|
Question 1 |
Initial Price |
$ 100.00 |
| Dividend |
$ 2.00 |
|
| Closing Price |
$ 125.00 |
|
| Tot. Ret. |
27% |
|
| Cap. G. Y. |
25% |
|
| Div. Y. |
2% |
|
|
Question 2 |
Interest |
4% |
| Preferred Stock |
$ 100.00 |
|
| Market Price |
$ 120.00 |
|
| Total Return for last Year |
20% |
|
|
Question 3 |
Risk-free rate |
5% |
| Beta |
1.2 |
|
| Expected market return |
12% |
|
| Expected Rate of Return |
13% |
|
|
Question 4 |
Common Stock |
80% |
| Debt |
20% |
|
| C. O. E |
12% |
|
| C. O. D |
7% |
|
| Rate of Tax |
30% |
|
| WACC |
11% |
|
|
Question 5 |
Debt E. Ratio |
0.75 |
| Cost of new plant |
$125,000,000.00 |
|
| Floatation C. on new Equity |
10% |
|
| Floatation C. on latest debt |
4% |
|
| Initial cost |
$125,000,007.20 |
|
Summary of How Companies Make Financial Decisions
There are three ways in which companies make financial decisions, and they include; Dividend Decisions, Investment decisions, and Financing Decisions.
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Dividend Decisions
When individuals invest in a company’s stock, they receive part of the profits which are disseminated annually to all shareholders. Therefore the first decision is based on the benefits shared among the investors who contributed seed funds to the organization. The choice is focused on the substantial amount of profits to be issued to the investors ( Fracassi, 2016) . The company's management has to choose whether the entire benefits realized in the fiscal year are to be disbursed, or there is a need to retain a certain amount of revenue within the enterprise.
The challenge is brought by the fact that when a certain amount s retained, the management can utilize it in re-investment. On the other hand, when the entire profits have been distributed the rates of the dividends rise, and this affects the price of the company’s shares in the market which ends up increasing the prosperity of the investors ( Fracassi, 2016) . Furthermore, the company has to decide on the bonus shares, the stability of the dividends, and a cash dividend.
Investment Decisions
Of all the three financial choices that the organization has to make, this is the most relevant as it determines the type of assets to be possessed by the company, the amount of the resources, and the nature of risks that the company can undertake. The decision can be grouped into the choices that the management has to undertake the controlling of the working capital and the accounting of the money for future investments ( Ehrhardt, & Brigham, 2016) . Hence, the decisions to be made have to assess the risks involved, expected returns, and the costs to be incurred before any project is initiated. Moreover, the choices are critical in the establishment or development of new or current units, costs of research and development, replacement of durable resources, and the reallocation of finances in unfruitful projects.
Investment decisions influence the choices that are made on projects that take one year or less in connection with the distribution of finances in relation to the inventories and receivables, cash and equivalents. The choices are as a result of transaction between profitability and liquidity. Thus, an asset that is more liquid the lower its profitability and vice versa. Therefore, it’s more sensible for the leadership in a company to focus on the management of working capital to ensure proper liquidity, raised yield, and comprehensive structuring of the company’s policies.
Financing Decisions
These decisions come into play after the decision-makers have resolved to work on approved proposals and have to agree upon the best way to raise funds for the initiatives. For companies to remain competitive in their respective markets, they have to initiate projects continuously. Thus, the requirement for financing decision is never-ending. Furthermore, the choice is not limited to budgeting for new investments but also the general best mix of revenue generation for the company ( Agliardi, Agliardi, & Spanjers, 2016) . What is of significance is the ratio of the different sources within the general company’s mix of capital. For instance, the equity to debt ratio must be set in a manner that will assist in the optimization of the profit margin. Obtaining funds from outsiders through the acquisition of debts can be beneficial in raising the profits about the assets but will heighten the liability on the company.
If in making their finance decision, the management of a company is able to structure the capital in such a manner that it raises the yield while reducing the threats, then they will have influenced the share prices and inadvertently optimizing the shareholders’ wealth.
References
Agliardi, E., Agliardi, R., & Spanjers, W. (2016). Corporate financing decisions under ambiguity: Pecking order and liquidity policy implications. Journal of Business Research, 69(12), 6012-6020.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage learning.
Fracassi, C. (2016). Corporate finance policies and social networks. Management Science, 63(8), 2420-2438.
