Financial Analysis: Determining Highsky’s Market Value Capital Structure And Cost Of Capital

Capital Structure Of the Company

• The existing market value capital structure of the Highsky Company:

Table 1: Capital Structure of the Company

• The floatation cost is the cost spent by the company when the company offers shares or securities in the market to the public. Floatation cost arises from services like the underwriting expenses or fees, legality charges, and the registration fees incurred while offering a security (Gupta, 2016). Floatation costs are generally not included in the incorporation for determining the cost for capital. The company adjusts the floating costs in the cash flows as the expenses incurred for raising the capital for the company. For Example, A company, which wants to raise $ 5 million worth of capital it then has to incur the around 1% of the total capital raised as floating charge. So the net amount raised by the firm will be 99% of the $ 5 million worth of capital (Gupta, Prakash, & Rangan, 2018).
• The cost of Equity is calculated for Equity, Debentures and Ordinary Shares.

• The various method for calculating cost of capital is the Capital Asset Pricing Model and through Dividend Capitalization Method. The CAPM model is calculated by the formula:

Expected Return = {Risk Free Rate of Return (Rf) + (Return on Market-Risk Free Rate of Return)*Beta (B)}

The following approach of calculating the cost of capital considers risk involved in the market with respect to the risk free investment (Barberis et al. 2015).

Whereas the Dividend Capitalization Method was the other method that was selected for calculating the cost of equity via the formula Re= {((Do+g)/Po) + Growth} (Hirtle et al. 2016).

• An alternative way of calculation of the growth factor that is to be used in the dividend growth factor is by calculating the growth of dividends in the form of IRR method in the excel sheet (Lugert, et al .2016). The growth can be calculated by the following method under the divided growth model as:

Growth = {(Dividend at Initial Year/Price at the Initial Year)-Required Rate of Return}

• And 7)

• Calculation Of WACC

• The Investment opportunity Schedule is given:
• The project that would be suitable for Investment in the project is the Project B, Project D and Project F is the ideal investment selected.

• The projects should be selected on the basis of the funds that the company has which is around 1.2million dollars, the project, which gives the highest IRR should be selected. So the project that should be selected are Project B, Project D and Project F given the fact that the fund of total 1.2 million dollar is utilized and the company is able to maximize the return from the given set of possible investment projects (Bora, 2015).
• If the capital structure changes then the cost of capital would rise for the firm making borrowing cost more costly for the company. The calculations for the same is as follows by taking the target structure mentioned:

• The previous capital structure is better than the new one as the cost of capital for the firm has significantly risen for the company. The comparison between the two is as follows:

1. The impact on the Earning Per Share will be as follows via new share issue:

1. The impact on Earning Per Share will be as follows via new debt issue:

The impact on EPS via the Good and Poor Weather is given below:

The indifference point between the two will be under the good weather case scenario where the Earnings Per share of the company would not deviate much.

Part A

Olivia in her twenties is a feminist activist who is taking part in the social issues as she is quite young and the probability that she is a bank clerk is very less, it must be the case that Olivia is active in taking part in the social activities. The age and the concern of Olivia regarding the social issues suggest that she is a feminist activist.

Part B

There has been a long run of reds in the roulette table and the probability for the same can be quantified as the best bet can be made with a house edge, which carries the worst amount of odds. The bet can be made as black/red or by the probability of odd/even and low/high option. The low option will be the range that is (1-18) and high would be (19-36). The probability for choosing the red would be the best option depending on the number of occurrence it has given. The best option would be to go for the red color (Zhou & Xu, 2018).

Part D

The occupation of Ben could be that of an engineer as the age of Ben is between 32 years old and lawyers who practice law or are well successful is of a age rage greater than the age range specified. The points mentioned such as highly motivated and liked by others and on the ability of the company gives a slight identification that Ben might belong to the Engineers profession and background.

Reference

Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics, 115(1), 1-24.

Bora, B. (2015). Comparison between net present value and internal rate of return. International Journal of Research in Finance and Marketing, 5(12), 61-71.

Gupta, M. C. (2016). An Integrated Model for the Cost-Minimizing Funding of Corporate Activities over Time. Review of Economics & Finance, 6, 1-18.

Gupta, M., Prakash, P., & Rangan, N. K. (2018). Cross?Country Variability in Cost of Raising Equity: Evidence from Seasoned Equity Offerings. International Review of Finance.

Hirtle, B., Kovner, A., Vickery, J., & Bhanot, M. (2016). Assessing financial stability: the capital and loss assessment under stress scenarios (CLASS) model. Journal of Banking & Finance, 69, S35-S55.

Lugert, V., Thaller, G., Tetens, J., Schulz, C., & Krieter, J. (2016). A review on fish growth calculation: multiple functions in fish production and their specific application. Reviews in Aquaculture, 8(1), 30-42.

Zhou, W., & Xu, Z. (2018). Probability calculation and element optimization of probabilistic hesitant fuzzy preference relations based on expected consistency. IEEE Transactions on Fuzzy Systems, 26(3), 1367-1378.