Corporate Finance

Corporate Finance

Corporate Finance

This paper presents investigation of financial, economical and managerial feasibility of a prospective theme park project by Wonderland Inc. The report will critically examine the current risk and financial structure of the company for the given project. Moreover, since we have financial information regarding Wonderland's prospective competitor i.e. Alice Inc. a comparative financial appraisal will also assist in forming decision regarding investment into the project.

Task 1

In finding out the net present value of a project, we first need to arrive at an appropriate discount rate accounting for inflation and risks. For the purpose of our NPV analysis, we use weighted average cost of capital or WACC as the appropriate discount rate, although inflation or risk free rate could also be used to discount the expected cash flows.

Wonderland's Expected Return of the Project using the CAPM approach

0.035+0.80(0.12 - 0.035)

= .103 or 10.3 %

Alice's Expected Return using the CAPM approach

0.035+ 1.20(0.12 - 0.035)

=0.137 or 13.7%

Wonderland's WACC of the theme park project

The Weighted Average Cost of Capital takes into account both the risk of investment and the time value of money. It is the ideal means of discounting any prospective capital project (Vinter 2010 71). WACC determines the average cost of capital and this could be taken as investment criteria for new ventures. The new project expected return should be greater than WACC, implying a profitable project opportunity. At present, Wonderland's expected return is 12 percent for the new project. Moreover, the weighted average cost of capital is computed as:

0.8*0.12 + 0.2*0.08(1-0.35)

=0.096 + 0.0104

=0.1064 or 10.64 %

Alice WACC of the theme park project

For calculating Weighted Average Cost of Capital, we first determine what capital structure Alice already has (Gradl et al 2009 152). For the purpose we need to explore condensed balance sheet of Alice Inc.

Balance Sheet of Alice Inc is presented as follows:

Non-current assets (net)

1,710

Current assets

630

Less current liabilities

-570

11,770

Financed by:

 

£1 ordinary shares

500

Reserves

700

Total Equity

1200

Medium and long term debt

570

 Total Assets and Liabilities

1,770

To sum, the capital structure of Alice could be presented as:

Capital Structure of Alice

 

%

Equity

1200

51

Debt

1140

49

Total Assets

2340

100

Since we know that Alice operates as a competitor in the theme park market, we presume that Alice has same cost of debt and equity as Wonderland Confectionary Inc. Therefore, we can compute Alice's Weighted Average Cost of Capital as:

This equation implies that:

WACC = (percent of the firm that is equity) times (cost of equity) plus (percent of the firm that is debt) times (cost of debt)

=51*0.12 + 49*0.08*(0.65)

= 8.668 or 8.67%

For deciding whether or not to invest in the theme park project, Wonderland needs to make a comprehensive financial appraisal using the concept of Net Present Value (NPV), Weighted Average Cost of Capital (WACC) and Capital Asset Pricing Model (CAPM).

 

 

Children

Adults

Total

 

 

14000

6000

 

Price of Admission

 

15

25

 

Food & Drink

 

10

10

 

Daily Revenue

 

350000

210000

560000

Yearly Revenue

 

127750000

76650000

204400000

As the case mentions, the expected daily visitor count to the park is 20000. Additional information has that 70% or 14000 of these daily visitors will comprise children. The rest 30% or 6000 will be adult ...