Calculate SVIs weighted average cost of capital

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Reference no: EM131610399

Financial Management Assessment - Group Report

Learning Outcomes addressed

1) Explain the goal of financial decisions and the importance of financial information.

2) Examine financial instruments and their valuation.

3) Prepare and develop a working capital management plan.

4) Evaluate the concept of optimal capital structure.

Assessment purpose

The assignment is designed to enhance students' skills in analysing the implication of the time value of money as well as facilitating students' discussion of the role of large diversified banks.

ASSESSMENT DESCRIPTION:

Students are required to work in a group of 2 - 4 students in the performance of this assignment.

Students must register for their group with the lecturer during the first three weeks of the trimester and are not allowed to change group members afterward.

The assignment consists of 2 parts.

Part A: Calculation of the time value of money

Valuing Shares

South Island Valley Industries (SVI) wishes to estimate its cost of capital for use in analysing projects that are similar to those that already exist. The company's current capital structure in terms of market value includes 40%debt, 10% preferred equity, and 50% ordinary shares. The company's debt has an average yield to maturity of 8.3%. Its preferred shares have a $70 par value, an 8% dividend, and are currently selling for $76 per share. SVI's beta is 1.05, the risk-free rate is 4%, and the return on the S & P 500 (the market proxy) is 11.4%. SVI is in the 40% tax bracket.

a. What are SVI's pre-tax costs of debt, preferred shares, and ordinary shares?

b. Calculate SVI's weighted average cost of capital (WACC) on both a pre-tax and after tax basis. Which WACC should SVI use when making investment decisions?

c. SVI is contemplating a major investment that is expected to increase both its operating and financial leverage. Its new capital structure will contain 50% debt, 10% preferred shares, and 40% ordinary shares. As a result of the proposed investment, the company's average yield to maturity on debt is expected to increase to 9%, the market value of preferred shares is expected to fall to their $70 par value, and its beta is expected to rise to 1.15. What effect will this investment have on SVI's WACC? Explain your finding.

Part B: Essay

Discuss the role of financial management in 'not for profit organisations'.

Assessment Criteria:

Demonstrated knowledge of the key differences of financial management between not for profit organisations and for profit organisations.
Logical inferences drawn from information presented and appropriate justification of stance taken.
Overall presentation of the argument is relevant and appropriate.

Reference no: EM131610399

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Reviews

len1610399

8/23/2017 4:47:55 AM

This assessment is a group activity and students are required to work with their respective groups. No individual submission will be accepted. You will not receive any marks for this assignment if your group members collectively report against you for non-participation or non-cooperation. You have to nominate someone as your group leader to coordinate the assignment submission. The assignment must be submitted online in Moodle and Turnitin. All materials MUST be submitted electronically in Microsoft Word format. Other formats may not be readable by markers. Please be aware that any assessments submitted in other formats will be considered LATE and will lose marks until it is presented in MS Word. No paper based or hardcopy submission will be accepted.

len1610399

8/23/2017 4:47:49 AM

GENERAL NOTES FOR ASSIGNMENTS - Assignments should usually incorporate a formal introduction, main points and conclusion, and will be fully referenced including a reference list. The work must be fully referenced with in-text citations and a reference list at the end. We strongly recommend you to refer to the Academic Learning Skills materials available in the Moodle. We recommend a minimum of THREE references, unless instructed differently by your lecturer. Unlessspecifically instructed otherwise by your lecturer, any paper with lessthan FIVE references may be failed. Work that includes sources that are not properly referenced according to the “Harvard Referencing Workbook” will be penalised.

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