CORPORATE FINANCE

Corporate finance



Abstract

Finance is the blood for any business. According to Damodaran (2012), Brigham (2013), Torries (1998), without finance it turns out to be difficult for the company to survive and compete in the market. Company need finance to start their business, they need long term finance for their fixed assets. Companies need finance for their expansion and diversification. Hence, for effective decision making and financing, management need to cover and need to consider element of corporate finance. In this paper, the focus would on a case study Trenton Brewery covering WACC, new product proposal, long term debt as a source of finance and lastly, Advise the Trenton family whether to accept the cash offer for their shares.



ABSTRACTII

INTRODUCTION1

DISCUSSION1

TASK 1: WEIGHTED AVERAGE COST OF CAPITAL - (WACC) FOR TRENTON1

TASK 2: NEW PRODUCT PROPOSAL APPRAISAL4

Investment Techniques4

1.Net Present Value5

2.Internal Rate of Return6

3.Payback period7

4.Sensitivity Analysis8

5.Recommendation10

TASK 3: NEW PRODUCT WITH A LONG TERM LOAN11

Advantages of Long Term Loan11

Disadvantages of Long Term Loan12

TASK 4: ADVISE THE TRENTON FAMILY WHETHER TO ACCEPT THE CASH OFFER FOR THEIR SHARES13

CONCLUSION14

REFERENCE16

Trenton Brewery

Introduction

This paper has been divided into four tasks. In first task the focus would be on Trenton Brewery WACC while in second task will cover Trenton Brewery New Product Proposal Appraisal including investment techniques, third task will cover New Product with a Long Term Loan and its benefits and drawbacks while in the last task there will be a discussion on Advise the Trenton Family whether to accept the Cash offer for their Shares.

Discussion

Task 1: Weighted Average Cost of Capital - (WACC) for Trenton

The concept behind Weighted Average Cost of Capital is the return rate that the company expects to pay on average to each of their shareholders. WACC is the minimum return that must be generated by companies on their current assets in order to satisfy their creditor, lenders and owners etc (Besley, Brigham, 2008, p. 462).

Brigham, (2013), WACC has been employed to determine the cost of capital of the firm and it is also used as a discount rate when financing a project. Hence, this rate is used as the discount rate in DCF valuation model. The main elements of WACC are debt and equity (Brigham, 2013, p. 360). The following is the formula for WACC:

WACC: [Equity Value / (Equity + debt)] * Re + [Debt Value / (Equity + debt)] * Rd (1-T)

WACC: (Equity Weight * Cost of equity) + (Debt Weight * Cost of debt)

Cost of debt = Interest Rate on Debt * (1 -Tax rate)

Cost of Equity = Risk Free Rate + Beta *(Market Return-Risk Free Rate)

The information available in the case study is as followed:

Value of Equity: £70 million (12.5%)

Value of debt: £10 million (87.50%)

Cost of Equity: 10%

Cost of Debt: 5%

Cost of equity has been considered as 10% as the shareholder required return as Venture Capital Company has used this rate to value the equity (Hirschey, 2009, p. 692). Putting these values in the formula:

WACC: (Equity Weight * Cost of equity) + (Debt Weight * Cost of ...