University Business Finance Report: Investment, Financing Decisions

This report provides a detailed analysis of business finance, focusing on investment decisions and financing strategies. Part A evaluates a project using techniques like Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and profitability index, concluding the project is financially viable. Part B explores financing decisions, specifically dividend policy and capital structure, critiquing the Modigliani and Miller theorem. It discusses the theorem's propositions, assumptions, and limitations in the context of real-world factors such as taxes and bankruptcy, concluding that the theorem is not fully applicable in contemporary market conditions. The report includes a comprehensive financial analysis and references relevant literature to support its findings.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Authors Note:

BUSINESS FINANCE
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Table of Contents
Part A: Investment Decision- Project evaluation.......................................................................2
Part B: Financing Decisions – Dividend policy and capital structure.......................................3
Reference and Bibliography:......................................................................................................8

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2
Part A: Investment Decision- Project evaluation
Years 0 1 2 3 4 5
Sales
$
10,00,000.
00
$
20,00,000.
00
$
30,00,000.
00
$
40,00,000.
00
$
50,00,000.
00
Operating
cost
$ -
2,50,000.0
0
$ -
5,00,000.0
0
$ -
7,50,000.0
0
$ -
10,00,000.
00
$ -
12,50,000.
00
Interest
expenses
$ -
5,50,000.0
0
$ -
5,50,000.0
0
$ -
5,50,000.0
0
$ -
5,50,000.0
0
$ -
5,50,000.0
0
Depreciation
$ -
13,00,000.
00
$ -
13,00,000.
00
$ -
13,00,000.
00
$ -
13,00,000.
00
$ -
13,00,000.
00
Salvage value
$
6,00,000.0
0
$
6,00,000.0
0
$
6,00,000.0
0
$
6,00,000.0
0
$
6,00,000.0
0
Advertising
campaign
$ -
2,50,000.0
0
$ -
2,50,000.0
0
$ -
2,50,000.0
0
$ -
2,50,000.0
0
$ -
2,50,000.0
0
Opporunity
cost rent
$ -
45,000.00
$ -
45,000.00
$ -
45,000.00
$ -
45,000.00
$ -
45,000.00
Profit before
tax
$ -
7,95,000.0
0
$ -
45,000.00
$
7,05,000.0
0
$
14,55,000.
00
$
22,05,000.
00
Tax
$
-
$
-
$
2,11,500.0
0
$
4,36,500.0
0
$
6,61,500.0
0
PAT
$ -
7,95,000.0
0
$ -
45,000.00
$
4,93,500.0
0
$
10,18,500.
00
$
15,43,500.
00
Opportunity
benefit
$
5,50,000.0
0
$
5,50,000.0
0
$
5,50,000.0
0
$
5,50,000.0
0
$
5,50,000.0
0
Depreciation
$
13,00,000.
00
$
13,00,000.
00
$
13,00,000.
00
$
13,00,000.
00
$
13,00,000.
00
Net working
capital
$ -
2,50,000.0
0
$
2,50,000.0
0
Initial cost
$ -
65,00,000.
00
Cash flow
$ -
67,50,000.
00
$
10,55,000.
00
$
18,05,000.
00
$
23,43,500.
00
$
28,68,500.
00
$
36,43,500.
00
Cum-cash $ - $ - $ - $ - $ $

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flow
67,50,000.
00
56,95,000.
00
38,90,000.
00
15,46,500.
00
13,22,000.
00
49,65,500.
00
NPV $ 19,46,877.01
IRR 17.67%
Payback period 3.5 Years
Profitability index 1.29
The above table provides information about the overall investment appraisal
techniques, which has been used for detecting the financial viability of the investment. From
the relevant evaluation, it can be identified that investment option in the project is viable, as
the NPV value is considered to be positive. In addition, relevant confirmation is provided by
the internal rate of return of the project, which is at the levels of 17.67%, and is higher than
the cost of capital assumed for the analysis. Moreover, the payback period is less than 5
years, which indicates the financial viability of the investment option. Lastly, the profitability
index is higher than one, which directly depicts that Investment in the project would directly
allow the organisation to increase profitability in the long run (Baum and Crosby 2014).
The positive net present value directly indicates that the time value of money will not
erode the benefits that would be generated by the project of the period of time. Hence, the
initial investment conducted for the project can be e obtained without hindering the benefits
provided by the investment. Thus, it could be understood that investments in the project
would be beneficial for the organisation, as it would generate higher revenues and cash
inflow in the long run (Harris 2017).
Part B: Financing Decisions – Dividend policy and capital structure
Modigliani and Miller suggested an adequate dividend irrelevance and capital
structure theory, which states that in a Perfect World with no taxes of bankruptcy condition
there is no impact of dividend policy of capital structure on the share price of an organization.
The assumptions made by Modigliani and Miller was relatively considered to be inaccurate

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adjust it did not compensate the conditions of taxes and bankruptcy which might incur due to
the alterations in capital structure. moreover the Dividend policy and capital structure assume
by mm theory directly States about the relevant Perfect World which does not comply current
market situation as it ignores the assumptions that has been made by the analyst (Cline 2015).
The Modigliani and Miller Theorem directly utilize three different propositions, which
describe the overall impact of Capital structure on the share price performance of the
organization. The first proposition directly indicates that firm total market value is
independent of its capital structure, where the second proposition directly indicates about the
cost of equity increases with the debt equity ratio. Lastly, the third proposition directly
indicates that the firm’s total market value is independent of its Dividend policy. The three
propositions are depicted as follows.
First proposition- Irrelevance of the capital structure
The first proposition provided by the Modigliani and Miller theory of capital
structure, where it is detected that the capital structure of form does not influence its market
value. However, the theorem directly encourages some relevant assumptions that should be
conducted, which are that under certain conditions where debt to equity ratio performance
does not affect the overall firms market value. Functions made by Modigliani in the theorem
is regarding the perfect capital market conditions investors buy and sell securities freely
without any kind of such as brokers commission and transfer fees (Ahmeti and Prenaj 2015).
Additionally, the theorem also indicates that all the relevant information a directory presented
to the investors regarding the decisions made by the organization. However, the theory
directly violates the current real market conditions where adequate brokerage and transfer
fees need to be conducted by the investors for each and every trade. Moreover, the
information provided by the organization related takes time the investors, which is relatively
alters the share price of the organization and does not benefit some of the investors.

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The theorem directly excludes the payment of taxes and interest conducted by the
firm. This condition is relatively not suitable in the real-world practices where adequate taxes
and interest needs to be paid by the organization. Moreover, the theorem also indicates that
additional that in the capital structure is more valuable as companies are able to acquire
adequate tax Shield effect from the rising debt in their capital structure (Gersbach, Haller and
Müller 2015). Assumptions made by the theorem is relatively adequate where with higher
debt conditions the company is able to increase tax shield, whereas it also raises the level of
debt to equity ratio and insolvency condition. The financial position of the organization will
not remain same, as alteration in the revenue generation capability, would negatively affect
the company's overall profits, as fixed interest rate needs to be paid due to the accumulation
of high debt. Therefore, companies having high debt in the capital structure are not
considered valuable in Real world scenarios.
Second proposition- Rate of Return on Equity
The second position is relatively related to the rate of return on equity, where the
model directly indicates that alterations in return on equity of the organization do not affect
the actual value of the firm. Moreover, Modigliani indicated that the weighted average cost of
capital is not affected by its leverage conditions, as the increment in debt to equity ratio
directly raises the level of cost of equity. Furthermore theorem also indicates that investors
are rational increment in the cost of capital of the organization does not increase any kind of
company value. However, the proposition is a relatively based on the tax conditions and laws
of a country where any changes in the country's regulations directly invalidate the overall
theorem of Modigliani (Charness and Neugebauer 2019).
Third proposition- Irreverence of Dividend policy
The third proposition directly indicates that the firm's total market value is not
affected by dividend policy, where growth and valuation of shares is not interrelated, which

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does not have any kind of impact on the significance for the valuation of a firm. Modigliani
directly argued that the market value of a firm is determined by its earnings power and the
risk that is affecting the underlying Assets of the organization. However, the theorem of
Modigliani is not supported in real world practices, as dividend policy have a direct impact
on the overall evaluation of an organization. There are different types of models and
calculation such as dividend discount model, which directly utilizes the evidence provided by
the company to determine the level of share price for the company in future (Hugonnier,
Malamud and Morellec 2014). The current Dividend policy and dividend payments that are
conducted by the organization directly state about the relevant demand for the share price of
an organization. The demand for high dividend value stocks relatively increase due to the
possibility of higher returns that will be generated by the investors from their exposure.
Hence, it could be criticize that the overall theorem of Modigliani is relatively not adequate in
current real word practices where Dividend policy has a direct impact on the share price and
valuation of a company.
Therefore, after evaluating the Dividend policy and capital structure of Modigliani
and Miller, it could be identified that there are relevant corporate tax consideration and form
value in contemporary world that needs to be taken into consideration (Maina and Ishmail
2014). The company has a relevant corporate tax rate that alters the overall value of the firm,
as they are not able to provide adequate dividends to the investors. Theorem used by
Modigliani and Miller does not support the current market conditions where the capital
structure and dividend policy maintained by the organization directly affects valuation. The
high level of corporate taxes would directly reduce the level of retained incomes by the
organization, which in turn would affect the level of dividends that is paid to investors.
Alteration in the Dividend policy conditions of the organization has direct impact on the
demand for shares, which in turn alters the firm valuation. Thus, the theorem of Modigliani

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and Miller can only be successful under specific terms and condition, where the in real world
practices the assumptions made by the theories become invalid and does not support both the
dividend policy and capital structure conditions.

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Reference and Bibliography:
Ahmeti, F. and Prenaj, B., 2015. A critical review of Modigliani and Miller’s theorem of
capital structure. International Journal of Economics, Commerce and Management
(IJECM), 3(6).
Aktas, R., Acikalin, S., Bakin, B. and Celik, G., 2015. The Determinants of Banks' Capital
Adequacy Ratio: Some Evidence from South Eastern European Countries. Journal of
Economics and Behavioral Studies, 7(1), p.79.
Baltacı, N. and Ayaydın, H., 2014. Firm, country and macroeconomic determinants of capital
structure: Evidence from Turkish banking sector. EMAJ: Emerging Markets Journal, 3(3),
pp.47-58.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Brusov, P., Filatova, T., Orekhova, N. and Eskindarov, M., 2018. Inflation in Brusov–
Filatova–Orekhova Theory and in Its Perpetuity Limit Modigliani–Miller Theory. In Modern
Corporate Finance, Investments, Taxation and Ratings (pp. 161-179). Springer, Cham.
Charness, G. and Neugebauer, T., 2019. A Test of the Modigliani‐Miller Invariance Theorem
and Arbitrage in Experimental Asset Markets. The Journal of Finance, 74(1), pp.493-529.
Cline, W.R., 2015. Testing the Modigliani-Miller theorem of capital structure irrelevance for
banks. Peterson Institute for International Economics Working Paper, (15-8).
Gersbach, H., Haller, H. and Müller, J., 2015. The macroeconomics of Modigliani–
Miller. Journal of Economic Theory, 157, pp.1081-1113.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.

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Hugonnier, J., Malamud, S. and Morellec, E., 2014. Capital supply uncertainty, cash
holdings, and investment. The Review of Financial Studies, 28(2), pp.391-445.
Maina, L. and Ishmail, M., 2014. Capital structure and financial performance in Kenya:
Evidence from firms listed at the Nairobi Securities Exchange. International Journal of
Social Sciences and Entrepreneurship, 1(11), pp.209-223.
Santibáñez, J., Alcañiz, L. and Gómez-Bezares, F., 2014. Cost of funds on the basis of
Modigliani and Miller and CAPM propositions: a revision. Análisis financiero, 124, pp.6-16.
Serghiescu, L. and Văidean, V.L., 2014. Determinant factors of the capital structure of a
firm-an empirical analysis. Procedia Economics and Finance, 15, pp.1447-1457.
Wamser, G., 2014. The Impact of Thin‐Capitalization Rules on External Debt Usage–A
Propensity Score Matching Approach. Oxford Bulletin of Economics and Statistics, 76(5),
pp.764-781.