Financial Management: Calculating Financial Metrics and Decisions

This document presents a comprehensive solution to a financial management assignment, addressing key concepts and calculations. It includes detailed answers to questions on cost of debt and equity, capital structure, and the weighted average cost of capital (WACC). The assignment delves into capital budgeting techniques, demonstrating the calculation of Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR), Profitability Index (PI), and payback period. It also covers topics such as initial investment outlay, operating cash flow, after-tax salvage value, and the impact of sunk costs and opportunity costs on investment decisions. Additionally, the assignment explores the calculation of additional funds needed (AFN) and the impact of changes in total assets on AFN. All calculations are thoroughly explained, making this a valuable resource for students studying financial management.

Running Head: Financial Management: Theory and Practice
Financial Management: Theory
and Practice

Financial Management: Theory and Practice 2
Table of Contents
Chapter 9...............................................................................................................................................3
Chapter 10.............................................................................................................................................4
Chapter 11.............................................................................................................................................9
Chapter 12...........................................................................................................................................12

Financial Management: Theory and Practice 3
Chapter 9
QUESTION 9-2
Calculation of Cost of Debt
Yield to Maturity® 8%
Tax rate 35%
Cost of Debt [r(1- Tax)] 5.20%
QUESTION 9-5
Calculation of Cost of Equity
Price(P0) $ 36.00
Dividend(D1) $ 3.00
Growth Rate(G) 5%
Ke [(D1/Po)+G] 13.33%
QUESTION 9-6
Calculation of Cost of Equity
Beta(β) 0.8
Risk Free Rate(Rf) 6%
Market Risk Premium(Rm-Rf) 0.055
Ke [Rf+(Rm-Rf)*β] 10.40%
QUESTION 9-8
Capital structure
Debt (Wd) 0.4
Equity (We) 0.6
Kd 0.054
WACC[(Ke*We+Kd*Wd)/We+Wd] 0.0996
Ke [{WACC(We+Wd)- Kd*Wd}/We] 13.00%

Financial Management: Theory and Practice 4
Chapter 10
QUESTION 10-1
Initial Investment($) 40,000.00
Net cash Inflows(Year 1-7)($) 9000/Year
Cost of Capital 11%
Calculation of NPV
Year Cash Flows PVF @ 11% PV of Cash Inflows
0 -40,000.00 1.00 -40,000.00
1 9,000.00 0.90 8,108.11
2 9,000.00 0.81 7,304.60
3 9,000.00 0.73 6,580.72
4 9,000.00 0.66 5,928.58
5 9,000.00 0.59 5,341.06
6 9,000.00 0.53 4,811.77
7 9,000.00 0.48 4,334.93
NPV 2,409.77
QUESTION 10-2
Calculation of IRR (Amount in $)
Year Cash Flows
0 -40,000.00
1 9,000.00
2 9,000.00
3 9,000.00
4 9,000.00
5 9,000.00
6 9,000.00
7 9,000.00
IRR 0.13

Financial Management: Theory and Practice 5
QUESTION 10-3
Calculation Of MIRR (Amount in $)
Year Cash Flows FV Factor Terminal Value
1 9,000.00 1.87 16,833.73
2 9,000.00 1.69 15,165.52
3 9,000.00 1.52 13,662.63
4 9,000.00 1.37 12,308.68
5 9,000.00 1.23 11,088.90
6 9,000.00 1.11 9,990.00
7 9,000.00 1.00 9,000.00
Terminal Value 88,049.47
MIRR 12%
QUESTION 10-4
Calculation of PI (Amount in $)
Year Cash Flows PVF @ 11% PV of Cash Inflows
0 -40,000.00 1.00 -40,000.00
1 9,000.00 0.90 8,108.11
2 9,000.00 0.81 7,304.60
3 9,000.00 0.73 6,580.72
4 9,000.00 0.66 5,928.58
5 9,000.00 0.59 5,341.06
6 9,000.00 0.53 4,811.77
7 9,000.00 0.48 4,334.93
Sum of PV 42,409.77
PI 1.06
QUESTION 10-5
Calculation of Payback Period
Initial Investment 40,000.00
Net cash Inflows(Year 1-7) 9000/Year
Payback period 4.44

Financial Management: Theory and Practice 6
QUESTION
10-6
Calculation of Discounted Payback Period
Year
Cash
Flows
PVF @
11%
PV of Cash
Inflows
Cumulative Cash
Flows
1
9,000.0
0
0.9
0
8,108.1
1
8,108.1
1
2
9,000.0
0
0.8
1
7,304.6
0
15,412.7
1
3
9,000.0
0
0.7
3
6,580.7
2
21,993.4
3
4
9,000.0
0
0.6
6
5,928.5
8
27,922.0
1
5
9,000.0
0
0.5
9
5,341.0
6
33,263.0
7
6
9,000.0
0
0.5
3
4,811.7
7
38,074.8
4
7
9,000.0
0
0.4
8
4,334.9
3
42,409.7
7
Discounted Payback Period
6.4
4
QUESTION 10-8
(Amount in $)
Year Truck Pulley
0 -17,100.00 -22,430.00
1 5,100.00 7,500.00
2 5,100.00 7,500.00
3 5,100.00 7,500.00
4 5,100.00 7,500.00
5 5,100.00 7,500.00
Cost of Capital 0.14
Calculation of NPV of Truck
Year Cash Flows PV @ 14% PV of Cash Flows
0 -17,100.00 1.00 -17,100.00
1 5,100.00 0.88 4,473.68
2 5,100.00 0.77 3,924.28
3 5,100.00 0.67 3,442.35
4 5,100.00 0.59 3,019.61
5 5,100.00 0.52 2,648.78
NPV 408.71

Financial Management: Theory and Practice 7
Calculation of NPV of Pulley
Year Cash Flows PV @ 14% PV of Cash Flows
0 -22,430.00 1.00 -22,430.00
1 7,500.00 0.88 6,578.95
2 7,500.00 0.77 5,771.01
3 7,500.00 0.67 5,062.29
4 7,500.00 0.59 4,440.60
5 7,500.00 0.52 3,895.26
NPV 3,318.11
Calculation of IRR of Trucks
Year Cash Flows
0 -17,100.00
1 5,100.00
2 5,100.00
3 5,100.00
4 5,100.00
5 5,100.00
IRR 15%
Calculation of IRR of Pulley
Year Cash Flows
0 -22,430.00
1 7,500.00
2 7,500.00
3 7,500.00
4 7,500.00
5 7,500.00
IRR 20%
Calculation Of MIRR of Truck
Year Cash Flows FV Factor Terminal Value
1 5,100.00 1.69 8,613.70
2 5,100.00 1.48 7,555.87
3 5,100.00 1.30 6,627.96
4 5,100.00 1.14 5,814.00
5 5,100.00 1.00 5,100.00
Total Value 33,711.53
MIRR 15%
Calculation of MIRR of Pulley

Financial Management: Theory and Practice 8
Year Cash Flows FV Factor Terminal Value
1 7,500.00 1.69 12,667.20
2 7,500.00 1.48 11,111.58
3 7,500.00 1.30 9,747.00
4 7,500.00 1.14 8,550.00
5 7,500.00 1.00 7,500.00
Total Value 49,575.78
MIRR 17%

Financial Management: Theory and Practice 9
Chapter 11
QUESTION 11-1
(a) Initial Investment Outlay (Amount in Million $)
Cost of New Equipment 17
Working Capital 5
Initial Investment Outlay 22
(b)
The amount spent by the company on research related to new project costing $150,000 last
year will not impact the decision of the company as this is sunk cost and will have no impact
on the decision making only relevant costs considered for decision making.
(c)
The Sale value of Building is $1.5 Million and if the company uses the building for installing
the equipment the cost involved for investing the new equipment is $ 22 Million. The
opportunity cost for new equipment is $1.5 Million. The company will purchase the new
equipment only if the cash inflows from the new project will exceed $1.5 Million.
QUESTION 11-2 (Amount in Million $)
Calculation of Operating Cash Flow at t0
Projected Sales 18
Less: Operating cost 9
Less: Depreciation 4
Less: Interest expenses 3
EBT 2
Less: Tax 0.8
EAT 1.2
Add: Depreciation 4
Operating Cash Flows 5.2
QUESTION 11-3 (Amount in Million $)
Calculation of after tax Net Salvage Value
Equipment Cost 12
Depreciation 9
Tax 40%
Salvage Value 3
After Tax Salvage Value 1.8

Financial Management: Theory and Practice 10
QUESTION 11-4 (Amount in $)
Initial Investment 1,10,000.00
Life(Years) 10
After Tax cash Inflows 19,000.00
WACC 10%
Tax Rate 35%
Calculation of NPV
Yea
r Cash Flows PVF @ 10% PV
0 -1,10,000.00 1.00 -1,10,000.00
1 19,000.00 0.91 17,272.73
2 19,000.00 0.83 15,702.48
3 19,000.00 0.75 14,274.98
4 19,000.00 0.68 12,977.26
5 19,000.00 0.62 11,797.51
6 19,000.00 0.56 10,725.00
7 19,000.00 0.51 9,750.00
8 19,000.00 0.47 8,863.64
9 19,000.00 0.42 8,057.85
10 19,000.00 0.39 7,325.32
NPV 6,746.78
Yes, Chain should buy the new machine as NPV is Positive
QUESTION 11-6 (Amount in $)
Cost 11,02,500.00
Working Capital 15,500.00
Life 3 years
Selling Price 6,05,000.00
Inflows(Before Tax) 3,80,000.00
Tax Rate 35%
Calculation of Depreciation
Year Depreciation
1 3,67,463.25

Financial Management: Theory and Practice 11
2 4,90,061.25
3 1,63,280.25
(a) Year 0 Cash Flow
Cost 11,02,500.00
Working Capital 15,500.00
Cash Flow 11,18,000.00
(b) Net Operating Cash
Flows
Year Cash inflows
After Tax Cash
Inflows
Depreciation(Tax
Benefit)
Net cash
Flows
1
3,80,00
0.00
2,47,00
0.00
1,28,61
2.14
3,75,612.
14
2
3,80,00
0.00
2,47,00
0.00
1,71,52
1.44
4,18,521.
44
3
3,80,00
0.00
2,47,00
0.00
57,14
8.09
3,04,148.
09
c) Additional Year 3 Cash flow
Working Capital 15,500.00
Salvage Value 53,101.91
Additional Year 3 Cash flow 68,601.91
d) Calculation of
NPV
Year Net cash Flows PVF @ 12% PV
0
-
11,18,000.00 1.00
-
11,18,000.00
1
3,75,612.1
4 0.89
3,35,367.9
8
2
4,18,521.4
4 0.80
3,33,642.7
3
3
3,04,148.0
9 0.71
2,16,486.6
0
3
68,601.9
1 0.71
48,829.4
9
NPV
-
1,83,673.21
NPV is negative hence; the machine should not be purchased.

Financial Management: Theory and Practice 12