Description
- Capital Budgeting Case – From the given case information, calculate the firm’s WACC then use the WACC to calculate NPV and evaluate IRR for proposed capital budgeting projects with a capital rationing constraint. After you choose the project(s), recalculate the capital structure based on the assumption that the project(s) are implemented and determine if the new capital structure will signal the investors either positively, negatively, or not at all. Write a business report on your findings. Include an executive summary and appendices if applicable.
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Explanation & Answer
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Running Head: CAPITAL BUDGETING
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Capital Budgeting Business Report
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Course
Tutor
Date
CAPITAL BUDGETING
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Introduction
Capital Structure gives a clear indication on how a company obtain its finances to
run its overall operations with different funding options. Investors obtain their Share
Capital funds by either Debt or Equity with expectation to earn when the money is
utilized. Long term debt, short term debt and Bonds are some of the examples that can be
used to obtain financing. Huge debt in a firm can be very risky to investors. Capital
Budgeting helps to evaluate the cost factor when an investment is undertaken. It is crucial
to assess the cash inflow and cash outflow of a given project to ascertain if it’s sufficient
to take the risk.
WACC-Weighted Average Cost of Capital majorly used as discount rate helps
determine a firms Cost of Capital in which the Capital is weighted. Sources of Capital
include Common Stock, Preferred Stock, Bonds and Long term Debt that could be
presented in any form which is used in the Calculation of WACC (Brealey et.al, 2011).
WACC increases with an increase in the rate of return on equity whic...
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