Corporate Finance - Assignment

CAPITAL STRUCTURE - 2005

Source Amount percentage (weight

12 Bond 1224 ,000 25 .79

6 other debts 366 ,000 7 .71

Ordinary shares 401 ,000 8 .45

Reserves 2755 , 000 58 .05

4 ,746 ,000 100

CAPITAL STRUCTURE - 2004

Source Amount percentage (weight

12 Bond 856 ,000 18 .06

6 other debts 590 ,000 12 .45

Ordinary shares 423 ,000 8 .93

Reserves 2870 , 000 60 .56

4 ,739 ,000 100 Have used the book

value figures for calculating the capital structure

Cost of new capital

Bond

Kd trading price - par value

110 - 100 10

I have used market values in calculating the cost of raising new capital

Ke D0 (I g g

P0 0 .8 (1 .075 0 .075 13 .23

15

Cost capital WdKd (1-T WpKp We Ke

2005

25 .79x 10 (0 .6 7 .71x 6 (0 .6 8 .93 x 13 .23 58 .05 x 13 .23

100 100 100 100 1 .5474 .27756 1 .1814 7 .68 10 .6864

2004

18 .06x 10 (0 .6 12 .45x 6 (0 .6 8 .45 x 13 .23 60 .56 x 13 .23

100 100 100 100 1 .0836 .04482 1 .1179 8 .012 10 .6617 When using the book value to calculate WACC , the average will be different from the one of market values . This is because of the changes in the values of in the market values . For example if the per value of common stock is 10 and the market value is 35 the value of WACC will be lower than when using market values . This will amount to underestimating the cost of capital . It will be vice versa if the market value was less than par value of the common stock . The market values are the ideal to use since they provide the true business value at that time in consideration . It considers the time value for money and the company goodwill or bad will

11 . The company cash flow is coming down and if wishes to seek to raise finds for expansion from the market will have problem as the cash and equivalent is coming down . This because each creditor of financier will require some information

On financial stability , the current ratio indicates that the firm was financially stable only in 2004 . This ratio was 0 .19 :1 . This means that for every 1 of current assets there are only 0 .19 of current liabilities . The recommended ratio is 0 .5 :1 i .e . current assets should be twice as much as current liabilities . But in this case , they are more than twice the current liabilities . Through the years 2005 , its financial stability declines as shown by the ratios 0 .71 :1

The quick Asset Acid test ratio also declines from 0 .25 :1 in 2004 to 0 .85 :1 in 2005 . The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets

The company / firms ' ability to generate cash flow operations and how the company is...