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Finance: capital budgeting, cost of capital, issuing bonds, dividend policy, M&A

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CORPORATE FINANCE. Eighth edition from: Ross. Westerfield. And Jaffe.
ISBN 978-0-07-310590-1
MHID 0-07-310590-2
Part of
ISBN 978-0-07-333718-0
MHID 0-07-333718-8

Please answer each of the following questions using the short answer format. The ideal responses for each question will be free of writing errors and must include academically valid course material citations in APA format to link responses to text concepts. Include a Reference page.

1. Explain the use of at least two financial decision-making techniques utilized in capital budgeting. What are at least one strength and weakness of each technique? The response may include the lease-versus-buy decision.

2. Select one approach to arriving at the cost of capital as it relates to the optimal capital structure of the corporation. Provide the rationale as to why this approach is applicable in certain situations.

3 Describe the similarities and differences in issuing bonds and stocks into the primary market.

4 Provide at least two different rationales with respect to an organization's dividend policy.

5 When do the following make sense for an organization and when do they not make sense (mergers, acquisition, and bankruptcy)?

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Answer 1:
In the financial world there are many decisions which the finance manager has to take on short term and long term projects of the organization. Every dollar invested in the organization has a cost attached to it and therefore it is very important to analyze every project which the firm has to maximize the return on the investment and this analysis is referred to as capital budgeting. Following are some of the financial decision-making techniques utilized in capital budgeting:
 Net Present Value Analysis (NPV) : The net present value analysis shows the difference between the present value of all cash inflows and cash outflows and to ascertain whether the net amount is positive or negative. Since the cost of capital is used to compute the present value this analysis also shows whether the project will be able to yield the minimum return equal to cost of capital.
Strength: One of the biggest advantages is that this method measures whether the firm's value will increase / decrease with the undertaking of the project
Weaknesses: One of the most important elements is cost of capital. Estimating true cost of capital is a big challenge and therefore the NPV computed may be wrong.
 Payback Period1: Payback period is computed to determine how many years will the project require for return of the initial investment. In case there are constant inflows and there is only one outflow at the beginning of the project, the payback period will be (Cost of the Project / Annual cash Flows). In case the inflows are not equal each year, excel formulas or hit and trial methods are used to compute payback period.
Strength: This is easy to compute and also provide some idea about the risk involved in the project.
Weaknesses: This technique ignores any benefits that occur after the payback period and, therefore, does not measure ...

Solution Summary

The expert explains the use of at least two financial decision-making techniques utilized in capital budgeting. One approach to arriving at the cost of capital as it relates to the optimal capital structure of a corporation is determined.

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Working Capital and Financing

Please help me complete and submit a 3,500-4,200-word Capital Structure Analysis Report. For this report, use Target. This report will consist of three sections:
a. Working Capital Management Section
1) Identify which of the liquidity or efficiency ratios were under-performing relative to industry standard or were deteriorating over the five-year trend.
2) Recommend specific changes in working capital strategies for each of the following (when applicable):
a) Cash and marketable securities
b) Credit policy
c) Inventory
d) Sources and uses of short-term financing
3) Your recommendations should include a detailed plan of your working capital strategy. Provide quantitative support for your recommendations. Discuss consequences of your recommendations on the firm's sales, profitability, customer service, quality, risks, and so forth.
b. Valuation and Investment Section
1) Prepare a five-year trend analysis table for the following financial market ratios for the company:
a) Price earnings ratio
b) Earnings per share
c) Dividend yield
d) Common stock share price
2) Recommend a "buy," "hold," or "sell" (reflecting expected performance over the next 12 months) for the company, based upon your prior financial research.
3) Provide five supporting reasons for this recommendation (including financial, market, and industry risks).
c. Cost of Capital Section
1) Calculate the cost of capital (show calculations) for the company using the following:
a) Weighted average cost of capital; and
b) Capital-asset pricing model (beta).
2) Discuss the relative strengths and weaknesses of the methods above as to the appropriate discount rate for the firm.
3) Describe why these two methodologies may produce different results.
4) How would you recommend that the firm lower its cost of capital?
d. Cost of Capital Section
Assume that the company will engage in a major capital acquisition program that is expected to improve EBIT by 10 percent. Do the following:
1) Calculate the EBIT/EPS for debt financing. Discuss the financial implications. Document the source of your information.
2) Calculate the EBIT/EPS for equity financing. Discuss the financial implications. Document the source of your information.
Based upon the calculations above, recommend the best capital structure. Document the source of your information.

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