Corporate Finance Report: Discount Rates, Dividends, and Agency

This report provides a comprehensive analysis of various corporate finance concepts. It begins by explaining the derivation and significance of discount rates, followed by an evaluation of dividend policies versus share repurchases and their impact on shareholder wealth. The report then delves into capital structure, exploring the advantages and disadvantages of increasing debt. It includes calculations related to futures contracts and stock rights, determining gains and losses for different investors. Finally, the report examines agency relationships within incorporated entities and their role in value creation, discussing the range of such relationships and their impact on organizational productivity and decision-making. The analysis incorporates real-world scenarios and provides recommendations based on financial calculations and theoretical concepts.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Question 1: Depicting how discount rate is derived and evaluating its significance in relation to
other factors.....................................................................................................................................3
Question 2:.......................................................................................................................................3
a. Evaluating the alternatives for depicting the effect on price per share and shareholders wealth:
.........................................................................................................................................................3
b. Depicting the EPS and PER of Mustang’s under two different scenarios:..................................4
c. Depicting in real world scenario the actions that could be recommended:.................................5
d. Discussing whether company’s dividend policy is not as important as its capital structure
policy:..............................................................................................................................................6
Question 3:.......................................................................................................................................6
a. Depicting the process and amount by which increment in income could be conducted without
increasing the risk:...........................................................................................................................6
b. Depicting the potential advantage and disadvantage to a company’s owner for increasing
proportion of debt in capital market:...............................................................................................7
Question 4:.......................................................................................................................................7
a. Depicting how much has Connor made or lost:...........................................................................7
b. Depicting how much has Milly made or lost in total:.................................................................8
c. Depicting how much has Michelle made or lost in total:............................................................8
d. Explaining the determinants of future prices and factors that might cause future market price at
maturity to be different from the spot market prices:......................................................................9
Question 5:.......................................................................................................................................9
a. Calculating theoretical value of a right to one new share:...........................................................9

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b. Calculating ex-rights price and the amount of right per share:.................................................10
c. Depicting what will happen if subscription price was $26:.......................................................10
d. Depicting the minimum possible subscription price:................................................................10
e. Discuss if company conducts share issue then overall value of investors shareholding is
reduced:..........................................................................................................................................11
Question 6: Describing and evaluating the range of agency relationships that exist for an
incorporated entity, while describing the extent to which value is incorporated in the entity:.....11
References and Bibliographies:.....................................................................................................13

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Question 1: Depicting how discount rate is derived and evaluating its significance in
relation to other factors
Discount rate is mainly identified as the moral interest that is used by commercial and
other financial depositories for loans received from Federal Reserve Bank. The discounting rate
directly indicates the relevant interest rate, which could be used for identifying the discounted
cash flow. The main factors and benefits that could be portrait by the discount rate is relevant
evaluation of an investment opportunity. Discounting rate is directly used by companies for
identifying the overall future cash flows value in present time. This directly helps the
management to meet adequate investment decisions, which could in turn generate the required
level of income and stability within the organisation. Jarmolowicz et al. (2014) mentioned that
evaluation of adequate discounting rate directly allows the organisation to identify the benefits
that could be provided by different investment and choose the most appropriate investment
opportunity.
Question 2:
a. Evaluating the alternatives for depicting the effect on price per share and shareholders
wealth:
Dividend payment Value
Share price $ 116.00
Expenses $ 13,325.00
outstanding shares 5,125
Alternative share price $ 113.40

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Alternative share price $ 113.40
Dividend $ 2.60
Shareholder's wealth $ 116.00
Share repurchase Value
Expenses $ 13,325.00
Number of share repurchase 115
Share price $ 116.00
Shareholder's wealth $ 116.00
From the overall evaluation alternative share price is mainly at $113.40, while the
shareholder wealth is mainly at $116. On the other hand, using share repurchase could eventually
make the share price constant, where both share price and shareholder wealth will be at $116.
b. Depicting the EPS and PER of Mustang’s under two different scenarios:
Dividend payment Value
Alternative share price $ 113.40
EPS $ 4.25
P/E ratio 26.68

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Share repurchase Value
EPS $ 4.25
outstanding shares 5,125
Number of share repurchase 115
Actual outstanding shares 5,010
New EPS $ 4.35
Share price $ 116.00
New EPS $ 4.35
P/E 26.68
c. Depicting in real world scenario the actions that could be recommended:
From the evaluation of both scenarios share buyback is not recommended for you would
purposes, as it directly reduces the overall cash availability of the company while declining the
number of circulated shares. On the other hand, dividend payment is one of the reliable
opportunities that could be conducted by the company. However, share buyback would
eventually increase demand for the company while decreasing its capability to acquire more
projects. From the overall evaluation dividend payment is mainly considered to be one of the
most viable actions, which is conducted by the company. Hence, the dividend payment needs to
be conducted by the company.

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d. Discussing whether company’s dividend policy is not as important as its capital structure
policy:
The statement indicating that company's dividend policy is not as adequate as company's
capital structure policies is relatively adequate. The companies with strong capital structure are
mainly able to generate the required level of income by investing in adequate projects. This
could eventually help in providing relevant dividends by the company as they have strong capital
structure to support the dividend expense. Companies with dividend policy could eventually end
up losing the required level of capital for expansion and growth process. Therefore, it is
important for companies to increase their capital structure and generate the required level of
profits from operations. Travlos, Trigeorgis and Vafeas (2015) mentioned that the use of
adequate capital structure policy could eventually help in strengthening the financial capability
of the organisation, while improving its ability to compensate and acquire more projects, which
could help in attaining sustainable growth.
Question 3:
a. Depicting the process and amount by which increment in income could be conducted
without increasing the risk:
Helena's Health Food
Earnings before interest 20,000
Market value of debt 58,000
Kd 5.50%
Ke 13%
Market value of equity 143,818

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Actual Total market value 201,818
Equilibrium value 181,818
WACC 5.32%
Investment 2,876.36
Expected increment in income 152.93
Total amount received 3,029.29
b. Depicting the potential advantage and disadvantage to a company’s owner for increasing
proportion of debt in capital market:
There is relevant advantage for increasing debt in an organisation, as it might help in
reducing the overall tax expenses and increasing the retained income of the organisation. The
relative use of debt could eventually help in fixing the overall expenses that needs to be
conducted by the company for acquiring the capital to complete their endeavours. However,
there are limitations of using excessive debt, as it increases the overall insolvency condition of
the organisation. Moreover, the use of debt could also increase the interest payments, which
might claw into the profits of the organisation (Graeber and Piketty 2014).
Question 4:
a. Depicting how much has Connor made or lost:
Particulars Value
90 day future contract 93.67

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Close out position value 92.46
Face value 1,000,000
Contract number 5
Actual investment 468,350,000
Close out position 462,300,000
Loss in transaction (6,050,000)
b. Depicting how much has Milly made or lost in total:
Particulars Value
10-year bond futures 94.69
Close out position value 96.02
Face value 100,000
Contract number 2
Actual investment 18,937,000
Close out position 19,204,000
Profit in transaction 267,000
c. Depicting how much has Michelle made or lost in total:
Particulars Value
SPI 200 futures 5,350.00

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Close out position value 5,480.00
1
Contract number 5
Actual investment 26,750
Close out position 27,400
Profit in transaction 650
d. Explaining the determinants of future prices and factors that might cause future market
price at maturity to be different from the spot market prices:
The key determinants of the future prices can be identified from the volatility in capital
market. The relevant changes in the future prices if due the continuous shift in the demand and
supply of shares. In addition, the factors that might cause the future market price at maturity to
be different from spot prices are the continuous trading from investors, changes in volatility, and
demand perception of investors. These factors mainly result in the difference in spot and future
prices of stocks (Rezende and Richardson 2015).
Question 5:
a. Calculating theoretical value of a right to one new share:
Particulars Value
Share price 24.00
Subscription price 21.10
Issue 4.00

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Number of shares required 1.00
Value of the right in cents 1.45
b. Calculating ex-rights price and the amount of right per share:
Particulars Value
Share price 24.00
Subscription price 21.10
Issue 4.00
Value of introduced shares 84.40
Market value of 5 shares 108.40
Therefore theoretical ex-right share value 21.68
c. Depicting what will happen if subscription price was $26:
If the overall subscription price was $26, while the shares were trading in the market for
the value of $24, then there will be no buyers for the stock. This is mainly demand and supply
concept, were the overall subscription needs to be lower than market prices, as it will instigate
the investors to opt for the issued shares.
d. Depicting the minimum possible subscription price:
According to theory, the minimum possible subscription price, which could be provided
by the company, needs to be greater than $0.

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e. Discuss if company conducts share issue then overall value of investors shareholding is
reduced:
The relevant investment is only true if investor does not take part in the right issue, which
could in turn affects its overall shareholding in the company. In addition, the increment in shares
would eventually raise the overall supply, while demand among investors would remain
unchanged. This could directly result in declining share value and affect shareholding of the
investor. Gielens et al. (2017) mentioned that share price of the company is mainly derived from
the rising demand and supply of shares in the market.
Question 6: Describing and evaluating the range of agency relationships that exist for an
incorporated entity, while describing the extent to which value is incorporated in the entity:
Agency relationship is one of the essential factors that allow the organisation to work
smoothly, as it helps in controlling the old activities of the organisation. Agency relationship is
integrated in operations and existence of a corporate entity, as it helps the organisation to
effectively conduct its daily operations. The range of agency relationships starts from the
production facility, while moving towards office, sales and representative facilities of the
organisation. The organisations without the help of agency relationship are not able to improve
productivity, as it helps in smoothing their daily operations. Bodie (2013) mentioned that
managers of an organisation are mainly responsible for building relationship with the workers,
which could help in smoothly finishing the production capacity of the organisation.
Agency relationship directly indicates that all the managers have to act according to the
duties without pursuing their personal interest. This Agency relationship mainly allows the
organisation to conduct all the relevant activities that is needed for improving their overall