Corporate Finance Assignment: Calculations, Analysis, and Answers

This document presents a comprehensive solution to a corporate finance assignment, addressing key concepts and calculations. The assignment covers a range of topics, including dividend yield, cost of goods sold, geared and ungeared beta, Weighted Average Cost of Capital (WACC) calculation, capital structure decisions, share price analysis, sensitivity analysis, and the differences between limited companies and LLPs. The solution provides detailed workings for each question, including calculations for dividend yield, cost of equity, market capitalization, and the impact of a scrip issue. Furthermore, the assignment delves into the advantages and disadvantages of scrip issues, along with balance sheet adjustments. The document also explores sensitivity analysis to assess the impact of different scenarios on Net Present Value (NPV), and provides a detailed analysis of various financial concepts, making it a valuable resource for students studying corporate finance.

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

1CORPORATE FINANCE
Table of Contents
Question 1..................................................................................................................................2
Question 2:.................................................................................................................................2
Question 3:.................................................................................................................................2
Question 4:.................................................................................................................................2
Question 5:.................................................................................................................................3
Par a:.......................................................................................................................................3
Part b:.....................................................................................................................................3
Part c:.....................................................................................................................................3
Part d:.....................................................................................................................................3
Question 6:.................................................................................................................................4
Question 7:.................................................................................................................................4
Part a:.....................................................................................................................................4
Part b:.....................................................................................................................................4
Part c:.....................................................................................................................................4
Question 8:.................................................................................................................................5
Question 9:.................................................................................................................................6
Part a (i):.................................................................................................................................6
Part a (ii):................................................................................................................................6
Part a (iii):..............................................................................................................................6
References..................................................................................................................................8

2CORPORATE FINANCE
Question 1
Answer: (d) None of a, b or c
Explanation: It can be observed that if the offer price or the strike price is £1.60 then the 20
million shares can be issued and the expected capital can be raised.
Question 2:
Answer: (c) 5.8%
Workings:
Total dividend = 2+1.5 = 3.5p
Current market price per share = 60p
Current dividend yield = 3.5/60 = 5.83%
Question 3:
Answer: (b) £13,800
Workings:
Cost of goods sold = opening stock + purchase – Closing stock = 3500+14500-4200 = 13800
Question 4:
Answer: (a) 2.75%
Workings:
Total savings = 4%+2% = 6%

3CORPORATE FINANCE
Savings after fees = 6%-0.5% = 5.5%
To be shared by each of them = 5.5%/2 = 2.75%
Question 5:
Par a:
Geared Beta = Ungeared Beta * (1+(1-t)*(Debt/Equity))
Part b:
The ungeared beta 0.8 states that investment in the shares of the company is less risky than
the market as the market beta is always considered to be 1.
Part c:
Cost of equity = 2.75%+4%*0.8 = 5.95%
Market value of equity = 5million*.50 = 2.5million
Total capital = 2.5+2+1 = 5.5million
WACC = 5.95 %*( 2.5/5.5)+3 %*( 2/5.5)+3.5 %*( 1/5.5) = 4.43%
Part d:
The objective of the capital structure decision is to minimise the overall cost of
capital. It can be observed that the cost of debenture is 3% while the cost of unsecured loan is
3.5%. Raising finance through unsecured loan would result in decrease of solvency of the
company. On the other hand raising finance through only the debenture would make a fixed
burden to the company. Hence, it is more preferable to raise the required finances through the
fixed interest stock split and between debenture and unsecured loan stock.

4CORPORATE FINANCE
Question 6:
The share price of the Rio Tinto Plc has been taken from the Yahoo Finance as on the
date of 8th April 2020. The closing price on that date was $45.95 per share. The shares of the
company are in the main market.
Question 7:
Part a:
Year 0 1 2 3 4 5 6 7 8 9 10
Cost of new equipment 100.00-£
Resale value of the old equipment 10.00£
Cost savings 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£
Net cash flow 90.00-£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£ 20.00£
Discounting factor @ 12% 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220
Discounted cash flows 90.00-£ 17.86£ 15.94£ 14.24£ 12.71£ 11.35£ 10.13£ 9.05£ 8.08£ 7.21£ 6.44£
Net present value 23.00£
Part b:
Sensitivity analysis:
Cases NPV
Pessimistic $ -16.98
Expected $ 23.00
Optimistic $ 89.86
It can be observed from the above sensitivity analysis that, in the pessimistic case the
replacement of the equipment will have a negative net present value, and in the expected and
optimistic case the present value would be positive. Hence, replacement decision can be
accepted if the expected case arises and if the pessimistic case arises then the replacement
decision should not be taken.
Part c:
Cases NPV Probability Weighted NPV
Pessimistic -£ 16.98 25% -£ 4.25
Expected £ 23.00 50% £ 11.50

5CORPORATE FINANCE
Optimistic £ 89.86 25% £ 22.47
Expected net present value £ 29.72
Question 8:
The two form of limited company are – Company limited by shares, and Company
limited by Guarantee. A company which is limited by shares can either be a public company
or a private company and it is referred to a company where liability of its shareholders will be
limited to a particular amount. A company limited by shares and by guarantee are jointly
recognized as “Limited Liability Companies.”
LLP shares some common features with Limited company but then there are few
differences between the two. A Limited company is either limited by shares or guarantee and
it pays corporation tax on all of its profits, possesses a registered address along with a bank
account. It provides dividend to its investors and can probably sell its shares for earning
profit. On contrary, an LLP which will be set up with minimum two person where their
liability will be limited based on the agreement between the partners. LLP cannot sell its
shares and it is not eligible to receive capital from them. The partnership structure is flexible
though and is changeable at any given period of time. One major difference is that LLP must
have minimum one managing partner who will be held responsible for partnership’s activities
(Morrison 2019).
In LLP the profits are passed through to the partners who report the gains or losses in their
personal income tax return. A LLC is successful in avoiding double taxation by paying
corporate taxes on income and pays personal tax on same earnings by filling as partnership.

6CORPORATE FINANCE
Question 9:
Part a (i):
Market capitalisation = 4million * 1.50 = 6million
Total number of shares after the scrip issue = 4million
Total number of shares after the scrip issue = 4+1 = 5million
Price per share after scrip issue = 6million/5million = 1.2 per share
Part a (ii):
Number of shares held before scrip issue = 50,000
Scrip shares receivable = 50000*1/4 = 12500
Total shares after scrip issue = +50000+12500 = 62500
Value of shares before and after = 50000*1.50 = 75,000
Part a (iii):
Balance Sheet
Noncurrent assets £ 1,500
Net current assets £ 450
Debenture -£ 300
Net assets £ 1,650
Share capital
(1000+1000*0.25) £ 1,250
Reserves (650-250) £ 400
Total equity £ 1,650

7CORPORATE FINANCE
A scrip issue is an offer for existing shareholders where shares of the company are
issued to such shareholders at free of cost (Donald 2017). A company would wish to issue
such shares due to following advantages (Sastry and Balakrishnan 2018) –
 The company has to pay no taxes on such dividend income.
 When a company issues additional shares and utilizes the cash for growth of the
business it raises the belief of investors in the business activities and operations of the
company.
 The company is able to conserve cash for future growth of business.
 It helps in increasing the perception of the company’s size.
 It is useful and essential for long-term investment.
The arguments against it –
 The capability of the organization to raise cash decreases.
 When the bonus shares will be sold it will lead to stake reduction in the company.
 It does not aid in providing additional wealth to investors. (Anderson 2017)
 The issue of bonus shares will only let to increase in number of shares but will lead to
a decrease in the EPS and in cash dividend yield.

8CORPORATE FINANCE
References
Anderson, J., 2017. Employee Reward Structures. Spiramus Press Ltd.
Donald, P., 2017. Scrip. Policy, 16(10).
Londonstockexchange.com, 2020. Home - London Stock Exchange. [online]
Londonstockexchange.com. Available at:
<https://www.londonstockexchange.com/home/homepage.htm> [Accessed 8 April 2020].
Morrison, K., 2019. Theory of the Firm and the Law'. Management for Scientists. Emerald
Publishing Limited, pp.17-31.
Sastry, S.V.N. and Balakrishnan, J., 2018, October. Capitalization of Profits as Dividends.
In ICRTEMMS Conference Proceedings (Vol. 437, No. 440, pp. 437-440).
SwarnaBharathilnstitute of Science and Technology.