Cost of Capital
From the rate of return, a company can select from a variety of investments with similar risks an investment that will guarantee the maximization of shareholder wealth.
Risk and Return
During capital budgeting decisions, a company can compare the returns that are expected from an investment with the associated risk for shareholder wealth maximization.
Delegate your assignment to our experts and they will do the rest.
Internal Rate of Return
The IRR is a critical tool used extensively in identifying the viability of projects. For instance, if a company has several projects that it proposes to undertake using limited funds, the IRR shows the project with the highest returns, and thus, more gains for less investment.
Capital Structure
A company can pursue the maximization of the shareholders' wealth through operating from an all-equity structure where it focuses on capital gained from the assets presented by the stakeholders or an all debt structure.
Net Present Value
A company could use these values to identify whether there is economic efficiency in its operations ( Yadav, Han, & Kim, 2017) . Any signs of orthodox or proficient patterns of the cash flow will result in the company undertaking the correct measures to maximize shareholders wealth.
Rate of Return (ROR)
ROR = (Current Mkt. Price – Annual Dividends) x 100
Annual Dividends
ROR (BCY) = (3.20 – 0.30)/0.3 x 100 = 966.67
ROR (PUQ) = (15.00 – 0.96)/0.96 x 100 = 1462.50
Therefore, it is evident that an investor needs to invest in the stock of PUQ which has a higher rate of return compared to the stock of BCY.
Net Present Value (NPV)
NPV = Cash F. – I. investment
(1+i) t
Where i is the discounted rate or required return and t is the time or period of the entire investment.
Thus,
NPV = 59,000,000/(1 + 0.2) 4 – 76,000,000 = -47547067.90123457
The net present value is negative hence; the project will not generate any profitability and should not be undertaken.
Reference
Yadav, P. L., Han, S. H., & Kim, H. (2017). Sustaining competitive advantage through corporate environmental performance. Business Strategy and the Environment , 26 (3), 345-357.
