Calculate cost associated with each new source of finance

Assignment Help Financial Management

Reference no: EM132992639

BUACC3701 Financial Management

QUESTION ONE FINANCIAL MATHEMATICS

A young graduate wishes to buy a small unit house in a very remote area priced at $190,000. They want to borrow the entire amount and repay this amount in full plus interest over the next 20 years. You can offer them a mortgage for the full amount at an interest rate of 17% (sounds like extortion to me) and calls for equal annual installment payments at the end of each of the 20 years.
Required:

(a) Calculate the amount of the annual payment? (b) Create and complete the amortization schedule. Hint: Use Excel spreadsheet to create this amortisation schedule.

QUESTION TWO COMPREHENSIVE QUESTION (CAPM, WACC, CF ANALYSIS)

Valley PLC is a leading company in Australia and you the below details relating to the capital structure of the company.

*Information concerning raising new capital*
Bonds	$1,000	Face value
	13%	Coupon Rate (Annual Payments)
	20	Term (Years)
	$25	Discount offered (required) to sell new bonds
	$10	Flotation Cost per bond
Preference Shares	11%	Required rate to sell new preference shares
	$100	Face Value
	$3	Flotation cost per share
Ordinary Shares	$83.33	Current Market Price
	$4.00	Discount on share price to sell new shares

	$5.40	Flotation Cost per bond
	$5.00	2021 - Proposed Dividend
Dividend History	$4.63	2020
	$4.29	2019
	$3.97	2018
	$3.68	2017
	$3.40	2016

a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available.

*Current Capital Structure*
Extract from Balance Sheet	$1,000,000	Long-Term Debt
	$800,000	Preference Shares
	$2,000,000	Ordinary Shares
Current Market Values	$2,000,000	Long-Term Debt
	$750,000	Preference Shares
	$4,000,000	Ordinary Shares
Tax Rate	33%
Risk Free Rate	5%

b) Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm's cost of capital in the medium term and believes they should be as follows

Long-term debt 40%
Preference Shares 15%
Ordinary Shares 45%

c) What impact do these new weights have on the WACC?

The firm is now (in 2021) considering the following investment opportunity for the period 2022-2029.
Data is as follows

Initial Outlay	$1,600,000
Upgrade	$700,000	Required at the end of Year 4
Incremental Sales	350,000	Increased sales units per annum - (Year 5-8)
Working Capital	$45,000	Increase required
Estimated Life	8	Years
Salvage Value	$60,000
Depreciation Rate	0.125	For tax purposes
The machine is fully depreciated by the end of its useful life
Other Cash Expenses	$60,000.00	Per annum (Years 1-4)

Other Cash
Expenses
$76,000.00
Per annum (Years 5-8)

Production Costs
$0.15 Per Unit
Sales price $0.75 Per Unit (Years 1-4)
Sales price $1.02 Per Unit (Years 5-8)

Sales estimates for next 8 years starting from 2022

Year	Sales (Units)
2022	679651
2023	694903
2024	710155
2025	725406
2026	740658
2027	755909
2028	771161
2029	786413

d) Calculate the Net Present Value, Internal Rate of Return and Payback Period

The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 percent. The information in the table below has been used by company management in calculating the stock beta value which is 1.151 and the expected return on the stock which is 12.5%.

Year	Stock Market	Share
Year	Index	Price

2011	2000	$15.00
2012	2400	$25.00
2013	2900	$33.00
2014	3500	$40.00
2015	4200	$45.00
2016	5000	$55.00
2017	5900	$62.00
2018	6000	$68.00
2019	6100	$74.00
2020	6200	$80.00
2021	6300	$83.33

e) Calculate the CAPM

f) Explain why this figure may differ from that calculated above (i.e. Cost of equity - Ordinary Shares)

QUESTION THREE - BOND VALUATION

Consider a bond with a face value of $1000, a coupon rate of 8% (paid annually), and ten years to maturity.

What is required of you:

a. What is the price of this bond if the required rate of return (r) is 18 percent?

b. What is the price if r increases to 20 percent? By what percentage did the price of the bond change?

c. What is the price if r is five percent? If r increases to seven percent, what is the percentage change in price?

d. From your answers in a to c, what can you say about the relative price volatility of a bond in high compared to low-interest rate environments?

Attachment:- Financial Management.rar

Reference no: EM132992639

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