Managerial Finance

It is an integral part of overall management which is conducted by an organization. In the current assessment, there will be a management accounting procedure that will be implemented over the business of Sara Alikhani and to manage the financial resources of the firm in an evident manner.

1. Estimate the Weighted Average Cost of Capital (WACC) for Sara Alikhani Services Pty. Ltd

Market Value of equity: NG$ 1.8 Million

Total Debt: NG$0.6

Cost of debt: Interest Expense (1- Tax rate)

Interest Expense

 First, we have found the interest expense of installment loan compounding daily

Hence

A=P(1+rn)^n?t

Where,

A = total amount

P = principal or amount of money deposited,

r = annual interest rate

n = number of times compounded per year

t = time in years

In this Calculation we have

P=$200000 , r=4.8% , n=365 and t=1 years

After plugging the given information we have

A=200000 (1+0.048/365)^365*1

A=200000*1.000132^365

A=200000?1.049356

A=209871.2

STEP 2: To find interest we use formula A=P+I

, since  A= 209871.2  and  P = 200000

 we have:

A= P+1

209871.2= 200000 + I

I=209871.2?200000

I=9871.2

No, we have calculated the interest expense of loan compounded monthly

Hence

A=P(1+r/n)^n?t

Where,

A = total amount

P = principal or amount of money deposited,

r = annual interest rate

n = number of times compounded per year

t = time in years

In this Calculation we have

After plugging the given information we have

A=400000 (1+0.06/12)^12*1

A=400000*1.005^12

A=400000?1.061678

A=424671.2

STEP 2: To find interest we use formula  A=P+I, since A=424671.2 and  P = 400000 we have:

A = P +I

424671.2=400000+I

I=424671.2?400000

I=24671.2

Total Interest Expense = 9871 + 24671

= NF $34542

Cost of debt= 0.034 (1- 0.25)

= 0.034 * 0.75

= 0.0255

Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return)

Cost of Equity= 8 + 1.25 * (9.2 - 8)

Cost of Equity = 9.25 * (1.2)

= 11.1

WACC  =  (E/V x Re)  +  ((D/V x Rd)  x  (1 – T))

Where:

E = market value of the firm’s equity

D = market value of the firm’s debt

V = total value of capital (equity plus debt)

E/V = percentage of capital that is equity

D/V = percentage of capital that is debt

Re = cost of equity

Rd = cost of debt (yield to maturity on existing debt)

T = tax rate

WACC =  [(1.8/2.4) *11.1] + [(0.6/2.4) * 0.0255] * (1-0.25)

WACC =  [8.3] + [0.006] * (0.75)

WACC = 8.306 * 0.75

WACC= 6.2295

2. Undertaking an NPV analysis of the two alternatives Sara Alikhani services Pty. Ltd has with regards to its operations in Gerbido

 

 

Table 2: NPV calculation

(Source: Self-generated)

3. Providing a recommendation to Sara Alikhani Services Pty. Ltd explaining your reasoning, setting out the assumptions made and explaining any limitations of the study

 

Looking at the NPV calculation of Sara Alikhani services Pty. Ltd it can be said that the scenario of combined stores is more profitable. As it can be seen in the section above the two store program will combined incur an NPV of $427,052 whereas in the scenario of the combined store the NPV is $726,851. Hence investing in the second scenario is better for the firm (Kaplan and Atkinson, 2015). Although there are some limitations to the study because in this study the future value can only be forecasted but there no certainty that the value will be the same inflation and deflation rates can effect the possible outcomes that have been noticed in the current scenario.

4. Sara Alikhani, the sole shareholder of Sara Alikhani Services Pty. Ltd, is an astute business woman and would like to understand more about the discipline of finance.

  1. Explain the term WACC, including discussion of how the WACC has been used in your analysis

WACC or Weighted Average Cost of Capital is a management accounting method of calculating the company's cost of capital in which each category of or type of capital is weighted. The cost of capital includes capital from debts, common stock, preferred stock, equity, and bonds.  WACC is subject to increase with the increase of beta and the rate of return over the equity increase due to the increase of WACC.  Hence it can be said that an increase in WACC denotes a decrease in the value of capital and an increase of risks that are associated with the capital. WACC is conducted by a firm to know the risks that are associated with the source of finance and what will be its value while being applied in the firm's operation.  In the calculation above it can be said that the amount of debt capital in the firm is lower than that of equity capital and the WACC is fairly low and this means that there are lower risks that are associated with the company's source of finance (Takeda and Boyns, 2014). 

  1. Provide an explanation in simple language of the concept of the time value of money including discussion of how this concept has been used in your analysis

Time value of money is a concept that states that the money available in the present has the capability of increasing its value in the future. This means the value of certain money now can be higher in the future.  This means that money that has been held can earn interest to grow its value in the near future.  Only for this purpose, there is a need for discounting the current value of money with a discounting rate to the net present value of future money that is being forecasted today. Hence in the NPV calculation, there is the use of Discounting factors that showcases the present nominal value of the money (Hung, 2016).

Conclusion

Concluding in the light of the above context it can be said that through the use of management accounting methods and concepts people can effectively evaluate the usage and viability of both sources and application of finance. Through the use of WACC, it has been measured that there is a low risk of capital involved within the company and that the second option is more viable for the investment of Sara Alikhani services Pty. Ltd.

 

 

References

Hung, K.C., 2016. Continuous review inventory models under the time value of money and crashable lead time consideration. Yugoslav Journal of Operations Research, 21(2).

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Takeda, H. and Boyns, T., 2014. Management, accounting, and philosophy. Accounting, Auditing & Accountability Journal.

 

 

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