Financial Management: WACC, Equity vs Debt Financing, and Financial Risk Measurement

This article covers topics such as calculating WACC, equity vs debt financing, and financial risk measurement. It includes solved problems and explanations. The subject is financial management and the content is relevant for students taking courses in finance, accounting, and business. The college or university is not mentioned.

Online Exam - financial
management

TABLE OF CONTENTS
QUESTION 2...................................................................................................................................3
A..................................................................................................................................................3
B..................................................................................................................................................3
C..................................................................................................................................................4
REFERENCES................................................................................................................................6

QUESTION 2
A
Current market value weighted average cost of capital (WACC)
WACC= (E/ V * Re) + [(D/ V * Rd * (1 – Tc)]
Where
E= market value of total equity
D= market value of total debt
V= total market value of debt and equity that is E + D
Re= total cost of equity
Rd= total cost of debt
Tc= income tax rate
Equity- 40 million
Preference= 18 million
Debenture= 210 million
Bank loan= 30 million
Total value= 298 million
WACC= (40 / 298 * 1.4) + (18/ 298 * 10%) + [(210/ 298 * 6%) + (30 / 298 * 7 %) * (1 – 20%)
= 0.187 + 0.006 + (0.042 + 0.007 * 0.8)
= 0.193 + 0.0392
= 0.2322
B
Investor has the main objective for investing into company is to have higher level of
return. The are two ways in which funds can be provided such as equity & debt. In case of equity
financing there are higher possibilities are considered to have higher level of return as compared
to debt due to several reasons. There are larger possibilities of obtaining the return on equity as
compared to debt due to the reason of achieving higher profitability which is basically taken into
consideration for providing divided to equity shareholders. Debt is considered to be an obligation
which possesses fix ate of interest that can be obtained by provided. In case of equity there is
possibility of getting higher return by using available equity. The main reason behind conducting

such practice is to satisfy the equity share holder whose divided are not mandatory to given in
turn continuous favourable decision in favour of company can be made.
C
Financial risk is associated with possibilities of losing money on an investment in the
business venture. In the current competitive environment, the competition has increased which is
fluctuating several factors and require firm to pay attention on having appropriate estimation of
financial risk concerned in turn relevant approach can be applied. There are several techniques
which can be used by individual as well organization to ascertain number of components that can
lead firm towards success. The financial risk basically involves credit, liquidity, operational that
highly has impact on the processing of company.
There are several approaches which can be taken into consideration for measuring
performance of financial risk prevailing for an investment (Aydemir and Aren, 2017). Interest
coverage ratio pay attention on ascertaining the ability h to handle its outstanding debt. There are
several types of ratio available which can contribute in having relevant insights regarding the
prevailing threat to overcome for having profitability. The coverage refers to the time which
refers to duration in which interest payment can be made by company currently available
earning. In addition to this, it contributes in assessing how well an organization can pay off the
prevailing obligations with usage of available earnings (Valaskova and et.al., 2021). On the basis
of this, it can be specified that interest coverage is one of the significant technique that can help
in assessing how well firm can pay off its debt by using its earning.
Gearing ratio is one of the crucial method of identifying the leverage of risk associated
with the investment in company. There are higher number of components which can be helpful
in gaining information regarding how total equity can be used to overcome the total debt. There
re several ways in which firm can get the debt such as current and long term that can help in
having ability to meet the requirements of firm. It indicates the financial leverage of the
enterprise which can be assessed by how company's operations are funded by equity in
comparison to debt financing.
On the basis of the provided information it can be specified that it becomes crucial for the
assessing the financial risk in order to make the relevant investment. Interest coverage ratio and
gearing are the two ways in which firm can assess how well an investment is required to be
managed.

REFERENCES
Books and Journals
Valaskova, K. and et.al., 2021. Financial risk measurement and prediction modelling for
sustainable development of business entities using regression
analysis. Sustainability, 10(7), p.2144.
Aydemir, S.D. and Aren, S., 2017. Do the effects of individual factors on financial risk-taking
behavior diversify with financial literacy?. Kybernetes.