GSB003: Managing Financial Resources- Financial Accounting- Whizz Bang Corporation- Finance…

GSB003: Managing Financial Resources- Financial Accounting- Whizz Bang Corporation- Finance Assignment Help

Task:

Assume you are a manager in the Whizz Bang Corporation Ltd (WBC), a large organisationwhose business is to manufacture and wholesale spare parts for heavy transport motorvehicles. This assessment presents you with three hypothetical scenarios that you arerequired to respond to. You must address all three scenarios and incorporate your answers into a single cohesive report that would be suitable for submission to senior management.

Scenario 1: Capital Acquisitions

One of your team members provides you with a request seeking your approval to replace an expensive worn-out piece of equipment. As it is a replacement, very few details to support the request is provided as the staff member automatically presumes your approval. In the past, your predecessor had approved all such requests, without further information.

Required

Discuss this scenario, in particular describing what information you should require before you approve the release of capital funds for such a request, and why you would require thatinformation.

Scenario 2: Project Proposal

You have identified a potential opportunity for WBC, which involves undertaking a projectthat will have a ten-year life. The project requires an initial purchase of equipment andfurniture totalling $4,500,000, plus ancillary programming capability and machinery costing$1,500,000. The equipment and furniture will depreciate and have a salvage value, and the programing machinery will have nil salvage Depreciation is calculated on a straight-line basis over five years.

In order to undertake this project, WBC is considering various financing options. One optionis to borrowing $5,000,000 at 7 per cent per annum. This loan will be paid off in 10 equalannual instalments.

Required
Evaluate this project, and provide a report to WBC management discussing whether or notyou recommend it should undertake the project, providing a full explanation of yourrecommendation.

As support for your recommendation ensure your answer includes the following:

Calculations of the NPV, IRR and the payback for the project and an analysis of the results.

Justification for the correct discount rate to be used in evaluating the project.

Your assessment of the advantages and disadvantages of each methodology (NPV,IRR and payback), and which you therefore recommend is applied to evaluate thisproject.

Details of any other (financial and non-financial) matters you would consider before making a recommendation in respect of this project.

Scenario 3: Project Financing

WBC is currently financed using debt and equity with a targeted debt to equity ratio of one (D/E = 1). Its debt financing is from three sources, overdraft, bank bills and debentures, withthe ratio of overdraft to bank bills to debentures of 1:2:3. Its equity is ordinary shares. These ratios represent the long-term capital structure target for WBC.

The debenture pays an annual coupon of 12 per cent per annum on its $1,000 face value.

The remaining term of the debenture is six years. The debenture is currently priced $922.23.

The bank bills issued by WBC are ninety-day bills, with a face value of $100,000 and are currently priced at $97,593.58.

The bank overdraft rate is 1 per cent per annum above the bank bill rate.

The ordinary shares sell for $8.00. The projected dividend for year one is $1.10. Dividends are expected to grow at 6 per cent per annum indefinitely.

Required

Calculate the Weighted Average Cost of Capital (WACC) for WBC, assuming a tax rate of 30 per cent. Hint: this requires a calculation of the effective annual cost for each source of finance.

Discuss whether the WACC could be used in the above project evaluation, and if so how.

Include a discussion of any restrictions that apply to the use of WACC?