Explain the concept of a weighted average cost of capital

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Reference no: EM132339245

Assignment- Managing Financial Resources & Decisions

Section One - Sources of Finance

The company for which you are a senior accountant has recently won a major government contract to supply equipment to an IT company in Asia. While the company is naturally encouraged by this, it is the biggest contract ever won by them and will require substantial expansion and changes to operating systems.

Your responsibilities mean you will need to oversee the management of the increased working capital required to respond to the order and to contribute to the appraisals of new projects required to achieve the necessary expansion.

Requirement for section one

a. In the company’s current position you are acutely aware of the need to manage working capital effectively. Discuss the main approaches available to your organisation to optimise its working capital. (LO2)

b. Identify two different sources of medium or long term finance available to the company and discuss the strengths and weaknesses of each source, were it to use it to finance its proposed expansion. (LO1)

c. Explain how the company’s interest cover ratio would help measure any increase in financial risk that the company might encounter.

Section Two - Finance as a Resource

The company’s current long term capital structure consists of 40,000,000 equity shares issued with a value of £4 each and £30,000,000 of debentures issued two years ago. The company currently estimates that shareholders require an annual return on their equity investment of 7%. The debentures were issued with a fixed interest rate of 5%.

Requirement for section two

a. Explain the concept of a weighted average cost of capital and calculate the company’s existing weighted average cost of capital. (LO2)

b. Why might the UK tax system encourage the company to adopt a relatively high gearing ratio? (L01)

c. In management meetings you have repeatedly said that fulfilling this order will have an opportunity cost for the company. Explain briefly what you meant by that. (LO2)

d. Consider the cash flow forecast for the company at Appendix A of this document.

i) You are required to complete the cash flow forecast. Comment briefly on the implications of the cash flow you identify over the period.

Section Three Financial Decisions

One of your roles as senior accountant is to contribute to project evaluation. A proposal for a new manufacturing facility has recently been drawn up and passed to you. The cash flows forecast to result from this project are attached at Appendix B. Further relevant information is as follows:

Company policy is to discount all future cash flows at 5% in relevant investment appraisal calculations.

Company policy is to depreciate all assets on a straight line basis over their useful life; unless otherwise stated you should assume assets

have no residual value at the end of their life.

Requirement for section 3

a. Calculate the following for the above project

i) payback

ii) net present value (LO3)

b. Explain the strengths and weaknesses of payback and net present value as methods of investment appraisal. (LO3)

c. Summarise the main factors that should be taken into account by any company when setting prices. (LO3)

d. In year 5 the new investment is expected to produce 900 units of production. Including depreciation in your calculation, identify the unit cost of production that year. (LO3)

Section 4 Analyse Financial Performance

Your professional institute has asked you to devise a series of short courses on company financial statements, which it can market to business people. You have begun to make some notes on this issue and decide to expand those into brief formal essays to help you prepare the course outlines.

Requirement for section 4

a. Explain the purposes of a balance sheet and profit and loss account. (LO4)

b. Discuss the differences in the above financial statements across different legal forms of organisation. (LO4)

c. Using appropriate examples, explain how ratio analysis can assist in the assessment of a firm’s working capital. (LO4)

Attachment:- Business Management.rar

Reference no: EM132339245

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