CORPORATE FINANCIAL STRATEGY

Corporate Financial Strategy

Corporate Financial Strategy

Question # 1

(a) NPV

RF Rate + (Market Return - RF Rate)*Beta

Year

Q

Q

P

P

0

-150000

-150000

1

1800

1200

45000

30000

2

2000

1400

50000

35000

3

2400

1400

60000

35000

4

2800

1600

70000

40000

5

2800

1600

70000

40000

NPV

$145,000.00

$30,000.00

IRR

25%

6%

(b) Standard Deviation of NPV

High Demand

0.6

$145,000.00

87000

Low Demand

0.4

$30,000.00

12000

E (NPV)

99000

NPV Deviation

113907.8575

(c) IRR

1

2

IRR

25%

6%

(d-1) Adjusted risk discount rate

In Portfolio Theory and Capital allowance investigation, the rate necessary to work out the Present worth of an unsure or risky stream of earnings; it is the risk-free rate in addition to a risk premium that is based on an investigation of the risk characteristics of the specific buying into or project. In this scenario, Adjusted risk discount rate is 13.5%

(d-2) Sensitivity analysis

Sensitivity analysis is very helpful when attempting to work out the influence the genuine conclusion of a particular variable will have if it differs from what was before assumed. By conceiving a granted set of scenarios, the analyst can work out how alterations in one variable(s) will impact the target variable.

(d-2) Scenario Analysis

There are numerous different ways to approach scenario analysis, but a common procedure is to work out what the benchmark deviation of every day or monthly security returns are, and then compute what worth would be anticipated for the portfolio if each security developed comes back two or three benchmark deviations above and below the mean return.

Advantages

1) Simple to understand.2) Has a great deal of intuitive appeal for risk averse businessman.3) It incorporates an attitude towards uncertainty.

Disadvantages

1) There is no easy way of deriving a risk-adjusted discount rate.2) It does not make any risk adjustment is numerator for cash flows that are for cast over future years.3) It is based on assumption that investors are risk-averse. Though it is usually factual, there lives a class of risk seekers who do not demand premium for assuming risks, they are eager to pay a premium to take risks. Accordingly, composite discount rate would be decreased, not bigger, as the grade of risk increases.

Question # 2(a)

(1a)

Cash = 20000000

Equity = 200000000

200000000-20000000

(Shareholders equity) = 180000000

(b) If firm distribute the reserves as dividends the additional fund required would be43200000

(2a) Nature of ownership furthermore sways the dividend decisions. A nearly held business is expected to get the assent of the shareholders for the suspension of bonus or for following a conservative bonus policy. On the other hand, a business having a good number of shareholders widely circulated and forming low or intermediate income group would face a great adversity in securing such assent because they will focus to circulate higher dividend.

(b) Availability of cash and sound financial place is also an important component in bonus decisions. A bonus comprises a money outflow, the larger the capital and the liquidity of the firm the better the proficiency to pay dividend. The liquidity of a firm counts very much on the buying into and economic conclusions of the firm which in turn works out the rate of expansion and the kind of financing. If cash place is feeble, supply bonus will be distributed and if money position is good, business can circulate the money ...