Introduction to Capital Budgeting/Investment Valuation

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ATTACHED ARE MY RESULT FOR THIS ASSIGNMENT AND THE TURNITIN REPORT. I NEED REWORDED SO THAT THE ORIGINALITY IS LESS THAN 10%

Respond to the following scenario with your thoughts, ideas, and comments. Be substantive and clear, and use research to reinforce your ideas.

Mary Francis has just returned to her office after attending preliminary discussions with investment bankers. Her last meeting regarding the intended capital structure of Apix went well, and she calls you into her office to discuss the next steps.

“We will need to determine the required return for our intended project so that we have a decision criteria defined for the project,” she says.
“Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?” you ask.
“I do,” she smiles. “We can determine the target WACC for Apix Printing Inc., given these assumptions,” she says as she hands you a piece of paper that says the following:
  • Weights of 40% debt and 60% common equity (no preferred equity)
  • A 35% tax rate
  • Cost of debt is 8%
  • Beta of the company is 1.5
  • Risk-free rate is 2%
  • Return on the market is 11%
“Great,” you say. “Thanks.”
“Be sure to indicate how these costs of capital might be used to determine the feasibility of the capital project,” Mary says. “I want your recommendation about which is more appropriate to apply to project evaluation, too. Let me know what you think.”
“One more thing,” she says as she stands up to signal the end of the meeting. “You did a good job with the explanations that you provided Luke the other day. Would you have time to define marginal cost of capital for me so I can include it in my discussions with investors? You seem to have a knack for making things accessible to nonfinancial folks.”
“No problem,” you say. “I’m glad my explanations are so useful!”

For this assignment, complete the following:

  • Describe capital structure.
  • Determine the WACC given the above assumptions.
  • Indicate how these might be useful to determine the feasibility of the capital project.
  • Recommend which is more appropriate to apply to project evaluation.
  • Define marginal cost of capital.

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Running Head: CAPITAL BUDGETING 1 Capital Budgeting Name Institution Affiliation Course Date CAPITAL BUDGETING 2 Capital Budgeting Describe capital structure The capital structure is how a company funds its entire tasks and growth by applying different sources of finance. It is important in this case to note that the debt takes the form of bond issues or sometime a long term notes payable (Fabozzi, Peterson, & Peterson, 2003). On the other hand, equity is established as common stock, preferred stock, or retained earnings. Short-term debt such as the working capital requirements is sometimes established to be part of the capital structure. It is important to note that a company’s capital structure can be a mixture of long-term debt, short-term debt, common equity, and preferred equity (Chandra, 2008). In a case where a company has a proportion of short- and long term debt, this will only be considered when the company is analyzing the capital structure. In this company, we should be able to establish that the capital structure should reflect the company’s debt-to-equity ratio. This shows understanding into how dangerous a firm is. In most cases, a form that is deeply funded by debt has a more force on capital structure and hence establishes a greater risk to the shareholders (Hirschey, 2009). However, this risk may be the primary source of the company’s growth. Determine the WACC given the above assumption In order to calculate the WACC, we first need to determine the cost of the equity using the capital asset pricing model: Re = (Rf) + [B(Rm – Rf)] In this case; Re = Cost of equity Rf = Risk free rate B = Beta CAPITAL BUDGETING 3 Rm = Return on the market Once we are able to calculate the Re, then we would be able to calculate the WACC. Re = (2%) + [1.5(11% - 2%)] Re = (2.718282) =2100+1.5(11100−2100) Re = 0.057021 WACC in this case should be; WACC = [(Weight of equity) * (Cost of equity)] + [(Cost of Debt) * (Weight of Debt) * (1- tax rate)] WACC = [(40%)* (60%)] + [(8%) * (40%) * (1 – 35%)] WACC = (2.718282) =40100(60100) + (8100(40100)) (1−35100) WACC = 0.095943 It is important to note that WACC is computed by considering the relative weight of every factor of the firm’s capital structure. In this case, the computation is required to apply the market values of the factors, other than the company’s book values, which in this case may be critically different (Chandra, 2008). Indicate how these might be useful to determine the feasibility of the capital project In order for the company to control the feasibility of the capital project, it is believed that the extent of a source of funding is basically its market value and it will be divided by the sum of the values of all the components (Hirschey, 2009). The easiest factor to compute is the market value of the equity of a publicly traded firm, because this is basically the cost per share multiplied by the number of the outstanding shares. Similarly, the market value of the favored shares is established to be easy to control and is computed by multiplying the cost per share by the CAPITAL BUDGETING 4 number of the outstanding shares. This brings us to the feasibility of the project. Feasibility is important because it helps the company’s managers to be able to determine how they will be able to successfully complete a project, keeping in mind that there are features that affect the project such as economic, technological, legal, and planning factors. The superiors of the company will use the feasibility to decide on the potential positive and negative results of a project prior to investing a substantial amount of time and cash into it (Fabozzi, Peterson, & Peterson, 2003). Recommend which is more appropriate to apply to project evaluation The first way the company can be able to evaluate the project should be through evaluating the satisfaction of the stakeholders and customers. This means that the company needs to measure the stakeholder and customer satisfaction. This will help the company to determine the areas where the company needs to make changes to fit the company’s long term goals. In addition to this, another recommendation is to be able to determine if the project was able to meet the required objectives (Hirschey, 2009). This should be determining by interviewing the parties if the project was able to meet their needs. Determining the outcome of the project is an effect way in which the company can be able to evaluate the success of the project. Define marginal cost of capital Marginal cost of capital is the fee of the final dollar of the investment contributed by a company, specifically the budget of another unit of investment contributed. It is significant to note that as more investment is contributed, the marginal cost of investment increases. This means that the marginal cost of capital is a graph that relates to the company’s weighted average cost of each unit of capital to the total amount of the new capital raised (Chandra, 2008). References CAPITAL BUDGETING 5 Chandra, P. (2008). Financial management: Theory and practice. New Delhi: Tata McGraw-Hill Pub. Hirschey, M. (2009). Fundamentals of managerial economics. Mason, OH: SouthWestern/Cengage Learning. Fabozzi, F. J., Peterson, P. P., & Peterson, P. P. (2003). Financial management and analysis. Hoboken: Wiley. IP3 by Edmond Saneaka Submission date: 25-Oct-2017 09:58PM (UT C-0500) Submission ID: 869082916 File name: FINC 615 IP3 2.docx (22.83K) Word count: 880 Character count: 4435 IP3 ORIGINALITY REPORT 92 % SIMILARIT Y INDEX 18% 0% 92% INT ERNET SOURCES PUBLICAT IONS ST UDENT PAPERS PRIMARY SOURCES 1 Submitted to Colorado Technical University Online St udent Paper Exclude quotes Of f Exclude bibliography On Exclude matches Of f 92%
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Explanation & Answer

Here

Running Head: CAPITAL BUDGETING

1

Capital Budgeting
Name
Institution Affiliation
Course
Date

CAPITAL BUDGETING

2
Capital Budgeting

Description of capital structure
Capital structure is the process of how the company funds its operations and growth with
the use of various sources of funds. For this case, it should be noted that the debt takes the form
of “long-term notes payable or bond issues” (Fabozzi & Peterson, 2003). Equity is established as
retained earnings, preferred stock and common stock. At times, short-term debt; just like
working capital requirement, is built to be consistent of the capital structure. The capital structure
of a firm may be a combination of common equity, short-term debt, long-term debt and preferred
equity (Chandra, 2008).
In instances whereby the firm has not long-term and short-term debts, such is considered
when the capital structure of the frim is being analyzed. For this particular company, there
should be the ability to establish that the capital structure reflects the debt-to-equity rat...


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