Integrated Project - Part 2 Capital Structure with comments Revised v2-2 (1)
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1
Integrated Project
Part 2: Capital Structure
Completed by
Royal Bank of Canada, RBC
Czegledi, Anna
September 29, 2023
Part 2: Capital Structure
Compare and Contrast Debt and Equity Financing
Debt and equity financing represent two pivotal avenues businesses employ to secure capital,
serving diverse objectives like expansion, investments, or operational requirements. Each
method boasts unique attributes, benefits, and inherent limitations. To elucidate these
financing paradigms, we turn to the comprehensive financial data divulged by the Royal Bank of
Canada (RBC) in its 2022 Annual Report. Delving into these financials offers valuable insights
into RBC's strategic capital allocation, highlighting its prudent financial management.
2
Debt Financing:
Debt financing involves borrowing capital from external sources, which is evident in RBC's
operations. RBC extends loans to key individuals, including directors and their families, ensuring
a steady cash flow with predefined interest rates and security measures. Moreover, RBC has
outstanding loans with joint ventures and associates totaling $251 million as of October 31,
2022 (
Royal Bank of Canada, 2022, p.221).
RBC's commitment to diligently manage loans to
entities it holds interests in reflects its continuous utilization of debt financing.
Advantages of Debt Financing:
One of the crucial advantages of debt financing is that it allows businesses to leverage their
existing resources. RBC can expand its lending capacity and generate interest income by
borrowing finances. Additionally, interest payments on debt are tax-deductible, which can lead
to implicit tax benefits for the institution (
FIN74000 - Fall 2023 pg. 421)
. Furthermore, debt
financing doesn't dilute ownership or control. RBC maintains complete control over its
operations and strategic decisions, as creditors don't have any voting rights or ownership claims.
Disadvantages of Debt Financing:
However, debt financing also comes with its set of challenges. One primary concern is the
obligation to make regular interest payments and repay the top amount. In profitable
downturns or financial stress, meeting these obligations can strain a company's cash flow.
Moreover, excessive debt can negatively impact a company's creditworthiness, potentially
leading to advanced borrowing costs or difficulty securing future loans.
Equity Financing:
Equity financing involves raising capital by issuing shares of stock to investors in exchange for
ownership stakes in the company. This method allows companies to sell partial ownership to
external investors, like individual or institutional investors. In the case of RBC, equity financing is
apparent through its ownership structure (
FIN74000 - Fall 2023 pg. 423)
. RВC is a publicly
traded company, meaning it has issued shares of stock that are traded on stock exchanges.
Individual and institutional investors hold ownership stakes in RВC based on the number of
shares they own.
Advantages of Equity Financing:
One of the crucial advantages of equity financing is that it doesn't involve debt obligations.
Unlike debt, equity doesn't require regular interest payments or top repayment. This can
provide lesser financial flexibility, especially during uncertain profitable conditions. Additionally,
equity investors share in the company's success. However, shareholders profit from capital
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appreciation and may receive dividends, enhancing their overall return on investment If RBC
performs well.
Disadvantages of Equity Financing:
However, equity financing also has its drawbacks. When a company issues shares, it dilutes
existing shareholders' ownership stake. In the case of RBC, issuing new shares would dilute
current shareholders' ownership, potentially impacting their control over the company. Also,
sharing ownership with external investors means sharing profits and decision-making authority.
While this can bring fresh perspectives and expertise, it also means relinquishing some control
over strategic decisions.
A table on Comparison of Debt Financing and Equity Financing Aspects
Debt Financing
Equity Financing
Underwriting and Advisory
Fees
Decreased $634 million or
24%,
indicating
debt
underwriting services.
Likely involved in equity
underwriting as part of
investment banking.
Interest Income
Recognizes interest on loans,
indicating lending activities.
Invests in equity securities,
earning
income
from
dividends.
Tax Treatment
Interest payments may be
tax-deductible.
Tax
treatment
varies,
potentially
fewer
tax
benefits.
Flexibility
Fixed repayment schedules.
More flexibility in dividend
payments.
Source: RBC, 2022 Annual Report, Page 26
https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf
Debt and Equity Financing for RBC
One of the biggest banks in Canada, Royal Bank of Canada (RBC), has operations all over the
world. RBC, like many big organizations, finances its operations and expansion plans using a
combination of debt and equity funding. A summary of RBC's use of debt and equity financing is
shown below:
Debt funding
1.
Bonds:
To raise money, RBC issues corporate bonds. These bonds are interest-bearing debt
instruments that are sold to bondholders. The money raised from bond sales is used by
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RBC for a variety of projects, including business growth, funding acquisitions, and debt
refinancing.
2.
Loans from banks:
In addition, RBC has access to loans from other financial institutions and the money
market. Depending on the requirements of the bank, these loans offer either short- or
long-term funding. Commonly, the terms and interest rates are negotiated based on the
state of the market and the bank's creditworthiness.
3.
Commercial Paper:
It is a sort of short-term financial instrument with maturities ranging from a few days to
many months. RBC may issue commercial papers. RBC effectively meets its short-term
liquidity needs with the use of commercial paper.
4.
Subordinated Debt:
RBC may issue subordinated debt, a sort of bond that, in the event of bankruptcy, has a
lesser priority than senior debt but often has a higher interest rate for investors.
Diversifying funding sources frequently involves using subordinated debt.
Equity Financing:
1.
Common Stock:
By issuing common stock, RBC raises equity capital. Common shareholders are entitled
to ownership and dividends. Either to increase the bank's capital base or to generate
significant funds for long-term investments, common stock issuance can be a successful
strategy.
2.
Preferred Stock:
RBC may also issue preferred stock in addition to ordinary stock. Common shareholders
do not have preference over preferred shareholders in the case of a liquidation, and
preferred shareholders normally get set dividend payments. Investors seeking a
combination of income and equity ownership may find preferred shares appealing.
3.
Retained Earnings:
RBC is also able to get equity financing by using its retained earnings. The accumulated
profits that the bank has not distributed as dividends are known as retained earnings.
This money may be used to expand the company, make acquisitions, or improve the
balance sheet, among other things.
4.
Stock Options and Employee Stock Purchase Plans:
To motivate staff and match their interests with those of shareholders, RBC may utilize
stock options and employee stock purchase plans. These initiatives assist to retain
workers and foster an ownership culture by enabling them to purchase RBC shares at a
reduced cost.
5
RBC must consider its capital requirements, market conditions, cost of capital, and risk
assessment while deciding between debt and equity financing. The financial management team
of the bank assesses these variables to choose the best ratio of debt-to-equity financing to
support its strategic goals while preserving a sound financial position. RBC's financing choices
may also be impacted by market circumstances and regulatory obligations.
For more information about RBC’s debt and equity financing, refer to pages 57 and 58.
Source: RBC, 2022 Annual Report, Page 57-58
https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf
Short-Term and Long-Term Financing Plan for RBC
Royal Bank of Canada (RВС), one of the most prominent economic institutions globally, calls for
comprehensive financing рlan to aid its short-term and long-term monetary desires. This рlan
should align with RBС’s strategic goals, risk tolerance, and the dynamic nature of the financial
industry. In outlining a financing plan for both short-term and long-term perspectives:
Short-Term Financing Plan:
Short-term financing is critical to the Royal Bank of Canada's (RBC) financial strategy, addressing
immediate funding needs, maintaining liquidity, and seizing short-term opportunities. RBC
employs several key approaches in its short-term financing plan:
Firstly, interbank borrowing plays a pivotal role, leveraging RBC's strong reputation and
creditworthiness to access short-term funds swiftly from other banks and financial institutions.
This flexibility allows RBC to efficiently cover daily operational expenses, meet regulatory
requirements, and capitalize on short-term investment prospects. Additionally, RBC issues
commercial paper, a short-term debt instrument with maturities typically ranging from days to
270 days, tapping into capital markets for short-term funding at competitive rates. RBC's robust
credit rating positions it as an attractive issuer, drawing investors seeking reliable short-term
investments.
Moreover, RBC utilizes repurchase agreements (repos) to secure short-term capital, selling
securities with a commitment to repurchase them later (Royal Bank of Canada, 2022, p.55).
Conversely, reverse repos can invest surplus cash for short durations, optimizing idle funds by
earning interest. Effective cash and cash equivalents management is another essential facet of
RBC's short-term financing strategy. Continuous assessment of liquidity positions ensures
optimal utilization of available cash while ensuring compliance with regulatory requirements.
Lastly, RBC maintains a robust contingency funding plan to address unforeseen liquidity needs,
given the unpredictable nature of financial markets (Royal Bank of Canada, 2022, p.82). This
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plan outlines actions to be taken in various scenarios, ensuring the bank's resilience in the face
of financial uncertainties.
RBC Short Term Financing
Source: RBC, 2022 Annual Report, Page 57
https://www.rbc.com/investor-relations/_assets-custom/pdf/ar_2022_e.pdf
Deposits
RBC operates in the banking industry, which means that its short-term financing is primarily
funded by deposits. RBC Deposits (Current Year: $1,208,814 million (about $3,700 per person in
the US) (about $3,700 per person in the US), Previous Year: $1,100,831 million (about $3,400
per person in the US) (about $3,400 per person in the US): These figures represent the total
amount of deposits held by RBC at two different points in time. Current Year (e.g., 20XX):
$1,208,814 million (about $3,700 per person in the US) Previous Year (e.g., 20XX-1): $1,100,831
million (about $3,400 per person in the US). As one of Canada's leading banks, RBC offers a wide
range of deposit products to its customers, including savings accounts, checking accounts, fixed-
term deposits (such as certificates of deposit or CDs), and other specialized accounts. These
deposits are provided by individual customers, businesses, institutions, and other entities. The
increase in deposits from the previous year to the current year suggests that RBC has seen
growth in its deposit base during that period. This can be influenced by factors such as
marketing strategies, interest rates offered on deposits, economic conditions, and changes in
customer preferences. RBC, like other banks, relies on deposits as a source of funding to
support its lending activities, investment in securities, and other financial services. The bank
uses these funds to make loans to individuals and businesses, invest in financial markets, and
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Related Questions
Ma3.
Assume that Nike decides to build a new warehouse complex at significant cost, financed with additional project-specific long-term debt. Describe how this project and financing will impact Nike’s financial statements. In your response, focus on the impact on the ratios gross margin, profit margin, ROA, current ratio, and debt-to-equity
Second, assume that management is wondering whether to capitalize the interest associated with the warehouse project’s financing. Describe how the financial statements will be impacted by the choice to capitalize interest or not. Also describe managements’ incentives to capitalize interest (or not to capitalize).
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4. Determining the optimal capital structure
Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis.
Debt Ratio
Equity Ratio
EPS
DPS
Stock Price
30%
70%
1.25
0.55
36.25
40%
60%
1.40
0.60
37.75
50%
50%
1.60
0.65
39.50
60%
40%
1.85
0.75
38.75
70%
30%
1.75
0.70
38.25
Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure?
Debt ratio = 30%; equity ratio = 70%
Debt ratio = 40%; equity ratio = 60%
Debt ratio = 50%; equity ratio = 50%
Debt ratio = 60%; equity ratio = 40%
Debt ratio = 70%; equity ratio = 30%
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QUESTION THREE
Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below
Details
Period
Project A (K)
Project B (K)
Cash Expenditure
At outset
410,000
500,000
Cash inflow
Year 1
140,000
170,000
Cash inflow
Year 2
170,000
195,000
Cash inflow
Year 3
135,000
180,000
Cash inflow
Year 4
110,000
140,000
Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%.
(a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR).
(b) State which project you would recommend to your board and explain in detail your reasons.
(c) Besides the IRR…
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Question 5
The Finance Director of Kawabwa Construction plc recently overhauled the control system and designed a new method of assessing capital investments that applies the NPV rule to all new investment proposals and will assess performance of current of investments by the same method. He has created a report that will go to the board of directors monthly. This will give an NPV estimation to the cash flows produced and expected by each investment, and CFO plans to use this as a signaling device on the performance of all investments. This, he claims, will introduce rigour into the whole use of capital process. The Chairman ventured the opinion that this approach was a receipt for disaster. Why do you think he felt this way?
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Part 1 (part one already answered, only entered info so that expert may be able to use it to answer part 2, thank you)
Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%.
Component
Scenario 1
Scenario 2
Cost of Capital
Tax Rate
Debt
$4,000,000.00
$1,000,000.00
8%
30%
Preferred Stock
1,200,000.00
1,500,000.00
10%
Common Stock
1,000,000.00
3,700,000.00
13%
Total
$6,200,000.00
$6,200,000.00
1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).)
Part 2
Assume the new project’s operating cash flows for the upcoming 5 years are as follows:
Project A
Initial Outlay
$ -6,200,000.00
Inflow year 1
1,270,000.00…
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Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis.
Debt Ratio
Equity Ratio
rdrd
rsrs
WACC
30%
70%
7.00%
10.50%
8.61%
40%
60%
7.20%
10.80%
8.21%
50%
50%
7.70%
11.40%
8.01%
60%
40%
8.90%
12.20%
8.08%
70%
30%
10.30%
13.50%
8.38%
Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure?
Debt ratio = 70%; equity ratio = 30%
Debt ratio = 40%; equity ratio = 60%
Debt ratio = 30%; equity ratio = 70%
Debt ratio = 50%; equity ratio = 50%
Debt ratio = 60%; equity ratio = 40%
Consider this case:
Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm’s cost of debt will be 8%, and…
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Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis.
Debt Ratio
Equity Ratio
rdrd
rsrs
WACC
30%
70%
7.00%
10.50%
8.61%
40%
60%
7.20%
10.80%
8.21%
50%
50%
7.70%
11.40%
8.01%
60%
40%
8.90%
12.20%
8.08%
70%
30%
10.30%
13.50%
8.38%
Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure?
Debt ratio = 70%; equity ratio = 30%
Debt ratio = 60%; equity ratio = 40%
Debt ratio = 40%; equity ratio = 60%
Debt ratio = 30%; equity ratio = 70%
Debt ratio = 50%; equity ratio = 50%
Consider this case:
Globo-Chem Co. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globo-Chem Co.’s market risk…
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QUESTION 5.
Happy Printers Ltd is evaluating four mutually exclusive projects which are competing for the same investment capital. The company’s main objective is maximising shareholder value.
Some analysis has been performed and you have been given the results by your manager who is not familiar with investment appraisal techniques.
Project
A
B
C
D
Payback Period
4 years
5 years
3 years
3 years
Accounting Rate of Return
6%
7%
7%
5%
Net Present Value
£16,320
£(16,100)
£16,100
£15,900
Internal Rate of Return
9%
8%
9%
7%
Initial Outlay Required
£50,000
£35,000
£45,000
£60,000
Required
a) Recommend which one of the projects should be undertaken explaining why you have chosen that one.
b) Discuss the limitation of the investment appraisal techniques used for the benefit of your manager including reference to academic sources to support your explanations.
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This problem continues the Canyon Canoe Company situation from Chapter F:16. The company wants to invest some of its excess cash in trading securities and is considering two investments, The Paddle Company (PC) and Recreational Life Vests (RLV). The income statement, balance sheet, and other data for both companies follow for 2025 and 2024, as well as selected data for 2023:
Requirements
1. Using the financial statements given, compute the following ratios for both companies for 2025 and 2024. Assume all sales are credit sales. Round all ratios to two decimal places.
a. Current ratio
b. Cash ratio
c. Inventory turnover
d. Accounts receivable turnover
e. Gross profit percentage
f. Debt ratio
g. Debt to equity ratio
h. Profit margin ratio
i. Asset turnover ratio
j. Rate of return on common stockholders’ equity
k. Earnings per share
l. Price/earnings ratio
m. Dividend yield
n. Dividend payout
2. Compare the companies’ performance for 2025 and 2024. Make a recommendation to Canyon…
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Problem 2
ABM Enterprise would like to evaluate/analyze an investment proposal.Given the following:Investment amount - 450,000 (2022)Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for thesucceeding yearsDiscount rate - 14%
a. NPV for the perio 2023 through 2029;b. Total NPV using manual computation;c. Total NPV using the Excel function; andd. IRR rate.
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Question 2
Sunshine Corporation is reviewing an investment proposal. The initial cost of the investment isR52 500. The estimated cash flows and net profit for each year are presented in the schedulebelow. All cash flows are assumed to take place at the end of the year.
year
Net cash flows
Net profit
R20 000
R2 500
R17 500
R3 500
R15 000
R4 500
R12 500
R5 500
R10 000
R6 500
The cost of capital is 12%.
Required:Calculate the following:1. Payback Period 2. Net Present value 3. Accounting rate of return
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Problem 4–2
Ontario, Inc. establishes a 5% hurdle rate for its investment projects. The firm is considering three projects: X, Y, and Z at the end of its fiscal year. Ontario, Inc. has sufficient funds to finance all of these independent projects at the beginning of the new year.
X
Y
Z
Cost of investment
$200,000
$300,000
$250,000
Cash outflow—year 1
15,000
10,000
20,000
Cash outflow—year 2
5,000
10,000
30,000
Cash inflow—year 1
40,000
46,000
75,000
Cash inflow—year 2
40,000
50,000
73,000
Cash inflow—year 3
40,000
44,000
71,000
Cash inflow—year 4
40,000
48,000
69,000
Cash inflow—year 5
40,000
52,000
67,000
Cash inflow—year 6
40,000
56,000
65,000
Required: Using Excel and its appropriate formula, compute the internal rate of return for projects X, Y, and Z. State which projects Ontario should accept.
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a. What percentage of the firm's assets does the firm finance using debt (liabilities)?
b. If Campbell were to purchase a new warehouse for
$1.1
million and finance it entirely with long-term debt, what would be the firm's new debt ratio?
Question content area bottom
Part 1
a. What percentage of the firm's assets does the firm finance using debt (liabilities)?
The fraction of the firm's assets that the firm finances using debt is
27.827.8%.
(Round to one decimal place.)
Part 2
b. If Campbell were to purchase a new warehouse for
$1.1
million and finance it entirely with long-term debt, what would be the firm's new debt ratio?
The new debt ratio will be
enter your response here%.
(Round to one decimal place.)
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Problem 4–1The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:
Data is enclosed in the picture.
Requirements:
Compute the net present value for each asset using Excel's NPV function.Determine which project the Riverside Company should invest in based on NPV.Compute the profitability index for each project.Determine which project the Riverside Company should invest in based on the profitability index.Should the firm invest in the Black or White project? What is the basis for your choice?
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N1
what are the risks and benefits a business investing in capital equipment. include necessary, ethical factors and examples to support your analysis. The NPV is $2,243,458 ^ explain based on this number. thank you i upvote
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QUESTION 2 REQUIREDStudy the information given below which was made available by Levis Limited and calculatethe following:2.1 Accounting Rate of Return on average investment of Project A (answerexpressed to two decimal places). 2.2 Net Present Value of Project A (amounts rounded off to the nearest Rand.) 2.3 Internal Rate of Return of Project B (answer expressed to two decimalplaces). INFORMATIONThe following information relates to two capital investment projects, under consideration byLevis Limited for 2021:Project A Project BInitial cost R800 000 R800 000Expected useful life 5 years 5 yearsScrap/Residual value (not included in the figures below) R80 000 0Expected annual profits: R REnd of: Year 1Year 2Year 3Year 4Year 5140 000130 000120 000110 000100 000105 000105 000105 000105 000105 000The company estimates that its cost of capital is 15%. The straight-line method ofdepreciation is used.
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D4)
You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems related to the cost of capital (page 4). You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance): (i) Describe and interpret the assumptions related to the problem. (ii) Apply the appropriate mathematical model to solve the problem. (iii) Calculate the correct solution to the problem. Submit all answers as percentages and round to two decimal places.
Ezally Corp. is investing in a new machine that will be financed by issuing new 25-year, $1,000 par, 7.5% semiannual coupon bonds. The bonds are currently selling in the market for $920. Flotation costs on newly issued bonds are $70. The corporation’s marginal tax rate is 35%. What is the posttax cost of debt for the newly-issued bonds?
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12. A firm's investment decision is also called its
A. liquidity decision.B. financing decision.C. leasing decision.D. capital budgeting decision.
13. A corporation, potentially, has infinite life because it
A. has the same ownership and management.B. is a legal entity.C. is closely regulated.D. has limited liability.
15. Which of the following assets is tangible?
A. ExxonMobil's corporate headquarters buildingB. Apple Inc.'s trademarkC. Microsoft's technical expertiseD. Hewlett-Packard's most recent printer patent
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Identification: Identify the best answer for each item.
16. It is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
17. These are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.
18. What term is used to describe the negative consequences of a project to the public?
19. In evaluating single projects, what method is based on the concept of equivalent worth of all cash flows relative to some base or beginning point in time called the present?
20. These are transactions that do not require cash or cash equivalents should be excluded.
21. It is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
22. In evaluating single projects, what method is based on the equivalent worth of all cash inflows and outflows at the end of the planning horizon (study period)…
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Assignment Four (B)African Capital Investment Company (ACIC) has decided to open a branch in Ghana as a firststep in diversifying its equity portfolios to incorporate emerging market assets. They aretherefore assessing the performance of three funds that have been suggested to them by theirlocal consultant. The three funds are:(a) Alpha Fund which caters to the investment needs of students and lecturers(b) Gamma Fund which is meant for nurses and medical doctors(c) GSE Fund which is set up to mimic the GSE-All Share IndexTheir decision to locate in Ghana is dependent on their perceived performance of the variousfunds already operating in the country. They have gathered five years of return data and otherbasic statistics on the funds; which are presented below:
YEAR
Alpha FundReturn (%)
Gamma FundReturn (%)
GSE Fund for AllShares Return (%)
1
18.5
24.3
18.3
2
10.3
9.4
4.7
3
-9.2
18.8
16.2
4
20.1
-12.6
31.4
5
14.3
20.4
-3.3
GSE Fund for AllShares Return (%)…
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A3)
Finance
The subject is Legal Strategy. please answer the question! thank you in advance.
What would be the most appropriate organizational form for a "social business," which aims to be financially sustainable and to reinvest any profits for increased social impact? (Maximum 100 words.)
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In 250 words please tell me whether or not you would recommend that I invest in Nike - you will need to substantiate your recommendation with your ratio findings from the first part of this assignment.
A: Working Capital:
Working Capital = Current Assets - Current Liabilities
For 2018: $15,134 - $6,040 = $9,094
For 2017: $16,061 - $5,474 = $10,587
Interpretation: This ratio determines a company's ability to weather financial crunch. Banking institutions are interested for this ratio before granting a loan.
B: Current Ratio:
Current Ratio = Current Assets / Current Liabilities
For 2018: $15,134 / $6,040 = 2.5
For 2017: $16,061 / $5,474 = 2.9
Interpretation: Current ratio is a measure of short term solvency which measures the entity's capability to cover up its current liabilities through its current resources.
C: Quick Ratio:
Quick Ratio = Quick Assets / Current Liabilities
Where, Quick assets = Current assets - Inventories - Prepaid expenses
For 2018: Quick assets = $15,134 -…
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- Ma3. Assume that Nike decides to build a new warehouse complex at significant cost, financed with additional project-specific long-term debt. Describe how this project and financing will impact Nike’s financial statements. In your response, focus on the impact on the ratios gross margin, profit margin, ROA, current ratio, and debt-to-equity Second, assume that management is wondering whether to capitalize the interest associated with the warehouse project’s financing. Describe how the financial statements will be impacted by the choice to capitalize interest or not. Also describe managements’ incentives to capitalize interest (or not to capitalize).arrow_forward4. Determining the optimal capital structure Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio EPS DPS Stock Price 30% 70% 1.25 0.55 36.25 40% 60% 1.40 0.60 37.75 50% 50% 1.60 0.65 39.50 60% 40% 1.85 0.75 38.75 70% 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 30%; equity ratio = 70% Debt ratio = 40%; equity ratio = 60% Debt ratio = 50%; equity ratio = 50% Debt ratio = 60%; equity ratio = 40% Debt ratio = 70%; equity ratio = 30%arrow_forwardQUESTION THREE Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below Details Period Project A (K) Project B (K) Cash Expenditure At outset 410,000 500,000 Cash inflow Year 1 140,000 170,000 Cash inflow Year 2 170,000 195,000 Cash inflow Year 3 135,000 180,000 Cash inflow Year 4 110,000 140,000 Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%. (a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR). (b) State which project you would recommend to your board and explain in detail your reasons. (c) Besides the IRR…arrow_forward
- Question 5 The Finance Director of Kawabwa Construction plc recently overhauled the control system and designed a new method of assessing capital investments that applies the NPV rule to all new investment proposals and will assess performance of current of investments by the same method. He has created a report that will go to the board of directors monthly. This will give an NPV estimation to the cash flows produced and expected by each investment, and CFO plans to use this as a signaling device on the performance of all investments. This, he claims, will introduce rigour into the whole use of capital process. The Chairman ventured the opinion that this approach was a receipt for disaster. Why do you think he felt this way?arrow_forwardPart 1 (part one already answered, only entered info so that expert may be able to use it to answer part 2, thank you) Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%. Component Scenario 1 Scenario 2 Cost of Capital Tax Rate Debt $4,000,000.00 $1,000,000.00 8% 30% Preferred Stock 1,200,000.00 1,500,000.00 10% Common Stock 1,000,000.00 3,700,000.00 13% Total $6,200,000.00 $6,200,000.00 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Part 2 Assume the new project’s operating cash flows for the upcoming 5 years are as follows: Project A Initial Outlay $ -6,200,000.00 Inflow year 1 1,270,000.00…arrow_forwardUnderstanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rdrd rsrs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50% Debt ratio = 60%; equity ratio = 40% Consider this case: Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 60% equity and 40% debt. The firm’s cost of debt will be 8%, and…arrow_forward
- Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rdrd rsrs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50% Consider this case: Globo-Chem Co. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globo-Chem Co.’s market risk…arrow_forwardQUESTION 5. Happy Printers Ltd is evaluating four mutually exclusive projects which are competing for the same investment capital. The company’s main objective is maximising shareholder value. Some analysis has been performed and you have been given the results by your manager who is not familiar with investment appraisal techniques. Project A B C D Payback Period 4 years 5 years 3 years 3 years Accounting Rate of Return 6% 7% 7% 5% Net Present Value £16,320 £(16,100) £16,100 £15,900 Internal Rate of Return 9% 8% 9% 7% Initial Outlay Required £50,000 £35,000 £45,000 £60,000 Required a) Recommend which one of the projects should be undertaken explaining why you have chosen that one. b) Discuss the limitation of the investment appraisal techniques used for the benefit of your manager including reference to academic sources to support your explanations.arrow_forwardThis problem continues the Canyon Canoe Company situation from Chapter F:16. The company wants to invest some of its excess cash in trading securities and is considering two investments, The Paddle Company (PC) and Recreational Life Vests (RLV). The income statement, balance sheet, and other data for both companies follow for 2025 and 2024, as well as selected data for 2023: Requirements 1. Using the financial statements given, compute the following ratios for both companies for 2025 and 2024. Assume all sales are credit sales. Round all ratios to two decimal places. a. Current ratio b. Cash ratio c. Inventory turnover d. Accounts receivable turnover e. Gross profit percentage f. Debt ratio g. Debt to equity ratio h. Profit margin ratio i. Asset turnover ratio j. Rate of return on common stockholders’ equity k. Earnings per share l. Price/earnings ratio m. Dividend yield n. Dividend payout 2. Compare the companies’ performance for 2025 and 2024. Make a recommendation to Canyon…arrow_forward
- Problem 2 ABM Enterprise would like to evaluate/analyze an investment proposal.Given the following:Investment amount - 450,000 (2022)Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for thesucceeding yearsDiscount rate - 14% a. NPV for the perio 2023 through 2029;b. Total NPV using manual computation;c. Total NPV using the Excel function; andd. IRR rate.arrow_forwardQuestion 2 Sunshine Corporation is reviewing an investment proposal. The initial cost of the investment isR52 500. The estimated cash flows and net profit for each year are presented in the schedulebelow. All cash flows are assumed to take place at the end of the year. year Net cash flows Net profit R20 000 R2 500 R17 500 R3 500 R15 000 R4 500 R12 500 R5 500 R10 000 R6 500 The cost of capital is 12%. Required:Calculate the following:1. Payback Period 2. Net Present value 3. Accounting rate of returnarrow_forwardProblem 4–2 Ontario, Inc. establishes a 5% hurdle rate for its investment projects. The firm is considering three projects: X, Y, and Z at the end of its fiscal year. Ontario, Inc. has sufficient funds to finance all of these independent projects at the beginning of the new year. X Y Z Cost of investment $200,000 $300,000 $250,000 Cash outflow—year 1 15,000 10,000 20,000 Cash outflow—year 2 5,000 10,000 30,000 Cash inflow—year 1 40,000 46,000 75,000 Cash inflow—year 2 40,000 50,000 73,000 Cash inflow—year 3 40,000 44,000 71,000 Cash inflow—year 4 40,000 48,000 69,000 Cash inflow—year 5 40,000 52,000 67,000 Cash inflow—year 6 40,000 56,000 65,000 Required: Using Excel and its appropriate formula, compute the internal rate of return for projects X, Y, and Z. State which projects Ontario should accept.arrow_forward
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