Financial Management Assignment Sample

Introduction To Financial Management Assignment

Part A

A) Calculations

i) Current after-tax cost

Figure 1: Calculation of tax cost and cost of equity

The cost of equity is around 12.8%, while the bond's current after-tax cost is about 1.89%. These are critical elements in figuring out a company's WACC, which is important for making financial choices and investment assessments. Although these risk assessment techniques offer insightful information, they should only be used sparingly, taking into account the unique features and circumstances of each transaction (Hmaittane et al. 2019). Furthermore, for efficient decision-making in changing corporate contexts, continuous monitoring and modification of assessments of risk as circumstances change are essential.

ii) WACC

Figure 2: Calculation of weighted average cost of capital

WACC is an essential indicator that helps businesses evaluate the cost of their financial resources and make well-informed financing and investment decisions. By including both stock and debt constituents in the capital structure, it offers a holistic perspective. With a weighted average cost of capital (WACC) of 10.61%, the business must provide returns that are at least as high as this rate in order to appease its debt and equity holders. Additionally, it acts as a standard against which to compare the anticipated returns on different investment options.

iii) Risk-adjusted WACC

Figure 3: Calculation of Risk-adjusted WACC

In this framework of projected cash flow analysis, adjusted beta and risk-adjusted weighted capital appreciation (WACC) are crucial indicators for evaluating the cost of capital when debt is present and for making well-informed investment decisions. The company's beta, the market risk of higher prices and other variables affecting the cost of stock can all have an impact on the risk-adjusted weighted capitalization rate WACC (Mari and Marra, 2019). For precise financial decision-making, it's critical to update this information on a frequent basis. In discounted cash flow (DCF) analysis, the risk-adjusted WACC is frequently utilized as the discount rate. It takes into consideration the price of stock as well as how financial leverage affects the risk of the business.

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B) Calculation of NPV

Figure 4: Calculation of Net Present Value

For the first year, the Boxe is sold for £2,000 per unit; after that, the price drops by 10% annually. Add the original working capital investment and raise it annually by the annual rate of inflation. Sensitivity analysis is evaluating how changes in one or more variables affect the financial parameters NPV of the project. Decision-makers may easily perform and comprehend it due to its relative simplicity. Enables scenario planning through the analysis of various variable value combinations considered as most efficient method (Leyman et al. 2019). The data does not specifically state the discount rate that was applied to the NPV computation. The project's risk is usually represented by the risk-adjusted WACC or another suitable discount rate.

A positive net present value (NPV) in the context of investment decision-making indicates that the project is anticipated to yield returns greater than the necessary rate of return, or discount rate. This may indicate that the idea is financially feasible and has the potential to increase shareholder value. The net present value (NPV) of £200 indicates that the project is anticipated to yield beneficial benefits for the firm. This metric is frequently employed in investment assessment to assess a project's financial viability. After accounting for capital costs, the project is predicted to provide positive net cash inflows during its lifetime with an NPV of £200. A project is deemed financially feasible and has the potential to increase the company's worth if it has a positive net present value (NPV).

c) Advise to the company

Examine the net present value (NPV) in relation to other financial indicators and the strategic goals of the organization. The project may help maximize shareholder wealth if the NPV is positive for cocaine, but it's important to take into account the larger macroeconomic and strategic ramifications (Fatimah and Kartikaningsih, 2020). The first outlay of funds for working capital and manufacturing machinery at the start of the project is vital. The last year's cash flow, which takes into account the salvage value, terminating value, and any tax implications.

Part B

i) Investment appraisal

Sensitivity analysis is evaluating how changes in one or more variables affect the financial metrics (NPV, IRR, payback time, etc.) of the project. The ratio of the original investment to the present value of future cash flows is known as the profitability index. Assumes, financial contributions are invested again at the project's cost of capital (Follert et al. 2019). The difference between the current value of cash inflows and outflows during a project's lifetime is known as net present value or NPV. Takes into account all monetary inputs and outflows to provide a thorough assessment of the undertaking's financial feasibility.

ii) Empirical investigations of investment appraisal

Empirical studies demonstrate the variation in investment assessment methodologies between businesses. Though NPV and IRR are still often used, decision-makers are becoming more aware of the need for flexibility and taking qualitative considerations into account. A comprehensive approach to investment assessment is required due to the changing nature of business settings. This method should integrate both financial and non-financial elements to enable greater understanding and strategic choice-making (Manes-Rossi et al. 2018). In the project execution, companies often monitor and assess the project continuously, modifying their appraisal techniques as necessary. This flexible strategy aids in improving the future's financial choices by drawing lessons from the past.

ii) Future advances can be made with respect to risk assessments

Cross-Asset Risk Integration

• Challenges: A thorough assessment of risk might not adequately incorporate risks from various asset types.
• Future Advance: Creating frameworks take interconnections and interdependencies into account and allow risks from different asset classes to be integrated. This method offers a more comprehensive understanding of the risk associated with portfolios.

Quantification of Qualitative Risks

• Challenges: It might be difficult to put a number on qualitative risks, such as reputation and regulatory concerns.
• Future advance: Creating representatives and processes to evaluate qualitative risks quantitatively and this might entail converting qualitative data into risk measurement metrics through the use of analysis of sentiment, natural language processing, and other methods.

Reference list

• Fatimah, N. and Kartikaningsih, D., 2020. Analysis of Rent, Buy and Rent-to-Buy With Net Present Value Method in the Decision of Truck Procurement at PT. XYZ. Journal of Islamic Economics Perspectives, 2(1), pp.48-65.
• Follert, F., Herbener, J., Olbrich, M. and Rapp, D., 2019. Agree or disagree? On the role of negotiations for the valuation of business enterprises. Quarterly Journal of Austrian Economics, 21(4), pp.315-338.
• Hmaittane, A., Bouslah, K. and M'Zali, B., 2019. Does corporate social responsibility affect the cost of equity in controversial industry sectors?. Review of Accounting and Finance, 18(4), pp.635-662.
• Leyman, P., Van Driessche, N., Vanhoucke, M. and De Causmaecker, P., 2019. The impact of solution representations on heuristic net present value optimization in discrete time/cost trade-off project scheduling with multiple cash flow and payment models. Computers & Operations Research, 103, pp.184-197.
• Manes-Rossi, F., Tiron-Tudor, A., Nicolò, G. and Zanellato, G., 2018. Ensuring more sustainable reporting in Europe using non-financial disclosure—De facto and de jure evidence. Sustainability, 10(4), p.1162.
• Mari, C. and Marra, M., 2019. Valuing firm's financial flexibility under default risk and bankruptcy costs: a WACC based approach. International Journal of Managerial Finance, 15(5), pp.688-699.