Financial Management: Computation of Cost of Capital and Investment Appraisal Techniques

Financial Management

Contents
INTRODUCTION...........................................................................................................................................3
QUESTION 1.................................................................................................................................................3
a. Computation of market and book value cost of capital.......................................................................3
b. Recalculation of cost of capital of company........................................................................................6
c. Discussion on minimisation of weighted average cost of capital by integrating the sensible level of
gearing in to the capital structure...........................................................................................................7
d. Effects of short-termism on agency problem and bankruptcy.............................................................7
QUESTION 3.................................................................................................................................................8
a. Calculation of different investment appraisal techniques such as pay back period, ARR, NPV and IRR
.................................................................................................................................................................8
B. Limitations and benefits of different investment appraisal techniques............................................13
CONCLUSION.............................................................................................................................................14
REFERENCES..............................................................................................................................................15

INTRODUCTION
Financial management can be characterized as the mechanism used mostly by trade
associations to sustain the funds and resources at the disposal of the organization. This is really
necessary to all companies as it enables to be using the resources wisely to meet long-term
business goals. Managing financial efficiency is very necessary to improve client
competitiveness. There are various ways that are used to this goal (Burtonshaw-Gunn, 2017). To
ensure that all of the processes connected with it have been carried out thoroughly, it is really
valuable for leaders to adequately review final reports so that decisions can be made for the
future. Questions first and third are identified to fulfill this Document. One of them is a ratio
study that ultimately determines whether or not the company is sustainable. This article
addresses numerous subjects including cost of debt evaluation using WACC and evaluation of
tight-term investment banking. In addition, this article also discusses numerous investment
assessment approaches that are used to shape investment choices.
QUESTION 1
a. Computation of market and book value cost of capital
Both liabilities and equity markets are maintained in a formal way known as financial
performance in all organizations. To accomplish most of the targets, including greater efficiency,
massive numbers of shareholders, etc., it is quite essential for corporations to ensure that the
shares are properly handled. The cost of borrowing is used in evaluating it to assess the expense
of all the securities, shares, loans, etc. Through reviewing the financial results, Kadlex Plc's
financial officer has determined that the present value cost of business capital is weak. For this
reason the management has decided to grant new shares in the industry, it is rather essential for
the organization to boost it (Cornwall, Vang and Hartman, 2016). With either the aid of estimates
below, the effect of announcing them could be reviewed:
For year 1 to 5 the growth are 21, 23, 25, 27 and 28 individually.
Year Dividend for the year
First year 21
Second year 23

Third year 25
Fourth year 27
Fifth year 28
Calculation of growth=
Formula= Sn=S0*(1+g)n
28=21*(1+g)4
28/21=(1+g)4
1.33=(1+g)4
(1.33)0.25= (1+g)
g=1–1.0757
=0.0757 or 7.57%
(Here, g =growth, S0 =First dividend, n =number of years, Sn =Last dividend)
Computation of rate of growth for all the stocks is as follows:
Cost of irredeemable bonds:
Formula= Kd=[j*(1–CT)]*(Po/Pn)
Kd =[0.10*(1–0.30)]*(100/107)
=0.0654 or 6.54%
(Here, P0 =Initial Price, CT =Rate of Corporate tax rate, Kd =Cost of Irredeemable Bonds,
Pn =Current Price, j =Rate of interest on bonds)