
underwriting expenses or fees, legality charges, and the registration fees incurred while
offering a security (Gupta, 2016). Floatation costs are generally not included in the
incorporation for determining the cost for capital. The company adjusts the floating costs
in the cash flows as the expenses incurred for raising the capital for the company. For
Example, A company, which wants to raise $ 5 million worth of capital it then has to
incur the around 1% of the total capital raised as floating charge. So the net amount
raised by the firm will be 99% of the $ 5 million worth of capital (Gupta, Prakash, &
Rangan, 2018).
3) The cost of Equity is calculated for Equity, Debentures and Ordinary Shares.
Calculation of Cost of Capital
Long Term Debt 500000
Before Tax Cost Of Capital 11.41%
Tax Rate 30%
After Tax Cost of debt
7.9891
%
Formula= 12.10*(1-Tax Rate)
Preference Share Capital 120000