FIN303 Case Solution

In order to discount the cash flows, WACC is calculated by using the CAPM method. It is expected that the project is equity finance. Therefore, the WACC will be equal to the cost of equity which has been calculated by using CAPM ( Rf+ Beta* Market premium), and WACC is 13.4%. By discounting the net cash flows with this rate, NPV of the project is calculated which is $253591 which shows that the project must be undertaken as it is generating positive NPV.

Question 6

Examine the factors that should be considered while the company is planning its capital structure.

There are various factors that must be considered while planning the capital structure of company such as regulatory framework, stock market conditions, the capital structure of competitor companies and the interest rate ratios against the investor’s required rate of return. The capital structure of the company involves the value of debt and the value of equity. It is expected that the value of debt and equity should be maintained while designing capital structure as the improper ratio of the debt or equity could create certain issues for the company such as the higher ratio of debt in the capital structure will increase finance risk of the company. The higher debt ratio increases the interest payment also and reduces the flexibility of the company to borrow further finance at the time of need along with reducing the profit levels as the higher the interest; the lower will be profit. In addition to this, the value of equity must also be maintained while formulating the capital structure of the company because higher the ratio of equity will increase dividend commitments which could be high as compared to the interest payments………………..

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