Strategic Investment Management

Read Complete Research Material

STRATEGIC INVESTMENT MANAGEMENT

Strategic Investment Management

Strategic Investment Management

Introduction

Strategic decisions are the business decisions that define the future of companies and organizations. Generally, these decisions require considerable amounts of resources both human and financial, to compromise and obtain results in the uncertain future of the business world. In many cases, the company is making strategic decisions for particular projects for the very first time, so there is not much past experience to relate to current decision making process, which can increase the risk. Even if the past evidence is available, many of the strategic decisions about the future can result in different event as compared to the previous results, thus increasing both the risk and the uncertainity. Strategic decisions require a comprehensive evaluation of the situation that includes different aspects of the project and is analyzed with a robust methodology that requires the confidence of the invester and the valuable resources to maximize the likelihood of successful results (Alvarez & Lippi, 2009, 23-25).

Section A

Q1. WACC Calculation

Weight Average Cost of Capital or WACC is a financial term that uses to measure the overall cost of capital of a corporation, such as preferred stock, common stock, shares, bonds and other long term debt of the corporation. All categories of capital are proportionally weighted in the cost measurement. When the rate of return and beta increases on equity, the WACC of a corporation also increases (Hovakimian, 2002, 54-99). With the increase of WACC, the rate of risk also increases while the valuation of the capital decreases. The formula of WACC is given as:

WACC = R e (E / V) + R d (D / V) (1 - t c),

where R e - rate of return of its own (equity) capital, calculated as a rule, using the CAPM model;

E - market value of equity (share capital). Calculated as the total number of ordinary shares and price per share;

D - market value of debt. In practice is often determined by financial statements as the amount of loans the company.If these data can not be obtained, it uses available information about the ratio of equity and debt capital of similar companies;

V = E + D - the total market value of loans the company and its share capital;

R d - rate of return on debt capital (acquisition cost of debt capital). As these costs are considered interest on bank loans and corporate bonds of the company. Thus the cost of debt adjusted for tax rates. The meaning of adjustment is that the interest on servicing of loans include the cost of production, thereby reducing the tax base for income tax 5;

t c - rate of income tax.

The WACC for Promomax PLC is calculated as

Cost of Equity

12.00%

Amount of Equity

7705

(Shareholder's Equity)

Amount of Debt

6440

Rate

13.00%

(Non-Current Liabilities)

Tax rate

35%

Total Capital

14145

Cost of Debt

8.45%

Putting the above values in the WACC formula

WACC

=

10.38%

Q2.

A portfolio return is the weighted average of the returns of the securities in the portfolio. The return on the portfolio is the total return of the firm. A weighted average of the return earnings from all the stocks at the firm and return earnings from all of the ...
Related Ads