Corporate Finance Assignment: University Financial Analysis Problems

This corporate finance assignment presents a comprehensive analysis of key financial concepts. It begins with the valuation of shares and the computation of the Weighted Average Cost of Capital (WACC) for CWC, including the calculation of the cost of equity and cost of bonds. The assignment then ...Read More

Running head: CORPORATE FINANCE
Corporate finance
Name of the student
Name of the university
Student ID
Author note

CORPORATE FINANCE 1
Table of Contents
Answer a.....................................................................................................................................2
Answer b....................................................................................................................................3
Answer c.....................................................................................................................................5
Answer d....................................................................................................................................6
Reference....................................................................................................................................8

CORPORATE FINANCE 2
Answer a.
Value of shares = 30,000,000 * $ 42 = $
Computation of WACC for CWC
Cost of equity –
Ke = Rf + β (Rm – Rf)
Where,
Ke = cost of equity
Rf = Risk free rate = 3.5%
Β = Beta = 2.639
Rm = Market return = 12.52%
Hence,
Ke = 3.5 + 2.639 * (12.52 – 3.5)
= 3.5 + 23.8038 = 27.3038%
Therefore, Ke or cost of equity = 27.3038%
Cost of bond –
Annual interest rate = 10% * 2 = 20%
Present value = 50,00,000 * $ 92.34 = $ 46,17,00,000
Maturity = 20 years

CORPORATE FINANCE 3
Face value = 50,00,000 * 100 = 50,00,00,000
Interest per year = 50,00,00,000 * 20% = $ 10,00,00,000
After tax interest = $ 10,00,00,000 * (1-0.34) = $ 660,00,000
Therefore, the effective rate = $ 660,00,000 / $ 50,00,00,000 = 0.132 or 13.20%
Cost of capital –
Therefore, the weighted average cost of capital = 23.52%
Answer b.
Depreciation calculation –
Value of project = $ 30,00,000
Salvage value = Nil
Useful life = 3 years
Depreciation method used = Straight line
Therefore, depreciation = $ 30,00,000 / 3 = $ 10,00,000 per year

CORPORATE FINANCE 4
NPV (Net present value) –
= Present value of cash flows – Initial investment
= $ 22,53,770.40 – $ 30,00,000 = - $ 746,222.60
As the NPV of the project is negative, it shall not be taken up.

CORPORATE FINANCE 5
Answer c.
Best – case scenario
Net present value –
= Present value of cash flows – Initial investment
= $ 39,50,083.15 – $ 30,00,000 = $ 950,083.15
As the NPV is positive, the project shall be taken up.
Worst – case scenario

CORPORATE FINANCE 6
Net present value –
= Present value of cash flows – Initial investment
= $ 19,04,634.86 – $ 30,00,000 = - $ 10,95,365.15
As the NPV is negative, the project shall not be taken up.
Answer d
The financial analyst must compare various projects and their return to suggest the
final project. Further, the analyst shall evaluate the required rate of return, period within

CORPORATE FINANCE 7
which the return is required and the initial outlay of the project. The final suggestion shall be
provided taking into consideration all these factors (Pasqual, Padilla and Jadotte 2013).
NPV is the difference between cash inflow and cash outflow of the project taking into
consideration the present value of the cash flows. NPV is used to evaluate the return from a
investment. If the NPV of the project is positive then the project is considered as acceptable.
On the other hand, if the NPV of the project is negative then it is considered as not acceptable
(Ross et al. 2014). From the above computation of NPV under various scenarios like current
scenario, best case scenario and worst case scenario, it is found that only under best case
scenario the company is able to generate positive NPV amounting to $ 950,083.15. However,
under current scenario and worst case scenario the NPV is negative and therefore, the project
of bottled water shall not be accepted under these 2 scenarios.

CORPORATE FINANCE 8
Reference
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria
with the net present value. International Journal of Production Economics, 142(1), pp.205-
210.
Ross, S.A., Bianchi, R., Christensen, M., Drew, M., Westerfield, R. and Jordan, B.D.,
2014. Fundamentals of Corporate Finance: Introduction to corporate finance Chapter: 2
Financial statements, taxes and cash flow PART 2 Chapter: 3 Working with financial
statements Chapter: 4 Long-term financial planning and corporate growth PART 3 Chapter: 5
First principles of valuation: TVM Chapter: 6 Valuing shares and bonds PART 4 Chapter: 7
Net present value and other investment criteria Chapter: 8 Making capital investment
decisions Chapter: 9 Project analysis and evaluation PART 5 Chapter: 10 Lessons ....
McGraw-Hill Education (Australia).