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

Financial Managment worksheet 3 - Essay ExampleThe investors who invest their money in the firm for hope to get a return on their investment are called stockholders or shareholders. In other words, evaluation of a proposed project should be based on the projects woo of groovy (Vernimmen, 2005). This is because when a company raises capital, at that place is usually no direct links between the return to the supplier of the companys capital and the return on individual project. The muckle then uses the weighted average of these capitals for mixing in the firms everywhereall equity to analyze the capital budgeting decisions. It takes into consideration the weighted average of all the capital and is and then 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 try to keep their financing mix close to a target capital mental synthes is. As we know that the WACC is a weighted average of comparatively low-cost debt and high cost equity, so precisely we can say that capital social organisation change will affect the WACC to subjoin or falloff with respect to the change 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 value is the stream of net cash flows generated by it assets. This stream is usually referred to as the companys net operational cash flow or earning before involution 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 compa ny tax, this entire stream is available to provide income to shareholders. If a company also borrows funds, the lenders have the first claim 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 approach 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 below 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. Estimate 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 value 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