Financial Management Sample Assignment
Added on 2021-02-19
14 Pages3724 Words29 Views
FinanceLeadership Management
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FinancialManagement
ContentsContents...........................................................................................................................................2INTRODUCTION...........................................................................................................................1QUESTION 1..................................................................................................................................1a. Calculation of book value and market value............................................................................1b. Recalculation of cost of capital of company............................................................................3c. Critical discussion regarding integration of capital structure of the company........................4d. Critical evaluation of the effect of short termism on bankruptcy and agency problem..........4QUESTION 3..................................................................................................................................5a. Calculation of different investment appraisal techniques........................................................5b. Merits and demerits of different investment appraisal techniques..........................................9CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................12
INTRODUCTIONFinancial management can be defined as the process which is used by business entitiesfor the purpose of maintaining monetary resources which are available to the company. For allthe organisations it is very important because it helps to use the funds in appropriate manner sothat long term business goals could be attained (Badolato, Donelson and Ege, 2014). In order toenhance profitability of the enterprise it is very important to manage financial performance.There are various techniques which are used for this purpose. One of them is ratio analysis whichhelps to assess that the organisation is viable or not. This report covers various topics such asanalysis of cost of capital using WACC and assessment of long term finance of firms. Alongwith this, various investment appraisal techniques which are used to form investment decisionsare also covered under this report. QUESTION 1a. Calculation of book value and market valueIn order to calculate book value and market value for different equities and debts it is veryimportant to determine the growth rate each year so that the accurate value could be analysed.For this purpose dividend of all the years is used (Baños-Caballero, García-Teruel and Martínez-Solano, 2014). The calculation of growth rate is as follows:YearDividend for the yearFirst year21Second year23Third year25Fourth year27Fifth year28The formula for the growth is as follows:Growth rate =S0*(1+g)n = Sn:- 21 ( 1+ g ) 4 = 28:- ( 1+ g ) 4 = 28 / 21:- ( 1+ g ) = (1.333) 0.25:- g = ( 1 ) – ( 1.0757 ) :- 0.0757 or 7.57%1
By using above formula growth rate is calculated which is 7.57%. It will be used todetermine book and market value of the asset.Calculation of different costs:Cost of equity: KeFormula: ( Sn * [ ( 1 + g ) + g ] ) / P0[ Sn = First Dividend ][ g = growth rate ] [P0 = Ex dividend ]Calculations of it are as follows:= [ 28 * ( 1 + 0.075 ) + 0.075 ] / 2.65= ( 28 * 1.15 ) / 2.65= 12.15%Cost of preference share: KpFormula: ( j ) / Pf[ j = preference dividend ] [ Pf = ex dividend for preference share ]Calculation of it is as follows:= 7 / 75= 9.33 %Cost of other debts (Irredeemable bonds): KdirFormula: [I * ( 1 – t ) ] * (Po / Pn)[ I = Rate of interest on irredeemable bonds ][ t = rate of corporate taxation ][ Po = Initial price of bonds ][ Pn = Current price of bond ]= [ 0.10 * ( 1 - 0.30 ) ] * ( 100 / 107 )= 0.0654 or 6.54%Calculation of cost at book and market value: FinancialinstrumentsMarket Value (£)Book value (£)Proposed Value (£)Equity(market price * total shares)(Reserve and share)2.85 * 20000 =2
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