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WACC Analysis Assignment | College Homework Help Online

Quiz 1:

 Part 1: Consider the example of WACC analysis in Lecture 1 Part 4 (https://unco.instructure.com/files/8047919/download?download_frd=1 file is linked in the assignment).

 

In this exercise, consider the following scenarios: a company is trying to raise $100 million

Bank rate for loans <= 20 millionBank rate for loans 20 million to 50 millionPrivate EquityGovernment funds up to 10 millionNo Government funds
Scenario 1A6%7%12%5%
Scenario 2A6%8%12%5%
Scenario 3A6%9%12%5%
Scenario 4A6%10%12%5%
Scenario 5A6%11%12%5%
Scenario 6A6%12%12%5%
Scenario 7A6%13%12%5%
Scenario 8A6%14%12%5%
Scenario 1B8%7%12%5%
Scenario 2B8%8%12%5%
Scenario 3B8%9%12%5%
Scenario 4B8%10%12%5%
Scenario 5B8%11%12%5%
Scenario 6B8%12%12%5%
Scenario 7B8%13%12%5%
Scenario 8B8%14%12%5%
Scenario 1C8%7%11%5%
Scenario 2C8%8%11%5%
Scenario 3C8%9%11%5%
Scenario 4C8%10%11%5%
Scenario 5C8%11%11%5%
Scenario 6C8%12%11%5%
Scenario 7C8%13%11%5%
Scenario 8C8%14%11%5%

 

Provide analysis of the company WACC and optimal capital structure under different sets of Scenarios A, B and C. Note: you should remember to provide calculations and analysis for cases with Government Equity (GE) and Without GE, so overall you will have 6 sets of Scenarios (A, B and C with/without GE) and a total number of 48 cases (8 for A with GE, 8 for A without GE, 8 for B with GE, … , 8 for C without GE). Make sure you visualize your calculations and that your visualizations support your analysis.

 

Part 2: In Lecture 1 Part 1 we outlined three aspects of the Cash Flow statement / analysis that impact the value of an investment. These are: (1) Amount of expected cash flows (bigger is better); (2) Timing of the cash flow stream (sooner is better); and (3) Risk of the cash flows (less risk(y) is better).

We have noted (video) that these aspects only work ‘in general’ or ‘holding everything else constant’ and that there are plenty of the reasons why they may fail to deliver higher value of an investment project to a firm. But we did not discuss specific examples of such failures.

Suppose you work as a project manager and are tasked to evaluate (at a high or strategic level) a proposed investment project that involves scaling up your existent operation to double output of your core product. Suppose producing double the output simply requires doubling the costs of production. Doubling output will increase revenues.

Why, in your opinion, can the project be problematic from the perspective of the first aspect (aspect (1))? Suppose the investment project is expected to generate higher cash flows once installed. Why, in your opinion, this may not be enough to raise the overall value of the project to the company?

Discuss.

 

Part 3: In Lecture 1 Part 5 we define and briefly discuss the cost of preferred equity than the cost of ordinary shares. Generally, the higher the risk involved in investing, the more investors tilt their preferences toward preferred equity and the higher is the cost of common/ordinary shares compared to preference shares. In our taxonomy of risks (PowerPoint slides 12-19), which specific risks do you think tilt Venture Capital investors (investors in early stage companies) toward almost never investing in common shares? Explain your answers.

 

 

Submissions format:

I suggest you use Excel file to post answers and solutions to all parts of the Quiz. Alternatively, you can post two files: one Excel file for calculations and one docx file for discussions.

Please make sure your name is listed on the front page of your assignment.

 

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