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##### Financial Management [20]

data easily.
QUESTION 2
a) Cost of equity
According to the cost of equity formula, cost of equity = Rf + β(Km + Rf)
Where Rf is risk free, β is the systematic risk, Km is the expected rate of return on the market portfolio. Based on the information given, and substitute in the numbers, we can get cost of equity = 10% + 0.8(15% - 10%) = 14%
Thus, the cost of equity is 14%.
Cost of debt
Based on the cost of debt formula showing below:
Cost of debt = {[I + (M – Vb) / nm] / [(M + Vb) / 2]} x m
Where, I = the periodic amount of interest paid on the bond
M = the maturity value of the bond
n = the bond’s term to maturity in years
m = number of coupon payments per years.
Vb = the current market price per bond ofr an existing issue, or net proceeds per bond for a new issue.
Then, we substitute in the numbers that given by the question
Where, I = 100 x 11% = 11
Thus, before tax-cost of debt = {[11 + (100 – 111) / 8] / [(100 + 111) / 2]} x 1
= 0.0912 or 9.12%
Therefore, after-tax cost of debt = 9.12% x (1 – 30%) = 6.384%

The weighted average cost of capital (WACC) formula which is:
WACC = (cost of capital x proportion of debt financing) + (cost of equity x proportion of equity financing)
Thus, rely on the calculation above that after tax cost of capital is 6.384%; cost of equity is 14; proportion of debt financing is 1/4 and the proportion of equity financing is 3/4.
Hence, WACC = (6.384% x 1/4) + (14% x 3/4) = 12.096%

b) There are several assumptions that the cost of capital calculated above for TLC Ltd in appropriate for a proposed project. [ http://cbdd.wsu.edu/kewlcontent/cdoutput/tr505r/page28.htm]There are perfect capital markets with perfect information available to all economic agents, no transaction cost and no taxation. Moreover, firms can be classified into distinct risk classes and individuals can borrow as cheaply as corporations. These are the assumptions upon which this conclusion is reached and needed to be mentioned.
QUESTION 3
a) (At beginning of the month)
Sales per month       \$50,000
Less expenses (80%)     \$40,000
Present value       \$10,000
The FV1 of it = \$10,000(1+1%)3 = \$10,303.01

Free credit terms
(At the end of month 3)
Sales per month…………\$55,000
Less expenses (80%)……..44,000
FV2……………………...\$11,000
Hence, TLC Ltd will benefit from offering such credit terms; Since the FV1 is smaller than the FV2.

b). Future value = \$55,000 (1 + 0.01)-3
= \$53,382
The average of sales per month is \$50,000, thus \$3,382 (\$53,382 – \$50,000) should be increase in sales need to be in order to justify the provision of these credit terms.
QUESTION 4
i)
Initial Outlay (Year 0)
Replacement machine \$110,000
Net Initial outlay \$110,000

Differential cash flow(Year 1 to Year 3)
Increase in EBIT(Revenue) \$50,000
Maintenance cost (6,000)
Depreciation(\$110,000/4) (27,500)
Cash flow before Tax 16,500
Less Tax (30%) (4,950)
Cash flow after Tax 11,55论文英语论文网提供整理，提供论文代写英语论文代写代写论文代写英语论文代写留学生论文代写英文论文留学生论文代写相关核心关键词搜索。

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