Determine the cost of all sources of capital

Assignment Help Accounting Basics

Reference no: EM131483316

ASSIGNMENT - BUSINESS SIMULATION

PART A: FINANCIAL STATEMENT ANALYSIS

Thank you for helping your client with the firm's first set of financial statements. That was a great help, allowing the firm to get on with what it does best - manufacturing security watches.

It is now 3 years later - the middle of January 2022. Your client has provided you with a complete set of financial statements for the last three years (shown below), and has asked for help in analysing and interpreting the firm's performance. The client has heard about various financial ratios which can be used aid in the analysis of financial statements, but doesn't know now to calculate them or interpret them, and has you to help with this.

Before you start analysing the firm's financial statements, you will need to obtain industry averages for each of the standard financial statement ratios. These are also provided below.

Your task:

1. Calculate the ratios shown below, for each of the last three years.

2. Analyse the firm's performance over the last 3 years. Identify any strengths or weaknesses, in terms of positive or negative trends.

3. Analyse the firm's performance in comparison to industry averages for each of the ratios, identifying any apparent strengths or weaknesses.

4. Based on your answers to Questions 2 and 3, summarise the firm's performance in terms of profitability, efficiency, liquidity, leverage and potential for investment.

5. Briefly explain to the client any possible problems with your analysis that the client should bear in mind.

PART B: CALCULATING THE COST OF CAPITAL

Your analysis of your client's financial position has been very helpful in enabling the firm to identify strengths and weakness, and make changes to capitalise on its strengths and tackle its weaknesses. Based on your advice, changes have been made and will be made to improve the firm's financial position and position it to take on new projects and expand into new markets.

It is now February 2022. Your client has identified a number of potential new projects that the firm could undertake, but isn't sure how to decide which ones to go ahead with. Your client has asked for your advice. You have initially explained to your client that the first thing to do is to work out the firm's Weighted Average Cost of Capital, because that is the minimum return required on new projects in order meet the cost of capital and maintain or increase the value of the firm. Your client has therefore provided the most recent set of financial statements, as at 31 December 2021 (see Part 3), and has asked you to calculate the firm's WACC based on the sources of capital shown in its most recent Balance Sheet.

Your task:

1. Determine the cost of all sources of capital (i.e. all non-current liabilities, ordinary shares and preference shares). (Note: Do not include Retained Earnings. Since all reserves, including retained earnings, belong to the owners of the ordinary shares, we assume that the market value of the ordinary shares includes the value of these reserves.)

2. Determine the market value of all sources of capital (excluding retained earnings).

3. Calculate the firm's Weighted Average Cost of Capital.

In order to carry out this task, you have asked for and received the following additional information from your client:

The interest rate on the Bank Loan is 10.8% p.a.

The interest rate on the Mortgage Loan is 8% p.a.

The corporate bonds are rated AAA, have 7 years to maturity and pay a quarterly coupon at a rate of 5.6% p.a.

The ordinary shares have a beta of 1.47.

The preference shares pay a fixed annual dividend of 10 cents per share.

Attachment:- Assignment File.rar

Reference no: EM131483316

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Reviews

len1483316

5/4/2017 12:42:49 AM

Format: Word or PDF. You should present your findings (i.e. the answers to each of the above three questions) in the main body of the report, and include all workings in an appendix. That way the reader can look at the detailed workings if they wish to. (But I am going to.) You can create the workings in Word (or similar), or you can do the workings in Excel and then copy and paste them into the appendix. Do not take a photograph of handwritten calculations. This is not acceptable for a business report or a University assignment. Do not round off intermediate answers when making calculations. Either use a spreadsheet, or keep all intermediate answers in your calculator, or if you must write down an intermediate answer, use 6 decimal places. Word limit: There is no word limit. This is not applicable to calculations. Your labelling of your results doesn't require many words, but there should be a brief introduction so that the client knows what information your are providing to them. You should conclude by explaining to the client what the final number - the WACC - means.

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