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Financial Management of Organisation

   

Added on  2021-02-20

14 Pages3498 Words47 Views
FinancialManagement

INTRODUCTIONFinance is the life line of any business organisation in long term survival and enhance theprofitability of its business operations. Finance management is about to raising the money,managing and application of funds in doing its business operations efficiently and effectively.The management of finance is essential activity in an organisation in order to achieve its financerelated goals and objectives. This report provides the understanding of net present value, payback period and accounting rate of return by solving some numerical problems. This alsoprovides information about how a business firm may find out its internal rate of return forevaluating its performances. In this report various questions is given related to financialmanagement for better understanding of this. This report provides information about calculationof cost of capital and another related aspects (Renz, D.O. and Herman, R.D. eds., 2016Arnold, 2012).

Question 1(a)Calculation of book value and market value of WACC:It is required for every company to calculate cost of capital which is a rate of return thatan enterprise has to pay to satisfy fund providers. This involves various models by which acompany determine certain risks involved in the business process like WACC, CAPM, dividendgrowth etc. Weighted average cost of capital includes weighting cost for individual sources offinance, cost of equity, debt (Alemis and Yap, 2013). Overview of given problem in question 1: The finance director of Kadlex plc is currentlyreviewing capital structure of her company. The firm is not financing well due to which cost ofcapital (WACC) is minimised. She feels that by issuing more debt the company will be able toreduce its cost of capital for which an issue of 15m of 11 per cent bonds have been issued. Theyare sold at 5% premium to par value and will be matured after seven years. It is required tocalculate market, book value WACC as well as new cost of capital after considering theproposed changes by the finance director. WACC: It is defined as the average cost of company's sources of finance like equity,bonds etc. weighted according as per the proportion of each cost. WACC is calculated bymultiplying cost of equity and debt to the weighted market value of both equity and debt (Kimand Chatterjee, 2013).= Cost of equity* [MV of equity/MV of equity + MV of debt + MV of preferenceshares] + cost of debt* [MV of debt/MV of equity + MV of debt + MV of preference shares]+ cost of preference shares* [MV of preference shares/MV of equity + MV of debt + MV ofpreference shares]= Market value of equity in firm: 20000*2.65 = 53000 + 5000 = 58000Market value of preference shares: 10000*0.75 = 7500Market value of debt in firm: 15000*107/100 = 16050Cost of equity: 24.8 (1 + g)/2.65 + g =Cost of debt: 10/1.07 = 9.35Cost of preference shares: d/0.75 =B) Cost of capital: Given: 15m of 11% bonds @ 5% premium after 7years

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