|
Particulars |
0 |
1 |
2 |
|
Initial Expediture |
($7,000,000) |
||
|
Receipt from Contract |
$12,000,000 |
||
|
Annual Expenses |
($2,000,000) |
($2,000,000) |
|
|
Total Cash Flow |
($7,000,000) |
($2,000,000) |
$10,000,000 |
|
Required Rate of Return |
8% |
8% |
8% |
|
Discounted Cash Flow |
($7,000,000) |
($1,851,852) |
$8,573,388 |
|
Net Present value |
($278,464) |
The net present value of the total cash flows would be negative. Hence, the project manager should reject the project.
|
Period |
||||
|
Particulars |
0 |
1 |
2 |
3 |
|
Business A: |
||||
|
Cash Flow |
($60,000) |
$50,000 |
$30,000 |
$20,000 |
|
Discount Rate |
10% |
10% |
10% |
10% |
|
Discounted Cash Flow |
($60,000) |
$45,455 |
$24,793 |
$15,026 |
|
Net Present Value |
$25,274 |
|||
|
Business B: |
||||
|
Cash Flow |
($60,000) |
$10,000 |
$20,000 |
$80,000 |
|
Discount Rate |
10% |
10% |
10% |
10% |
|
Discounted Cash Flow |
($60,000) |
$9,091 |
$16,529 |
$60,105 |
|
Net Present Value |
$25,725 |
|
Period |
||||
|
Particulars |
0 |
1 |
2 |
3 |
|
Business A: |
||||
|
Cash Flow |
($60,000) |
$50,000 |
$30,000 |
$20,000 |
|
Internal Rate of Return |
37.39% |
|||
|
Business B: |
||||
|
Cash Flow |
($60,000) |
$10,000 |
$20,000 |
$80,000 |
|
Internal Rate of Return |
26.44% |
Both the businesses would be provide more or less same net present value. However, as the internal rate of return of business A is higher than business B, it is better to invest $60000 in Business A.
If Greg & Joan invest in the both the business, then the expected NPV and internal rate of return would be as follows:
|
Period |
||||
|
Particulars |
0 |
1 |
2 |
3 |
|
Business A: |
||||
|
Cash Flow |
($120,000) |
$60,000 |
$50,000 |
$100,000 |
|
Discount Rate |
10% |
10% |
10% |
10% |
|
Discounted Cash Flow |
($120,000) |
$54,545 |
$41,322 |
$75,131 |
|
Net Present Value |
$50,999 |
|||
|
Internal Rate of Return |
30.68% |
The table denotes that the investors would get comparatively lower return for investing in both the business comparing to the return rate of business B. Hence, if the investors want higher returns in term of volume then they can invest in both the investments. However, of they consider the return rate, then tey should focus on business A only.
|
Particulars |
0 |
1 |
2 |
3 |
4 |
5 |
|
Project A: |
||||||
|
Initial Investment |
($200,000) |
|||||
|
Annual Cash Flow |
$76,000 |
$76,000 |
$76,000 |
$76,000 |
$76,000 |
|
|
Total Cash Flow |
($200,000) |
$76,000 |
$76,000 |
$76,000 |
$76,000 |
$76,000 |
|
Cumulative Cash Flow |
($200,000) |
($124,000) |
($48,000) |
$28,000 |
$104,000 |
$180,000 |
|
Payback Period |
2.63 |
|||||
|
Project B: |
||||||
|
Initial Investment |
($180,000) |
|||||
|
Annual Cash Flow |
$60,000 |
$64,000 |
$72,000 |
$80,000 |
$90,000 |
|
|
Total Cash Flow |
($180,000) |
$60,000 |
$64,000 |
$72,000 |
$80,000 |
$90,000 |
|
Cumulative Cash Flow |
($180,000) |
($120,000) |
($56,000) |
$16,000 |
$96,000 |
$186,000 |
|
Payback Period |
2.78 |
Both the projects meet the payback criteria.
There are two options to invest $50000. Either it can be used fully to buy a duplex apartment near campus or it can be divided to buy a new car, start a moving business and buy a collection of old comic books. The two options are compared below:
|
Particulars |
Investment |
NPV |
PI |
|
Option 1: |
|||
|
Buy a duplex apartment near campus |
$50,000 |
$22,500 |
1.45 |
|
Total |
$50,000 |
$22,500 |
1.45 |
|
Option 2: |
|||
|
But a new car for your business |
$20,000 |
$10,000 |
1.5 |
|
Start a small moving business |
$25,000 |
$10,000 |
1.4 |
|
Buy a collection of old comic books |
$5,000 |
$1,000 |
1.2 |
|
Total |
$50,000 |
$21,000 |
1.42 |
The PI of the second option is lower than the option 1. Hence, $50000 should be invested to buy a duplex apartment near campus.
The net present value of the incremental cash flow, generated for replacing the old machine with a new one, is computed below:
|
Particulars |
0 |
1 |
2 |
3 |
|
Cost of New Machine |
($20,000) |
|||
|
Loss of Cash Inflow from old Machine |
($5,000) |
($5,000) |
||
|
Cash Inflow from New Machine |
$10,000 |
$10,000 |
$10,000 |
|
|
Incremental Cash Inflow |
($20,000) |
$5,000 |
$5,000 |
$10,000 |
|
Discount Rate |
15% |
15% |
15% |
15% |
|
Discounted Cash Flow |
-$20,000.00 |
$4,347.83 |
$3,780.72 |
$6,575.16 |
|
Net Present Value |
-$5,296.29 |
If the old machine is replaced by the new machine, the NPV of the cash flows woukld be negative and therefore, the old machine should not be replaced now.
|
Share Y |
|||||
|
Probability |
Return |
Expected Return |
Probability |
Return |
Expected Return |
|
0.2 |
10% |
2.00% |
0.1 |
8% |
0.80% |
|
0.4 |
15% |
6.00% |
0.3 |
12% |
3.60% |
|
0.3 |
18% |
5.40% |
0.5 |
15% |
7.50% |
|
0.1 |
2% |
0.20% |
0.1 |
19% |
1.90% |
|
Total Expected Return |
13.60% |
13.80% |
Antec Corporation should invets in Share Y, as expected return of Share Y, is higher than that of Share X.
NPV is calculated by adjusting the risk factors. From the table, it is clear that Project Y would provide higher return after adjusting the higher risk. Hence, it is recommended to invest in Project Y.
Co-eeficient of variation measures the proportion of variation from the mean value. Thus, it can be very effective to compare two projects with different returns and different risk level.
Co-efficient of variation is calculated on the basis of mean value, whereas, NPV is the sum of the present values of future cash flows. Therefore, it is not possible to compare the two projects, as its mean values are not given. In such scenario, the first method would be more appropriate to evaluate the projects.
|
Particulars |
Amount |
|
Beta |
0.8 |
|
Risk Free rate |
4% |
|
Market Return |
14% |
|
Expected Return of Portfolio |
12% |
|
Particulars |
Amount |
|
Bond Par Value |
$1,000 |
|
Less: Average Discount |
($30) |
|
Less: Floatation Cost |
($20) |
|
Sale Proceedings from Bond |
$950 |
|
Annual Coupon Rate |
10% |
|
Period (in years) |
10 |
|
Annual Coupon Payment |
$100 |
|
Cost of Bond |
10.77% |
|
Particulars |
Amount |
|
Par-Value of Preferred Stock |
$100 |
|
Annual Dividend Rate |
11% |
|
Annual Dividend Payment |
$11 |
|
Cost of Issuing & Selling Shares |
$4 |
|
Cost of Preferred Stock |
11.46% |
|
Particulars |
Amount |
|
Expected Dividend per share |
$6 |
|
Selling Price per share |
$80 |
|
Less: Floatation Cost |
$4 |
|
Current Value of Stock |
$76 |
|
Growth Rate |
6% |
|
Cost of Equity |
13.89% |
|
Particulars |
Weightage |
Rate of Return |
Amount |
|
Long-Term Debt |
40% |
10.77% |
|
|
Preferred Stock |
15% |
11.46% |
|
|
Common Stock Equity |
45% |
13.89% |
|
|
Tax Rate |
40% |
||
|
Weighted Average Cost of Capital |
10.6% |
The investment opportunities are ranked in the following table on the basis of excess return over the cost of capital:
|
Investment Opportunity |
Expected Rate of Return |
Initial Investment |
WACC |
Total Return |
Total Cost |
Profit/(Loss) |
Ranking |
|
A |
11.20% |
$500,000 |
10.6% |
$56,000.00 |
$52,779.98 |
$3,220.02 |
4 |
|
B |
9.70% |
$400,000 |
10.6% |
$38,800.00 |
$42,223.99 |
($3,423.99) |
7 |
|
C |
12.90% |
$550,000 |
10.6% |
$70,950.00 |
$58,057.98 |
$12,892.02 |
2 |
|
D |
16.50% |
$600,000 |
10.6% |
$99,000.00 |
$63,335.98 |
$35,664.02 |
1 |
|
E |
11.80% |
$520,000 |
10.6% |
$61,360.00 |
$54,891.18 |
$6,468.82 |
3 |
|
F |
10.10% |
$400,000 |
10.6% |
$40,400.00 |
$42,223.99 |
($1,823.99) |
6 |
|
G |
10.50% |
$450,000 |
10.6% |
$47,250.00 |
$47,501.99 |
($251.99) |
5 |
As Investment D would provide higher excess return over the cost of capital, it should be selecred for the investment purpose.
The following financial and non-financial factors influence the capital structure of any company:
|
Particulars |
Capital Structure 1 |
Capital Structure 2 |
Capital Structure 3 |
|
Book Value per share |
$10 |
$10 |
$10 |
|
Ordinary Share capital |
$300,000 |
$300,000 |
$300,000 |
|
Debt Ratio |
20% |
40% |
60% |
|
Debt Capital |
$60,000 |
$120,000 |
$180,000 |
|
Interest Rate |
10% |
11% |
12% |
|
Sales |
$375,000 |
$375,000 |
$375,000 |
|
Fixed Operating Costs |
($125,000) |
($125,000) |
($125,000) |
|
Variable Operating Cost @40% |
($150,000) |
($150,000) |
($150,000) |
|
Total Profit before Interest |
$100,000 |
$100,000 |
$100,000 |
|
Less: Interest on Loan |
($6,000) |
($13,200) |
($21,600) |
|
Total Profit before Tax |
$94,000 |
$86,800 |
$78,400 |
|
Less: Income Tax @40% |
($37,600) |
($34,720) |
($31,360) |
|
Net Profit after Tax |
$56,400 |
$52,080 |
$47,040 |
|
Earning per Share (EPS) |
$1.88 |
$1.74 |
$1.57 |
The capital structure with the debt ratio 60% would be the opitmal capital structure, which would provide the maximum earnings per share.
|
Particulars |
Westpac |
ASB |
|
Average Loan Amount |
$75,000 |
$100,000 |
|
Annual Interest rate |
12% |
13% |
|
Interest Amount |
$750 |
$1,083 |
|
Add: Administration Fee |
250 |
|
|
Total Dollar Cost of Loan |
$1,000 |
$1,083 |
As the dollar of loan from Wetspac would be lower than ASB, the company should obtain the loan from Wetspac.
|
Particulars |
General |
Credit Controller |
Local Factoring |
|
Credit Sales in last year |
$2,550,000 |
$2,550,000 |
$2,550,000 |
|
Growth in Sales |
25% |
25% |
25% |
|
Expected Credit Sales |
$3,187,500 |
$3,187,500 |
$3,187,500 |
|
Less: Advance on Sales |
$2,550,000 |
||
|
Balance Credit Sales |
$3,187,500 |
$3,187,500 |
$637,500 |
|
Accounts Receivable Days |
60 |
40 |
35 |
|
Accounts Receivable Balance |
$523,973 |
$349,315 |
$61,130 |
|
Total Collection from Receivables |
$2,663,527 |
$2,838,185 |
$576,370 |
|
Add: Advance on Sales |
$0 |
$0 |
$2,550,000 |
|
Total Collection |
$2,663,527 |
$2,838,185 |
$3,126,370 |
|
Less: |
|||
|
Cost of Collection |
$47,000 |
$41,438 |
|
|
Interest on Advance |
$306,000 |
||
|
Net Collection |
$2,663,527 |
$2,791,185 |
$2,778,932 |
As per above table, it can be suggested that the company would collect more cash by appointing credit controller.
The NPV for leasing the car is higher than the NPV for purchasing the car. Hence, the company should obtain the car through leasing.
The most common motivation for undertaking the process of leasing is that it acts as a substitute to the process of ownership. The party that provides the lease even has the benefit of restricting their resources from getting invested in the tools. Individuals and organizations have the intention of undertaking leasing means that operational activities can be undertaken without the transfer of the ownership. This indicates that the operational services are effectively processed without the use of a huge amount of capital. In the process of leasing the risk of investing in the tools and machinery is absent and hence this motivates the parties to undertake the process of leasing.
The main kind of conflict that arises in the process of leasing has been found to be the conflict of interest among the lessors and the lessess. The conflict of interest generally arises when the mindset and the objectives of the two parties are different. The conflicts arise during the construction of the leasing agreement when the objectives and the ideas of the party taking the lease do not comply with the ideas and the objectives of the party giving out the lease. The other kind of conflict of interest arises due to the differences in the price that has to be paid for the process of leasing. The difference in leasing price restricts the undertaking of lease and it is up to the parties to decide whether a solution can be attained or not.
The investment bankers, while underwriting new security offerings prefer that the securities to be underpriced as lower prices would disclose that the securities offerings will be sold off at a faster rate. Additionally, the investment bankers prefer the new offerings to be underpriced as it attracts long term investors who are helpful in providing stability for the price of the shares once the secondary market for the concerned shares has been constructed. The investors that have been considered will not sell off their shares quickly and in that manner would be a helpful contributor to volatility of the price. The prices being underpriced is helpful for the establishment of the IPO of the share in the market and in that manner would make the share stable in the secondary market for the long term.
The various factors that determine the various factors of total cost in an IPO involve:
Being the Chief Financial Officer of Gaga Enterprises, a firm related with edgy fashion, it is essential to raise $10 million to expand the business as well as their production. This can be possible by taking help of the financial institutions for raising the money or can be done by directly collecting money from the financial markets. It has been observed that raising money directly from the financial markets would be permit the Chief Financial Officer of Gaga Enterprises to avoid the commission that would be levied by the investment banks and the financial institutions for the collection of the money on behalf of the company. In that manner the company could be benefitted as higher amount of money could be generated at a lower cost per dollar that has been raised. Furthermore, if the money has been gathered by taking help of the financial institutions it would be hard to know who the supplier is and whether the fund is secure and whether the repayment of the loan along with the interest can be paid within the stipulated time period. On the other hand, if the capital is raised directly from the market, it would be likely be with the help of the public offerings of the security in the capital market. This would be undertaken by taking help of the sale of the preferred and the common stock or the bonds, which even charges interest. It is even seen that collecting money directly from the market offers lower level of interest rate and hence this is the process that would be implemented with respect to taking help of the financial institutions and this has been the key difference between raising money directly and raising money with the help of the financial institutions.
In accordance to the question that has been provided in this question, it is seen that a promissory note that would be paying 5% worth of interest would lead in the greatest after tax income as it has been observed that all the interests are tax-deductable expenditure and on the other hand the dividends are subject to double taxation. This would indicate that the organization would be paying taxes on their annual earnings at the corporate level and then the dividends that would be received by the shareholders would be subject towards any kinds of taxes at the level of the individuals and in a manner further decreasing their tax after income.
Reference List
Lazar, P. R. (2013). Lease Agreement and Its Variations-Unitary Regulation in New Civil Code. Contemporary Readings in Law and Social Justice, 5(2), 595.
Svoboda, P. and Bohušová, H., 2014, June. The uncertainty Associated with the Estimated Lease Term and its Impact on the Financial Analysis Ratios. In Proceedings of the 11th International Scientific Conference on European financial systems (pp. 621-628).
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