Financial Management
Q1. From the below-given data calculate the overall cost of capital (WACC) for Business Scanner Ltd. (10 Marks)
Equity Capital |
20,00,000 |
11% Debt |
30,00,000 |
Tax Rate |
30% |
The risk-free rate of return |
6% |
Sensex yearly return |
15% |
Beta |
1.4 |
Introduction
Common shares, preferred shares, securities, and various other types of obligations comprise the weighted average charge of the capital. It is the standard investment cost for a company after considering any applicable taxes. The weighted average price of money, or WACC, is the particular interest amount a company will most likely have to pay to endow its resources.
Concept and application
The weighted average cost of capital (WACC) is a financial statistic used to estimate the cost of an organization’s principal. The WACC is the minimum amount of profit an organization needs to make from its assets to maintain positive relations with its depositors and lenders. In addition to the weight of each primary type in the company’s wealth construction, the Weighted Average Cost of Capital (WACC) considers the cost of debt and the price of equity.
Conclusion
The weighted average cost of capital is the measure used to express the average amount of money it takes for a bondholder or shareholder to entice a new investor. (WACC). Adjusting the cost of investment by the amount of debt and equity utilized by the organization, this strategy poses a significant challenge to the completion of any internal projects or goals that may be attainable.
Q.2 Ramadheer wants to invest 10, 00,000 for 5 years and he is having 2 investments option. (10 Marks)
Option 1 Investment in a mutual fund with a return of 12%
Option 2 50% investment in shares with a return of 14% and
50% investment in bonds with a return of 10%
Find out which option should be considered.
ANS:
Introduction
It is a good idea for Ramadheer to put his one hundred thousand rupees, which he has worked hard to achieve, into an investment that will mature in five years. However, given the variety of opportunities for financial investment open to him, he is trying to decide which path to pursue first. Investing in a mutual fund with a return of 12%, investing 50% of his money in shares with a return of 14%, and investing 50% of his money in bonds with a return of 10% are two choices available to him. One of the most important considerations when making investments is the return on investment (ROI).
Concepts and Applications
Choosing how much risk to take on in exchange for a certain level of expected return is one of the most challenging aspects of any investment choice that must be made. Before settling on an option, it is critical to consider all possibilities now open to you. In this scenario, Ramadheer wishes to invest 100,000 dollars for five years. He has two investment alternatives available to him: Option 1, which involves investing in a mutual fund with a return of 12%, and Option 2, which consists in financing 50% of the money in shares with a return of 14% and 50% of the money in bonds with a return of 10%. Let’s examine both choices to determine which offers the most significant advantages.
Conclusion
After examining both possibilities, we have concluded that Ramadheer would be best served by participating in a mutual fund. He can ensure his future financial stability and get the best return on his investment by maintaining a diversified investment portfolio. Although both choices have an estimated return of 12%, the mutual fund reduces the risk associated with the investment because of its diversification and professional management.
Q.3 Adani has two alternative proposals under consideration. Project Food Chain requires a capital outlay of Rs. 50, 00,000, and Project Ice Cream Parlor requires Rs. 100, 00,000. Both are estimated to provide a cash flow for five years:
Project Chai Rs. 18, 00,000 per year, and Project Ice Cream Parlor Rs. 35, 00,000 per year. The cost of capital is 14%. Show which of the two projects is preferable from the viewpoint of
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Net present value method (5 marks)
Introduction
Using the present value in the analysis of future profitability is standard practice. The value of the capital at present is determined by adding up all of the upcoming monetary changes during the lifetime of the investment and then discounting those changes to their current value.
Concept and application
We are discussing the capital value law. A project or asset’s net present value (NPV) indicates how much of an income or loss it will create relative to the available capital. Because of things like price rises and numerous returns that need to be accounted for, it’s possible that prospective money movements won’t exactly contest the scheme’s current money movements.
Conclusion
The current net worth is often applied in determining the project budget and evaluating the various investment opportunities available. The NPV is a tool that assists project managers in precisely predicting the return.
(ii) Profitability Index (5 marks)
Introduction
The success directory, which may also be referred to as the worth asset relation or the income asset proportion, evaluates the association amidst the costs and benefits of a future scheme. The effectiveness directory is designed to be calculated by first dividing the early asset of the plan by the current value of the anticipated prospective money movements.
Concept and application
The current worth of upcoming money movements and early asset characteristics are employed in estimating the value of the Success Directory. The formula for the success index is presented in the following format:
Success Index= (current worth (PV)of upcoming currency movements)/(early investment )
Conclusion
The profitability index is designed to measure the ratio of the business’s discounted profit to its initial investment. An optimistic NPV for a company is one in which the profit margin is higher than the required investment, as demonstrated by a PI ratio of more than 1.0. Conversely, if a project’s PI is lower than 1.0, it will likely harm shareholder value and, consequently, a negative net present value.
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