Fundamentals of Finance: WACC, NPV, IRR and Payback Period

Running Head: Fundamentals of Finance
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Project Report: Fundamentals of Finance

Fundamentals of Finance
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Contents
Introduction.......................................................................................................................3
Weighted average cost of capital......................................................................................3
Explanation of WACC as discount rate............................................................................4
Net present value..............................................................................................................4
Internal rate of return........................................................................................................5
Payback period..................................................................................................................5
Methods explanation.........................................................................................................6
Recommendation..............................................................................................................6
Conclusion........................................................................................................................6
References.........................................................................................................................8
Appendix...........................................................................................................................9

Fundamentals of Finance
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Introduction:
This report has been prepared to evaluate the financial concepts and non financial
concepts of an organization. In the report, WACC of the Freemantle Manufacturing company
limited has been calculated firstly to calculate the discount rate of the company. And on the
basis of discount rate, net present value, internal rate of return and payback period of the
company has been calculated. This report evaluates that which method is the best option to
evaluate the investment proposal.
Weighted average cost of capital:
Weighted average cost of capital (WACC) measures the total cost of capital of the
company which has been generated while enhancing the funds for the long term projects and
the investment proposal of the company (Brijlal, 2008). For calculating the WACC, cost of
bond, cost of equity and cost of preference share has been calculated which are as follows:
Calculation of cost of bond
Bond amount 17,00,000
interest rate 5.50%
Yield to maturity 1.87%
Net interest amount 4.87%
Tax rate 30.0%
Kd 3.85%
Calculation of cost of equity
(CAPM)
RF 2.25%
RM 7.10%
Beta 1.300
Required rate of return 8.56%
Calculation of cost of preference
share
Preference share 12,00,000
Dividend 1.39
Market price 11.56
Cost of preference share 12.02%
(Besley and Brigham, 2007)