Financial Managment worksheet 3 Essay Example | Topics and Well Written Essays - 1500 words

Financial Managment worksheet 3 - sample ExampleThe investors who invest their money in the firm for hope to get a return on their investment ar called stockholders or shareholders. In other words, evaluation of a proposed project should be ground on the projects cost of capital (Vernimmen, 2005). This is because when a confederation raises capital, there is usually no direct links between the return to the supplier of the attach tos capital and the return on individual project. The corporation thus uses the leaden bonnie of these capitals for mixing in the firms overall equity to analyze the capital budgeting decisions. It takes into consideration the weighted average of all the capital and is thus referred as weighted average cost of capital (WACC).The firms mixture of debt and equity is called its capital expenditure. Although actual level of debt and equity may vary somewhat over time, most firms picture to keep their financing mix close to a target capital structure. A s we know that the WACC is a weighted average of relatively low-cost debt and high cost equity, so precisely we can declare that capital structure transplant will affect the WACC to increase or decrease with respect to the variety show that occurs in the capital structure.The firms mixture of debt and equity is called its capital structure. ... ecisely we can say that capital structure change will affect the WACC to increase or decrease with respect to the change that occurs in the capital structure. optimal CAPITAL STRUCTUREThe firms mixture of debt and equity is called its capital structure. The fundamental source of a companys cherish is the sprout of net cash period of times generated by it assets. This decant is usually referred to as the companys net operating cash ply or earning before interest and taxes (EBIT). The capital structure adopted by a company divides the stream between different classes of investors. If a company is financed entirely by equity and there is no company tax, this entire stream is available to provide income to shareholders. If a company also borrows funds, the lenders thrust the first take over on the net operating cash flow and shareholders are entitled to the riskier, residual cash flow that remains after the lenders have been paid (Vernimmen, 2005). Manager should choose the capital structure that maximizes shareholders wealth. The basic move up is to consider a trial capital structure based on the market values of the debt and equity, and then estimate the wealth of the shareholders under this capital structure. This approach is repeated until an optimal capital structure is identified. We have to take 5 steps into consideration to determine an optimal capital structure, the steps are1. predict the interest rate the firm will pay2. Estimate the cost of equity3. Estimate the weighted average cost of capital (WACC)4. Estimate the free cash flow and their present value, which is the value of the firm5. Deduct the v alue of the debt to find the shareholders wealth which we want to maximizeAn investor in a company with a low debt-equity ratio is likely to attach a low