Financial Analysis

Financial Analysis

[Name of the Institute]\

Financial Analysis

Question # 1

Answer.

Preference shares are the shares that are listed in the stock market. The holders of the preference shares receive fixed dividends. The holders get the running yield is dependent on the price paid by the holders in the open market while their dividend are to be paid before the other ordinary dividends can be paid.

The cost of preference share is calculated by annual dividend for the year / face value or the par value of the preference share - floatation cost. In order to get the number of preference

shares the total cost or the expenditure (funds) is divided by the cost of shares (McCahery,2010).

Preference Shares to be sold = Total cost / [Price per share).

Total Investment

105.08

 

Total Cost

 

 

Variable Cost

5

 

Fixed Cost

5%

 

Tax Rate

30%

 

Expected Inflow

20 m

 

Total Investment and Cost

 

111.08

Dividend (1000*10%)

100

per share

 

Annual dividend / Net proceeds after floatation costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

kp (cost of preference shares)

100/(1000-2%)

Floatation cost

1000*2%

20 per share

 

 

 

10/(1000-20)

 

 

 

 

 

 

0.102040816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Cost

 

105.08

 

 

 

 

Share Price

 

0.1020408

 

 

 

 

Number of shares to be issued

 

1030

 

1030 shares must be sold at 1000 par value

Question # 2

Answer.

The cost of capital is basically the cost of the firms funds, or the cost required for the project. It is used to analyze and evaluate the firms position for having minimum return expected by investor in order to provide the capital to an investor or the firm. Therefore, the cost of capital is used to analyze the setting of benchmark in order to start the project. The cost of capital has two major components, the cost of debt and the cost of equity (Kothari, 2009).

Cost of Debt

The cost of debt is basically when the firms borrows money or funds in order to start the project. It is calculated by taking the risk free rate bonds whose time duration is being matched by the corporate debt, along with adding the default premium. If the debt amount is increased then the default premium also increases, keeping all others things constant,. However in many cases the expense is deductible, therefore it is calculated by the after tax cost for making comparable along with the cost of equity. Thus, for the firms who are profitable by the rate of tax, the formula for the cost of debt is (risk free rate + credit or the default risk)(1-t). For the approximation of the cost of debt, the yield to maturity can also be used (Guay, 2011).

Cost of Equity

Cost of equity is usually calculated by using following formula

Cost of Equity = Risk free Rate of Return + Premium Expected for Risk

However another formula for the calculation of the cost of equity is Risk free rate of return +Beta * (market rate of return - risk free rate of return).

Beta is called as the business risk.

Assuming

 

 

 

Risk-free rate of 5.5%.

 

Beta coefficient of 1.3.

 

Equity risk premium of 3.2%.

 

 

 

Cost of Equity

Risk-Free Rate + (Beta times Market Risk Premium)

 

 

5.5+(1.3*2.5)

Cost of Equity

8.75

Cost of Debt

0.9125

Tax Rate

30%

Cost of Capital

(8.75)*(1-0.30)+(0.9125)*(1-.30)

Cost of Capital

6.76375

Question # 3

Answer.

Let the expected return is 60000000, the actual rate of return will be 72000005.42

Risk-Free rate + Risk Coefficient(Expected Return - Risk-Free ...