Confirmation Letter Example - 848 Words

Poconos, PA Dear Mrs jenkins, Thank you for choosing Great Wolf Lodge. Weve got tons of fun (and gallons of water) in store for your whole family. If you need to update your information or make any changes to your reservation, please call us at 800.768.WOLF(9653). For security purposes, we will require the last four digits of the credit card used to make the reservation. We look forward to your stay. GUEST PROFILE Name: Email @aol.com STAY ITINERARY Great Wolf Lodge Confirmation ID # is: 1775729959 Check in: 01-13-12* Check out: 01-14-12* # Nights: 1 Suite Type: Family Suite w/ Balcony/Patio # of Adults: 2 # of Children: 2 Rate, Taxes Fees: $ 207.36 Deposit Amount: $ Remaining Balance: $ 207.36 *Check in time begins at 4 pm or as the†¦show more content†¦If you call back and change your arrival date or length of stay, your rate for each date is not guaranteed and may increase with any changes. If you need to cancel your reservation within 72 hours of arrival, we will allow you to change your reservation ONCE to another date without penalty; however, again the room rate may change because it is based upon your arrival date and length of stay. Any additional changes to your reservation or choosing not to arrive on the new scheduled date will result in a complete forfeiture of your deposit. Cancellation Policy All guests have up to 72 hours prior to arrival to cancel minus a $25.00 processing fee that will be deducted from all deposits prior to refund. A forfeiture of one nights deposit will be required if the reservation is changed or cancelled within 72 hours of arrival. Choosing not to arrive on the scheduled date will result in a full forfeiture of your deposit. Have a Question? No problem. Click Here for answers to frequently asked questions about your visit to Great Wolf Lodge,Show MoreRelatedAudit Letter of Inquiry to Client Lawyer1269 Words   |  6 Pagesrepresented on the financial statements. Section 337 accomplishes this by using a number of practices to guide the auditor. A detail of the accounting standards and explanations of the techniques in field work are the basis. These are supported by examples of letters amp; correspondences that an auditor can use, key interpretations of difficult passages, and corresponding passages from other professional associations that the auditor will encounter when trying to assure such contingencies. The documentRead MoreAccounting Manual On Date Of Shipment And Make Inquiry About Accountants1740 Words   |  7 Pagesoverdue accounts with audit procedures (confirmation, determine existence of debtor in directories, etc.) 7.63 Confirmation of Trade Accounts Receivable a. 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For example, after the 9’11 incident, people started fearing all Muslims and had the concept of terrorist and the best prototype that matched the concept â€Å"terrorist† was Muslim. In this paper I will cover three terms; Prototypes, confirmation bias, and belief perseverance. Depending on the situation, prototypes can be used as an advantage or disadvantage. The advantage

Nonresident Parents and Their Effects on Families Essay

Nonresident Parents Involvement and its Effect on the Family Members Divorce, single parenting, early pregnancy, are just some reasons for a parent not to be present in their families as a matter of fact its been said that almost half of the kids have had lived in a family where one of the parents for many different reasons had been missing. But is it different when parents are involved with their kids? What are the different effects that this causes on them both the kids and the parents? First, childrens discipline is affected by the nonresident parents situation. If the parents want to have a better control of their kids and if they continue to have contact with their children they may be able to maintain consistent discipline†¦show more content†¦And they are more likely to have emotional crash downs In few studies it has been explored the level of the fathers involvement what shows that if the father is highly involved the mothers are more satisfied and have less stress. Financial support is a really important part of the mothers satisfaction. If the mother receives economic support from the father it has been shown that these mothers are the most satisfied. It is also said that mothers who receive child support often want their kids to see their father more regularly these mothers were angry and resentful if the father had no contact. In other cases mothers get frustrated because they are unable to handle their children and their needs a mother who is stress out because the situation and see themselves without the backup of the father fall into depression and are unable to handle their child. This leads them to be careless and hopeless about the situation; in this case mothers are highly not satisfied. Finally the fathers satisfaction is another effect of nonresident parents. In some families its usual to see the mother interfering with the fathers visitation, like not letting the father see the child or not respecting the hours of visitation or just obstructing the process. But this behavior is frequently denied by the mother. The fathers satisfaction can be affected by the remarriage of the mother which makes it difficult for the fatherShow MoreRelatedThe Role Of Father Involvement For Children Development Essay1535 Words   |  7 Pagespresents about Role in the father involvement literature trough the researches. To know the father involvement for children development. Further we present what different other nation’s father role and what is going changed. This paper is based on The Effects of Father Involvement: An Updated Research Summary of the Evidence(FIRA, Sarah Allen, Kerry Daly, University of Guelph). It is not to compare with father and mother, Knowing the fathe r’s importance. 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Cyclermate Report Free Essays

string(92) " value has been recorded with historical price in the purchase time – by the end of 1990\." CYCLERMATE COMPANY PERFORMANCE REPORT Word count: 3099 words The INCREDIBLES – FB2A Ngo Mai Anh Hoang My Hanh Dinh Ngoc Huyen Nguyen Hai Ly Nguyen Ha Thu Nguyen Son Tung Content 1. Introduction 2. Liquidity and Capital structure 2. We will write a custom essay sample on Cyclermate Report or any similar topic only for you Order Now 2. 2. 3. 2. 4. 2. 5. 3. 1. 3. 2. SWOT Analysis Liquidity Matters Capital Structure Matters Short-term options Page 3 4 3. Production Methods SWOT Analysis Short-term Options 8 4. Human Relations 5. Investigation for Lone-term Survival and Profitability 6. Conclusion 7. Reference 8. Appendix 10 12 13 14 15 2|Page 1. Introduction Cyclermate Ltd is a small company producing bicycles in UK. The firm was set up by Lewis Llewellyn and Dai Armstrong, the two close friends in a local cycle touring club. They produce traditional upright cycle, which imitate the 1940’s and 1950’s. In 1990s, the company expanded to meet the demand and they bought a 15,000 square feet warehouse with 2,000 square feet of office accommodation. The high quality hand- made bikes brought them good reputation and maintained high sales though they did not advertise much. However in 2010 the company has trouble as the sales decrease and the demand fell in spite of lower price. Some customers even complained about quality of the product because they got accidents due to front brake. We are a group of consultants and we are preparing this report that will give Cyclermate’s banker an objective view about this company. Although at the moment they are having overdraft and some difficulties in selling products, we are here to make the bank see opportunities of this company and continue investing in it. 3|Page 2. Liquidity and Capital Structure 2. 1. SWOT Analysis ? Strengths ? ? Cyclermate has a long establishment time and reputation in producing traditional bike. The company has asset of a large piece of land worth ? 208,000 (included ? 48,000 of factory and ? 160,000 of unused land). ? Weaknesses ? ? Cyclermate has very few current assets and more non-current asset. This reduces the liquidity of money. There is a great liability that is in the form of bank overdrafts. Costs are rising while price per unit decrease to encourage customers resulting in reduce in revenue. ? Opportunities ? ? A fixed amount of bike is ensured to be sold with Cyclermate’s reputation Sales may increase with environment protection trend There is a chance of getting investment from Dai’s cousin ? ? ? ? Threats Banks do not allow anymore overdraft, thus there is a possibility of bankruptcy With competition from other companies and e-commerce, together with bad reputation from accidents caused by Cyclermate’s bikes. sales may continue to remain low ? Linda Llewellyn – one of three shareholders wants to withdraw money from company business 2. 2. Liquidity Matters The current ratio measures whether or not a firm has enough resources to pay over its debt over the next 12 months. Current ratio is calculated as follow. In this case, current ratio is 1. 85 which means that for every dollar the company owes in the short term it has ? 1. 5 available in assets that can be converted to cash in the short term. Therefore, it can be understood that current liabilities are still in control. However, the ratio is a little bit high so it reflects that the company is not efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capit al management. 4|Page Quick ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. The higher the ratio, the greater the company’s liquidity is. (Quick Assets = Current Assets – Inventory) Here, Cyclermate has a quick ratio of 1. 15 which means Cyclermate has enough quick assets to convert to cash in order to pay current liabilities if necessary. Cash ratio measures a company’s ability to immediately use cash to pay its current debts This ratio indicates that this company does not have much cash in hand and naturally it cannot pay bank overdraft right away by cash. Generally, Cyclermate’s current liabilities are still in control with the liquidity of its current assets. However, with limited cash in hand, other current assets are needed to increase liquidity in to ensure the ability to pay debts in urgent circumstances. . 3. Capital Structure Matters Capital structure is the way a company combines between Equity and Liabilities in order to optimize financial sources. The effectiveness of a company’s capital structure is often analyzed through debt-to-equity (D/E) ratio. Here, Cyclermate’s D/E ratio is estimated 1. 976. It means that with eac h ? 1 of Equity, there is ? 1. 976 of Liabilities. In other words, at the moment, the ability to pay debt of Cyclermate is over the ability of payment for shareholder’s fund. To resolve the problems or to reduce the ratio, there are two main trends: decrease Liabilities and/or increase Equity. In the short term, it is very difficult to raise shareholder’s fund as it takes time to persuade individuals and organizations to invest in a small company who is in the verge of bankruptcy. Even when there is a possibility that Dai’s cousin will invest to Cyclermate, long time will be needed to complete legal policies and internal matters. Thus, in short-term, it is more rational to focus on minimizing Liabilities. Therefore, problems of capital structure in short-term turns out to be the same matters with liquidity, which is: how to increase cash in company account to pay bank overdraft and other liabilities. |Page 2. 4. Short-term Options To deal with the difficulties of Cyclermate Ltd in liquidity as well as capital structure, we firstly take into account about the company assets that can be quickly converted to cash in case bank asks for paying back overdraft. The assets are chosen includes company’s free hold land and trade debtors. Looking at this companyà ¢â‚¬â„¢s financial strengths, it is easy to recognize its very huge freehold land which is worth ? 160,000. However, this value has been recorded with historical price in the purchase time – by the end of 1990. You read "Cyclermate Report" in category "Papers" Thus, we calculate the current price of the land in December 2011 is about ? 269,160. 4 (if the price in 1990 was 100%, the inflation rate made the average price in December 2011 reach up to 168. 244%). As a result, if we convert immediately the freehold land, the money gained is enough to pay all ? 264,864 current liabilities (including ? 177,364 of bank overdraft and ? 87,500 of trade creditors). In addition, the company has a small scale; therefore; we do not have to concern so far about expanding factory area. In addition, this company has ? 00,571 at trade debtors that represents the amounts own by cycle shops and this amount of money can cover the bank overdraft. Though Cyclermate could not take back all the trade debtors, they should take back as much as they can. Then, we consider about plans to increase profit or to decrease cost for Cyclermate in short-time with the purpose to raise the company’s fund: The draft budget for 2010/11 points out that Cyclermate has poten tial to have budgeted trading loss with only 950 and 1300 bikes sold through direct mail order and cycle shop in turns. In the first stage, we calculate the amount of bikes to reach BEP (break-even point) with assumption of the same price, same cost and same proportion of two types. In the calculation: Q*: Break-even point Fixed cost = Indirect cost Price per unit = Average price per unit = Total sales / Total bike quantity (of both 2 types of bike) Variable cost = Direct cost per unit ? Q* (estimated) = 2,753 bikes 6|Page Thus, to reach BEP Cyclermate needs to sell 503 more bikes (including about 212 bikes through direct mail order and 291 bikes through cycle shop). In fact, how to sell 503 more bikes is a difficult matter. As a result, we decide to suggest lowering direct cost in each bike by reducing parts namely lamps, lock, basket, dynamo and brake front (replace by brake front without dynamo). The reasons will be explained in detail in next part about Production. By doing this, each bike saves about ? 31. 09 for direct material / variable cost. We calculate BEP again with the new variable cost and find out Q* = 2310 bikes which means Cyclermate only needs to sell more 60 bikes (25 bikes through direct mail order and 36 bikes through cycle shop). Consequently, the cost cutting method can help increase profitability. Moreover, there are some employees want to retire or cannot work anymore like Lewis Llewellyn or Idris Pugh. If Cyclermate accepts to let them free (the plan will be explained in Human Relations part), they will have a new budget of ? 67,534 per year. This budget is not only enough to employ new staffs to vacant positions, but also can save an amount of salary for the company. 7|Page 3. Production Methods 3. 1. SWOT Analysis ? Strengths: ? The cycles made by the company are â€Å"retro† styles and totally hand-made with high-standard which have high demand from the market ? The whole process is divided clearly into stages which are responsible by specialized people at each specific stage ? Weaknesses: ? ? ? ? Faults is continuously appearing and reduces the quality of the product The recent painting method causes some quality problems to a number of fames. Moreover, the highly toxic paint materials is ruining the compressor and extraction equipment There are some components that are not necessary make the cost to produce a cycle quite high There are some employees’ issues that invisibly affects the production and reduces the productivity ? Opportunities: ? The new materials and technologies that Dai’s relative provides is a great opportunity to develop the product The firm has commissioned a cycle shop in Cardiff to build the wheels for it with reasonable quality and are always delivered quickly 3. 2. Short-term Options First of all, it is good that the company have specialized people responsible for each specific stage. This is because on e of the most important facets of job specialization is its potential to increase worker productivity and output. However, in the current arrangement, there are still some clashes of tasks between people. Therefore, it is necessary that tasks are assigned specifically to employees. Secondly, after the interview, it is clearly that faults causes mainly by the painting method and Janice’s mistakes as she has to work quickly and late. In short term, it is too difficult to upgrade the painting method to fix the paint quality problems so reducing the number of fames painted each day to focus on the quality should be concerned since demand for the period continues to fall. The company also should prioritize assembly to guarantee that every product is tested carefully before reaching customers. Beside the problems mentioned above, there are some employees’ issues that also need to be concerned about such as Idris Pugh who is responsible for wheels, mudguards, chain guards, stays and other hardware is really old and often absent because of his heath. Fortunately, the company has already 8|Page commissioned a cycle shop in Cardiff to do the job with reasonable quality and is always delivered quickly. The direct cost is somewhat higher than the materials and components used by Idris, but the company can reduce the cost of paying salary for Idris. Since the cost is rising significantly, it is highly recommended that some component which does not add any value to the product should be eliminated. In addition, whether something adds to the value of the product or not are determined by customers rather than by the company. For instance, an example of something a customer would consider being waste: redundant accessories. Customers obviously do not want to pay for it, so the company can reduce costs by eliminating it as much as possible. In this situation, the company could reduce costs by removing lock, basket, and lamp and replace the brake with dynamo with a normal brake. The company also should rearrange the warehouse to reduce the wastes causes by moving between places, searching things and so on, because the process looks to be somewhat shambolic. The warehouse should be rearranged. (Refer to appendix) 9|Page 4. Human Relations Human relation is the way people interact and behave toward each other, human relation plays important role in business. Each organization or business tries to find out the effective ways that build up a good relationship in firm and maintaining it. Taking the time to think strategically about how the people in your business are managed will help you avoid potential problems. After interviewing with people in the company and reviewing their work, we realized that the clash of work did not only slow down the process but also create conflicts between members. Since each job is not done or supervised by one specific person, it is hard to keep track of the responsibilities when errors occur. To make ourselves clear when suggesting specialization, we will now name the specific jobs for each person in the company. Dai Armstrong is enthusiastic both about the company and about its future, he gave a number of ideas about possible directions, however he has too much work such as paperwork, doing fame. As a director, his task is about external relation but he only works in the factory. To develop their company, he needs to go out and work with the distributors. Another shareholder, Lewis Llewellyn, is less optimistic than Mr. Armstrong about company’s future. He also shows that he is keen on retiring. Since he does not desire with work, company should let him retire. The third shareholder in the board of director is Mr. Lewis’ wife. After divorcing with Mr. Lewis, she wants one third value of the business. To deal with this difficult problem the company should negotiate with Lewis’s ex-wife, either by continue giving her her dividend or persuade her to take her investment back only according to inflation rate. In production team, Mr. Maldwyn Jones thinks that his manager undervalues his skills and he is thinking about leaving due to this. To improve as well as motivate him, the company should let him replace Lewis in manager board in the business manager position while Mr. Armstrong works on external relations. At the same time, Mr. Maldwyn should still continue his painting job while helping Dai with management. Mr. Emlyn Morgan has many ideas about how to improve production and his wife thinks that he is undervalued by the managers. Like Mr. Maldwyn, to motivate him to work his best, he should be promoted to the overall production managers, overseeing all the works happens in the factory and assist the young workers as they have questions. 10 | P a g e Although Idris Pugh is a wheelwright perfectionist and his products never gets complaints, he is not not healthy enough to work regularly. We think that the best solution is to let him retire and recruit a new skillful worker to replace him. Janice and Ffred are two young assemblers. Janice likes her job but sometimes she feels pressure because she has to work overtime. However, because the sales have decreased and there are a lot of bikes left therefore she will not have to work overtime for a while. Ffred is young and in experience so he often makes mistake. Now, with the supervising of Emlyn Morgan, he will able to avoid faults. Packing is a step that is taken by anyone who has time. We think that factory should have an employee who is specialized in this task. Ianto Prichard is an odd-job man and cleaner in the factory. We decide to promote him to be in charge of this task since he is used to the work in the firm. He can do his job every weekday morning and for certain his salary will be higher. Glady Wells, who cleans the office twice a week, can clean both office and factory now twice a week and he will be paid more. 11 | P a g e 5. Investigation for Lone-term Survival and Profitability Political ? From 1990s, UK government and campaign group have tried to promote cycling as a good alternative choice for car and a good way to improve health ? 12,000 miles of the National Cycle Network is build which are equivalent to 200% of the network expansion ? London is the host of Olympic 2012 with the commitment to encourage people to participate more in sports activities like cycling Economic ? UK has recovered from economic crisis thus customers would have more budget ? Fuel costs is rising, therefore many people are switching from car to bicycle ? Growing online sales of bicycle products Social ? UK people are more aware of health and environment benefits from riding bicycle, especially in avoiding absenteeism ? More events organized to encourage people participation in cycling ? Traditional bike has been in favor of customers Technology Law Environment ? New types of bike has been launched to the market ? Laws encourage people to choose bicycle (e. g: protecting cyclists against car drivers in an accident or having preferential traffic signals) ? Environment protection campaigns promote and make people aware of advantages of riding bicycles in reducing emissions One company is a successful company if it has a good management team. Cyclermate Ltd really needs a good director who has clear vision about the company’s future and he must know exactly how to run this company. By looking at the PESTEL analysis above, we think that Dai Amstrong still see a great potential in this industry, thus he keep being so optimistic about it. He now must reorganize the company’s structure to make it work more efficiently. In addition, the director should pay attention to financial management. It plays an important role in the survival of the company. According to Mr Jones, the company had not advertised its products in the national press for some years now, we would have to advertise more on media. Besides, he mentioned an alternative route to increased sales that is trying to build up the direct sales to have the maximum benefit. We can sell the products online through Internet which is a helpful tool for saving advertising cost. Furthermore, the directors also should pay attention to the demands of customers to know exactly what they want so that its products could meet the needs of customers. The other firms in the same market were increasing their sales of â€Å"traditional† machines; therefore; we could think about the new technologies to develop new products. Mr Owen – Dai’s cousin had some expertise in new technologies and he was willing to help. The profitability of the company might be ensured if all the options are applied. Besides, we can apply some campaigns such as saving energy that helps reduce the heating, lighting and power cost. 12 | P a g e 6. Conclusion To conclude, the main problems in Cyclermate are the low liquidity of their asset, and problems in managing human resources. We believe that with the suggested solution, Cyclermate will be in a safer and more successful position than they are now. Through this report, the bank has a clearer view of where Cyclermate is standing in its development. With the resources and potential they have in hand, it is such a waste if they do not get further loan to continue developing. We also want to point out that with this uch potential, Cyclermate may even appear to be a very good candidate for loan, as they can expand their market not only local-wide but world-wide. 13 | P a g e 7. Reference 1. TIMOTHY S. HATTEN (200), Accounting Records and Financial Statements. In: Small Business Management: Entrepreneurship and Beyond. 4th ed. South-Western: Cengage Learning, pp. 202-234 2. The British Cycling Economy [Online] http://corporate. sky. com/documents/pdf/publications/the_british_cycling_economy. htm 3. Gregory Hamel. January 07, 2011. The advantages of Job Specialization. [Online]. Avaiable: http://www. ehow. com/info_7743130_advantages-job-specialization. html. [December 10, 2011] 4. David Anderson. October 2006. 5S Manufacturing: What Is It?. [Online]. Available: http://www. todaysfacilitymanager. com/tfm_06_10_profdev. php. [December 10, 2011]. 5. Steve Jonathan. March 14, 2011. The advantages of 5S. [Online]. Avaiable: http://www. ehow. com/info_8061038_advantages-5s. html. [December 10, 2011] 6. LeanMan. 2010. Increase The Profit through waste reduction. [Online]. Avaiable: http://leanman. hubpages. om/hub/Increase-Profit-through-waste-reduction. [December 10, 2011] 14 | P a g e 8. Appendix Sales Direct mail order Cycle shop Budgeted total revenue Direct materials Indirect costs Total Costs Budgeted trading loss Interest Payable Possible tax loss recovery Shareholders’ Funds 846,118 (916,312) 446,580 1,292,698 (1,362,892) 29,602 (-40,592) (36,000) 35,000 28,602 units 1067 1370 Price ? 700 420 Revenue 7 46,900 575,400 1,322,300 Table 1: Draft budget – 2010/11 after selling more cycles (Number in red is the old record) Picture 1 Rearrangement of Warehouse 15 | P a g e How to cite Cyclermate Report, Papers

Weighted Average Cost of Capital †Free Sample Assignment

Question: As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations? Answer: Executive Summary This report provides analysis for investment decision in Project A and investment choice between Project B and Project C. Method of analysis includes capital budgeting. Weighted average cost of capital is calculated including debt and equity form of financing. Discounting the project A with companys cost of capital gives positive NPV. But with WACC of project financing NPV of project A is negative. Investment choice between Project B and Project C depends on expected cash flow as both the project has same life and same investment required. Project C has higher expected cash flow than Project B which makes project C as better investment choice. Report includes detailed calculation of WACC, anticipated cash flows, NPV and IRR for project A, B and C. Analysis for Project A A. Equity Financing Theoretically cost of equity is return required by stock holders of company. Formula for calculating cost of equity is Recent dividend is $2.50 and dividend growth is 6%. Dividend in first year would be $2.50 * (1+0.06) = $2.65 Currently stock is trading at $50 and flotation cost is 10% Solving above formula with all inputs gives cost of equity 11.89% Advantages: Equity financing doesnt require any fixed payment obligation to equity holder. Dividend rate is not fixed and cash can be used for better opportunity in business opportunity. Equity financing doesnt require any collateral or pledge. Existing assets remain unencumbered. Assets purchase with equity financing can be used to secure long term debt. Equity share holders invest for long term horizon. Company has responsibility to give returns but not responsibility or obligation to generate immediate returns. So business which cant generate immediate return or require relative long payback period may opt for equity financing. Disadvantages: As equity investment doesnt guarantee any fixed return or dividend payment, investors expect more return than debt holders for the risk associated with equity. Equity share holders have rights pertaining to selection of board of directors and major business decisions. Capital raised by equity dilutes the controlling rights of business with equity shareholders. Investors has right to claim on cash flow after fulfillment of all disbursement when business sold out. They have right on cash flow in proportion of their investment B. Debt Financing Appropriate cost of debt is 5% for wheel industries. As tax advantage on debt financing brings down the cost of debt, cost of debt after tax will be = 5% * (1-0.35) = 3.25% Advantages: Control: Equity financing dilutes the controlling rights of business with share holders, but debt financing doesnt dilute any controlling rights of business. Simple Obligation: Debt financing has simple obligation of repayment of principal with terms and conditions. Once debt is paid, lender doesnt have any obligation with business. Tax advantage: Interest payment on debt is recorded as expense and hence it helps to save tax. As seen, debt with cost of 5% before tax has effective rate of 3.25% due to tax advantage Budgeting: As loan payment requires fixed payment, its easy to prepare budget in advance precisely. Disadvantages: Fixed Payment: For new business and startup, its difficult to manage fixed obligation initially as business takes time to generate returns. Credit rating: High debt on balance sheet is viewed as high risk. High risk rating makes additional debt (if raised) costlier Collateral: long term debt financing requires collateral as guarantee of repayment of loan. If the loan gets default assets and personal collateral may get ceased which can stops ongoing business activities. C. Weighted Average Cost of Capital Firm has decided capital structure consisting of 30% debt and 70% common stock Cost of common stock is 11.89% Cost of debt before tax is 5% Tax rate is 35% WACC = Equity Proportion * Cost of Equity + Debt Proportion * Cost of Debt * (1-tax) = 0.70 * 11.89 + 0.30 * 0.05 * (1-0.35) = 9.30% Use of WACC WACC is widely used for project evaluation in business When new project has similar risk profile like existing projects of company, WACC is used to discount such projects to decide between investment options WACC is used as discount rate to find net present value (NPV) of cash flows. WACC is used to calculate economic value added (EAV). WACC is cost of capital for project. EAC is calculated deducting cost of capital from profit of the company WACC is also used for valuation of stock or company. Cash flows are projected for future years and discounted with WACC to find out present value of business, firm or stock. D. After tax cash flow Project A Year 0 Year 1 Year 2 Year 3 Cash inflow Additional revenue after tax $780,000.00 $780,000.00 $780,000.00 Depreciation tax advantage $175,000.00 $175,000.00 $175,000.00 Cash outflow Initial investment $1,500,000.00 Additional annual cost after tax $390,000.00 $390,000.00 $390,000.00 Net cash flow -$1,500,000.00 $565,000.00 $565,000.00 $565,000.00 Initial outlay is $1,500,000 (Investment) Additional revenue after tax for 3 years is $1,200,000 * (1-0.35) = $780,000 Initial investment is depreciable on straight line method for 3 years Depreciation each year = $1,500,000/3 = $500,000 Tax advantage on depreciation = $500,000 * 0.35 = $175,000 Additional annual cost after tax for 3 years is $600,000 * (1-0.35) = $390,000 Net cash flow for year 1, year 2 and year 3 is $565,000 E. NPV Discount rate is 6% Project A Year 0 Year 1 Year 2 Year 3 Net cash flow -$1,500,000.00 $565,000.00 $565,000.00 $565,000.00 Discount factor 1 0.94339623 0.88999644 0.83961928 Discounted Cash Flow -$1,500,000.00 $533,018.87 $502,847.99 $474,384.89 NPV $10,251.75 Discount factor = 1/(1 + 6%)^Year Discounting cash flows with 6 % gives NPV of $10,251.75 As NPV is positive its financially feasible to undertake the project Positive NPV shows project is generating $10,251.75 cash in present value after covering cost of capital F. IRR IRR for project is 6.37% WACC for project is 9.30% As WACC IRR, its not financially feasible to undertake this project Its conflicting with earlier result when discount rate was taken 6% and NPV was positive for project A With cost of capital 9.30%, NPV of project A is -$228,113 Its not recommended to invest in project A with WACC of 9.30% Analysis for Project B and Project C A. Cash flows Project B Probability Cash Flow Expected Cash flow 0.25 $20,000.00 $5,000.00 0.50 $32,000.00 $16,000.00 0.25 $40,000.00 $10,000.00 Expected Annual Cash flow from Project B $31,000.00 Project C Probability Cash Flow Expected Cash flow 0.30 $22,000.00 $6,600.00 0.50 $40,000.00 $20,000.00 0.20 $50,000.00 $10,000.00 Expected Annual Cash flow from Project C $36,600.00 For project B, expected value of cash flow considering probabilities of different cash flows is $31,000 For project C, expected value of cash flow considering probabilities of different cash flows is $36,600 Project B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Net cash flow -$120,000.00 $31,000.00 $31,000.00 $31,000.00 $31,000.00 $31,000.00 $31,000.00 Discount factor 1 0.925925926 0.85733882 0.7938322 0.7350299 0.6805832 0.6301696 Discounted Cash Flow -$120,000.00 $28,703.70 $26,577.50 $24,608.80 $22,785.93 $21,098.08 $19,535.26 NPV $23,309.27 IRR 14.17% Project C Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Net cash flow -$120,000.00 $36,600.00 $36,600.00 $36,600.00 $36,600.00 $36,600.00 $36,600.00 Discount factor 1 0.925925926 0.85733882 0.7938322 0.7350299 0.6805832 0.6301696 Discounted Cash Flow -$120,000.00 $33,888.89 $31,378.60 $29,054.26 $26,902.09 $24,909.35 $23,064.21 NPV $49,197.40 IRR 20.57% B. Conflict between IRR and NPVs Conflict between IRR and NPV occurs when project size is different and project life is different Its not correct to compare two projects with different investment requirement on NPV basis. Project with huge investment may have greater positive NPV, though IRR would marginally greater than cost of capital, than project with small investment but better IRR. For example, Project A has initial investment of $1,000,000, WACC of 8%, IRR is 9% and NPV is $50,000 Project B has initial investment of $200,000, WACC of 8%, IRR is 12% and NPV is $20,000 Though NPV of project B is smaller but its better investment as investment is much less than project A and IRR is better to cost of capital Other conflict with investment size is: Its difficult to generate higher IRR with larger project As project size increases its difficult to maintain IRR as high as smaller project has With increasing project size, efficiency of business activities goes down compare to smaller size and cost of financing also increases Problem with IRR is it doesnt give any concrete number in absolute term. IRR can be compared to other project but for standalone project it doesnt reflect value addition to company C. Investment Decision Discounting cash flow with 8% project B gives NPV of $23,309 and Project C gives NPV of $49,197 IRR of project B is 14.47% and IRR of project C is 20.57% As Project C has higher NPV and higher IRR also project C should be selected for investment Recommendation Wheel industries need to raise capital for financing of project A. Current cost of capital is 6% for ongoing projects. WACC for project A is 9.30%. Discounting project A with existing cost of capital gives positive NPV while discounting project A with WACC of financing it gives negative NPV. WACC of financing for Project A would be correct discount rate than using existing cost of capital of company. As with WACC of 9.30%, NPV is negative its not recommended to invest in Project A Project B and Project C both have same investment and life. But expected annual cash flow of project C is higher than Project B. Discount rate for both the project is same which makes NPV of project C higher than Project B. 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