InterActive
Module
Corporate Finance
Assignment
Title CF Written Coursework Assignment
Assignment Type Individual Assignment
Word Limit 3500 – 4000
Weighting 100%
Issue Date 17th September 2018
Submission Date 22nd October 2018
Issued by (Assessor)
Internal Verifier
Plagiarism When submitting work for assessment, students should be aware of the InterActive guidance and regulations in concerning plagiarism. All submissions should be your own, original work.
You must submit an electronic copy of your work. Your submission will be electronically checked.
Harvard
Referencing The Harvard Referencing System must be used. The Wikipedia website must not be referenced in your work.
Learning
Outcomes
On successful completion of this assignment you will be able to:
1. Summarise key principles and tools for financial decision-making.
2. Compare various investment decision rules and apply the process of capital budgeting.
3. Analyse the concept of corporate capital structure and compute cost of capital.
4. Determine and critically evaluate the economic benefit of various types of financing.
5. Explain the concept of risk management and analyse the role of
derivative instruments in mitigating risks.
Grading Criteria Postgraduate Grading Criteria for this assignment is available at the end of this document.
Your Task
Question 1
You are a new recruit in the finance division of Dynamic Investments, Inc.
Your finance manager has requested a critical examination of the company’s capital structure when the amount of debt is changed. He has provided you with the following information from previous year’s annual report (in $’000s):
S-T Debt plus Current Portion of L-T Debt $2,000,000
Long Term Debt $4,000,000
Total Shareholder’s Equity $10,000,000
Ordinary Shares Outstanding 2,500,000
Further, the following market information has been obtained from the financial press:
Current Stock Price (per ordinary share) $ 30.00
Current Yield to Maturity on outstanding bonds 3%
Cost of unleveraged equity under current market conditions 12%
Industry average Market Debt to Equity ratio 17.5%
Required:
Part 1) Demonstrate, that in a perfect capital market, a firm’s choice of capital structure is unimportant.
The following computations are required:
a) Market Debt to Equity ratio.
b) Cost of levered equity based on the market Debt to Equity ratio.
c) Current Weighted Average Cost of Capital (WACC).
d) Repeat steps b and c for the scenario where the company issues $1 billion in stock to repurchase debt.
Critically analyse and comment on the results.
[20 Marks]
Part 2) In real world conditions, realities of the market, such as taxes, cannot be ignored.
Assuming that Dynamic Investments, Inc. has a corporate tax rate of 40%, you are required to critically analyse the impact of the company issuing $5 billion in new debt (to be held in perpetuity). It is planned that the proceeds will be used to repurchase stock.
Synthesise your answer with any relevant finance theories applicable.
[15 Marks]
[Q1 Total: 35 Marks]
Question 2
You are evaluating the proposed purchase of some new equipment by your company, FlightRecord Ltd. The price of the machinery is $275,000, and it would cost another $25,000 to adapt it to your firm’s purposes. The machinery would be sold after 6 years for $60,000 and depreciation is based on the straight-line method.
Use of the equipment would require an increase in Net Working Capital of
$12,000 which would be recovered in the final year of the investment project.
The machinery is expected to save the firm $55,000 per year in operating costs. The corporate income tax rate is 35%.
Required:
a) What is the initial investment outlay associated with the project?
b) What is the terminal cash flow in Year 6?
c) Critically examine the treatment of working capital in the above calculations.
d) If the project’s required rate of return is 14%, should the equipment be purchased?
e) Perform a detailed critical evaluation of how FlightRecord Ltd could increase the NPV of the project by using debt finance.
[Q2 Total: 25 Marks]
Question 3
Critically examine how knowledge of financial leverage is important in the production of financial forecasts and also in the control process for a firm.
Synthesis your answer with an overall evaluation of why financial planning is critical to a company’s likelihood of survival.
[Q3 Total: 20 Marks]
Question 4
Critically evaluate how the stage of the corporate lifecycle can influence (or limit) the choices of finance available to a company and, therefore, its capital structure.
Your answer should cover the following key areas:
a) Critical evaluation of the corporate lifecycle, including the various stages.
b) Synthesis of the choices of finance available to companies, and the extent to which the financing decision may be dependent on which stage of the corporate lifecycle the company is in.
c) Critical evaluation of the benefit of different types of financing and finance structures in an international and digital environment.
[Q4 Total: 20 Marks] [Assessment Total: 100 Marks] Guidelines Please read all questions and information provided carefully. Answer should be made in appropriate length keeping in view the requirement of each question and total word counts allowed.
In addition, your assignment should demonstrate the following qualities:
A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment.
Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources which is descriptive or simply just theoretical regurgitation is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice.
Logical flow of ideas and treatment; appropriate selection of real world factors related to the companies under scrutiny.
Evidence of additional personal research, and the ability to analyse material from a variety of appropriate relevant perspectives.
Presentation, structure, appropriateness of methodology, breaking into section headings/subheadings, tidiness.
Marks will be awarded for proper referencing and originality of work. Also note that plagiarism is a serious offence and your submission will be electronically checked.
Your report must be handed in electronically no later than given date of submission.
Grading Criteria
Grading
Criteria 70%+100 60-69% 50-59% 0 -49% Fail
Generic skills:
communication and presentation. Comprehensive and correctly structured assessment. Style of writing is very fluent and develops a coherent and logical argument. Excellent referencing. Well structured report which follows appropriate format but some aspects of layout and referencing could be improved. Style of writing is fairly fluent. Good referencing. Good report in most aspects but suffers from variations in quality and the layout contains some inadequacies. Style of writing is satisfactory.
Referencing needs improving. Very poor report which is incorrectly structured and contains major errors and omissions. Style
of writing is descriptive, lacks coherence and fluency. Poor referencing.
Knowledge & Understanding Demonstrates excellent knowledge of theory and provides critical theoretical underpinning. Very good interpretations and summarising of main themes. Wide range of knowledge demonstrated and evidence of good understanding of the topic.
Ability to interpret and summarise succinctly. Good range of knowledge demonstrated but with some room for improvement. Some understanding displayed of the topic.
Summary and
interpretation are satisfactory. Very poor range of knowledge, research and interpretation of information that is subjective and lacks conceptual coherence. There is no clear identification, understanding or interpretation of main themes.
Analysis Excellent use of theoretical and conceptual models to guide analysis linked with a critical discussion of main themes.
Has demonstrated
an ability to discriminate in the use of more abstract concepts and techniques. Very good use of the theoretical and conceptual models with good critical discussion. Has applied a range of analytical skills with
greater independence and understanding of more abstract data or concepts.
Use of theory and concepts limited in scope and depth but relevant. Application could be improved and there is a tendency towards description rather than application of concepts.
Very poor use of theory and very little application of core concepts.
Very little or limited analysis and evaluation in relation to fundamental principles and concepts.
Synthesis/ Creativity/
Application Logical presentation of themes with appropriate examples being demonstrated. Very good demonstration of synthesis.
Models have been clearly applied to the argument. Very good account of main themes with sound application. Good attempt at applying models to the argument. Fairly good attempt at synthesising the salient points. Good account of main themes with some attempt at application. Limited
evidence of synthesis. Very poor account of main themes with little or no application. No links between models and argument.
Evaluation Shows clear evidence of in-depth
critical reflection and evaluation of the argument by providing a robust defence of the opinions presented in the assessment. Shows evidence of critical reflection and evaluation and a fairly cohesive defence of the argument Shows some
evidence of critical
reflection but could have been developed. Shows little or no evidence of critical reflection and needs to be much more developed. There is no defence of the opinions presented.