Financial Management: Calculation of WACC and Optimal Investment Decision

This article provides a detailed explanation of the calculation of WACC and optimal investment decision for a business. It includes a statement showing the calculation of cost of equity and NPV and IRR of different investment options. The article is relevant for students studying financial management and related courses.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Authors Note:

1FINANCIAL MANAGEMENT
Table of Contents
Answer to Question 1......................................................................................................................2
a)..................................................................................................................................................2
b)..................................................................................................................................................2
C...................................................................................................................................................7
Reference.........................................................................................................................................9

2FINANCIAL MANAGEMENT
Answer to Question 1
a)
Calculation of WACC
Source of Fund Cost (C ) Weight (W) C X W
Equity Capital 21% 0.5 10.50%
Debt 4% 0.5 1.75%
WACC 12.25%
Statement showing calculation of Cost of Equity
Particulars Amount
Beta 2
Market Rate of Return 13%
Risk Free Rate of Return 5%
Cost of Capital 21%
The calculation above shows the weighted average cost of capital applicable to the
business. The WACC is taken as the discounting rate for evaluating the project because the
projects that have return higher than the WACC is expected to have positive Net present value.
Therefore selecting WACC as the discounting rate is appropriate to the business (Titman et al.,
2017).
b)
The decision for optimal investment is made after calculating the NPV and IRR of
different options. Based on the calculations provided below it can be said that the best
investment option for the company is e Phone as the NPV and IRR of this investment decision is
high. The calculations are provided below:

3FINANCIAL MANAGEMENT
Investment in e phone
Calculation of NPV of e Phone
Particul
ars
Yea
r 0
Yea
r 1
Yea
r 2
Yea
r 3
Yea
r 4
Yea
r 5
Yea
r 6
Yea
r 7
Yea
r 8
Yea
r 9
Yea
r 10
Tot
al
Sales
Unit
200
00
200
00
200
00
200
00
200
00
200
00
200
00
200
00
200
00
200
00
Sales
Revenue
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
$10,
000,
000.
00
Less:
Variable
Cost
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
$4,0
00,0
00.0
0
Contrib
ution
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
$6,0
00,0
00.0
0
Less:
Fixed
Costs
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
$1,0
00,0
00.0
0
Deprecia
tion
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
$25
0,00
0.00
Consulti
ng fees
$80
0,00
0.00
Net
Profit
Before
Tax
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$4,7
50,0
00.0
0
$3,9
50,0
00.0
0
Less:
Tax
@30%
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,4
25,0
00.0
0
$1,1
85,0
00.0
0
Net
Profit
After
Tax
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$3,3
25,0
00.0
0
$2,7
65,0
00.0
0
Deprecia
tion
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00
$25
0,00

4FINANCIAL MANAGEMENT
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net
Cash
flow
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,0
15,0
00.0
0
Discount
ing
factor
0.89
086
859
7
0.79
364
685
7
0.70
703
506
2
0.62
987
533
3
0.56
113
615
5
0.49
989
857
9
0.44
534
394
5
0.39
674
293
6
0.35
344
582
2
0.31
487
378
4
Discount
ed Cash
flow
$3,1
84,8
55.2
3
$2,8
37,2
87.5
1
$2,5
27,6
50.3
5
$2,2
51,8
04.3
2
$2,0
06,0
61.7
5
$1,7
87,1
37.4
2
$1,5
92,1
04.6
0
$1,4
18,3
56.0
0
$1,2
63,5
68.8
2
$94
9,34
4.46
$19,
818,
170.
46
Less:
Initial
Investme
nt
$2,5
00,0
00.0
0
Investme
nt in
Working
capital
$50
0,00
0.00
Net
Present
Value
$16,
818,
170.
46
Cash
flows
-
$3,0
00,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,5
75,0
00.0
0
$3,0
15,0
00.0
0
IRR
119
%
Investment in e slate
Calculation of NPV of e Slate
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total
Sales Unit 8000 8000 8000 8000 8000

5FINANCIAL MANAGEMENT
Sales Revenue
$4,800,
000.00
$4,800,
000.00
$4,800,
000.00
$4,800,
000.00
$4,800,
000.00
Less:
Variable Cost
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
Contribution
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
$2,400,
000.00
Less:
Fixed Costs
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
Depreciation
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
Consulting fees
$800,00
0.00
Net Profit Before
Tax
$1,400,
000.00
$1,400,
000.00
$1,400,
000.00
$1,400,
000.00
$600,00
0.00
Less: Tax @30%
$420,00
0.00
$420,00
0.00
$420,00
0.00
$420,00
0.00
$180,00
0.00
Net Profit After
tax
$980,00
0.00
$980,00
0.00
$980,00
0.00
$980,00
0.00
$420,00
0.00
Depreciation
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
$500,00
0.00
Net Cash flow
$1,480,
000.00
$1,480,
000.00
$1,480,
000.00
$1,480,
000.00
$920,00
0.00
Discounting
factor
0.89086
8597
0.79364
6857
0.70703
5062
0.62987
5333
0.56113
6155
Discounted Cash
flow
$1,318,
485.52
$1,174,
597.35
$1,046,
411.89
$932,21
5.49
$516,24
5.26
$4,987,
955.52
Less:
Initial Investment
$2,500,
000.00
Investment in
Working capital
$500,00
0.00
Net Present
Value
$1,987,
955.52
Cash flow
-
$3,000,0
00.00
$1,480,
000.00
$1,480,
000.00
$1,480,
000.00
$1,480,
000.00
$920,00
0.00
IRR 38%
Combined
Calculation of NPV of combined Investment

6FINANCIAL MANAGEMENT
Particulars
Yea
r 0
Yea
r 1
Yea
r 2
Yea
r 3
Yea
r 4
Yea
r 5
Yea
r 6
Yea
r 7
Yea
r 8
Yea
r 9
Yea
r 10
Tot
al
Net profit from
E phone
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
$4,
750
,00
0.0
0
Loss of
Contribution
from reduction
in e phone sale
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
$1,
200
,00
0.0
0
Net Profit from
E slate
$1,
400
,00
0.0
0
$1,
400
,00
0.0
0
$1,
400
,00
0.0
0
$1,
400
,00
0.0
0
$60
0,0
00.
00
$0.
00
$0.
00
$0.
00
$0.
00
$0.
00
Savings in
fixed costs
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
$30
0,0
00.
00
Combined Net
profit Before
Tax
$5,
250
,00
0.0
0
$5,
250
,00
0.0
0
$5,
250
,00
0.0
0
$5,
250
,00
0.0
0
$4,
450
,00
0.0
0
$3,
850
,00
0.0
0
$3,
850
,00
0.0
0
$3,
850
,00
0.0
0
$3,
850
,00
0.0
0
$3,
850
,00
0.0
0
Less: Tax @
30%
$1,
575
,00
0.0
0
$1,
575
,00
0.0
0
$1,
575
,00
0.0
0
$1,
575
,00
0.0
0
$1,
335
,00
0.0
0
$1,
155
,00
0.0
0
$1,
155
,00
0.0
0
$1,
155
,00
0.0
0
$1,
155
,00
0.0
0
$1,
155
,00
0.0
0
Combined Net
Profit After
Tax
$3,
675
,00
0.0
0
$3,
675
,00
0.0
0
$3,
675
,00
0.0
0
$3,
675
,00
0.0
0
$3,
115
,00
0.0
0
$2,
695
,00
0.0
0
$2,
695
,00
0.0
0
$2,
695
,00
0.0
0
$2,
695
,00
0.0
0
$2,
695
,00
0.0
0
Add:
Depreciation
$75
0,0
00.
00
$75
0,0
00.
00
$75
0,0
00.
00
$75
0,0
00.
00
$75
0,0
00.
00
$25
0,0
00.
00
$25
0,0
00.
00
$25
0,0
00.
00
$25
0,0
00.
00
$25
0,0
00.
00
Combined
Cash flow
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$3,
865
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0

7FINANCIAL MANAGEMENT
Discounting
factor
0.8
908
685
97
0.7
936
468
57
0.7
070
350
62
0.6
298
753
33
0.5
611
361
55
0.4
998
985
79
0.4
453
439
45
0.3
967
429
36
0.3
534
458
22
0.3
148
737
84
Discounted
cash flow
$3,
942
,09
3.5
4
$3,
511
,88
7.3
4
$3,
128
,63
0.1
5
$2,
787
,19
8.3
5
$2,
168
,79
1.2
4
$1,
472
,20
1.3
1
$1,
311
,53
7.9
2
$1,
168
,40
7.9
5
$1,
040
,89
7.9
5
$92
7,3
03.
29
$21,
458,
949.
04
Less:
Initial
Investment
$5,0
00,0
00.0
0
Investment in
Working
capital
$1,0
00,0
00.0
0
Net Present
Value
$15,
458,
949.
04
Cash flow
-
$15,
458,
949.
04
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$4,
425
,00
0.0
0
$3,
865
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
$2,
945
,00
0.0
0
IRR
22
%
C.
i)
The homemade dividend is a form of income from investment income that arises from the
sale of shares held. In this the dividend policy of the company is not important as the investor
relies on sales of shares for generating income (Lau, 2016). Tim Jobless has 50.1% stake in the
company and to earn desired payout Tim is required to sales shares at the current market price of
$20.

8FINANCIAL MANAGEMENT
Statement showing Desired Payout from Home Made Dividends
Particulars Amount
Cash Flow $3,575,000.00
Expected Annual Dividend $715,000.00
Stock Price $20.00
Shares Need to be sold 35750
In order to earn expected return from Homemade Dividend Tim Jobless has to sell 3750
shares at the expected market price of $20.
ii)
In the process of Homemade dividend shares are sold at current market price for making
expected return. The selling of shares will reduce the controlling stake in the company. This
could affect Tim Jobless in the long term in taking important business decision.

9FINANCIAL MANAGEMENT
Reference
Lau, C. (2016). Financial Management.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and
applications. Pearson.