Exam (elaborations)
APS1016 - Financial Management for Engineers Group Assignment 1
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Exam of 14 pages for the course APS1016 - Financial Management for Engineers at U of T (N/A)
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Table of ContentsIntroduction................................................................................................................................................... 1
Objective and Problem Identification .......................................................................................................... 1
Methodology ................................................................................................................................................. 2
Analysis .......................................................................................................................................................... 3
Cost of Debt ............................................................................................................................................... 3
A. Short-term Debt ........................................................................................................................... 3
B. Long-term Debt ............................................................................................................................ 4
Cost of Equity ............................................................................................................................................. 5
A. CAPM (Capital Asset Pricing Model) ............................................................................................ 5
B. Dividend Growth Model ............................................................................................................... 6
C. Internal Growth Rate Method ...................................................................................................... 7
Cost of Capital (WACC) .............................................................................................................................. 8
D/E Ratio .................................................................................................................................................... 9
Fallacies ....................................................................................................................................................10
Conclusion ...................................................................................................................................................11
References ...................................................................................................................................................12
Appendix......................................................................................................................................................13
Table of Figures
Figure 1: Equity and Debts ...........................................................................................................................13
Figure 2: D/E Ratios .....................................................................................................................................13
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, Introduction
EnCana Corporation was originally formed in Alberta in 2002 and it was the leading oil and gas
producer in Canada and North American Continent. Nowadays, the EnCana Corporation is known
as Ovintiv and based in Denver, United States. The primary focus of EnCana Corporation was on
discovering and developing oil and gas fields and selling their products that include natural gas
and crude oil to interested customers. In the presented scenario, two managers were computing the
cost of capital for EnCana Corporation and aiming to determine the hurdle rate which is the
minimum rate of investment that can attract future investors in capital investment projects.
Similarly, the cost of capital is defined as the minimum rate of return that EnCana Corporation
needs to provide for investors to find a project worthwhile in terms of time value of money and
risk associated with the investment. A low cost of capital increases the wealth of the company and
allows it to compete effectively in the market. Hence, it is important to find at different sources of
income that agree to a low cost of capital and allow a company to maximize its profit. A
company’s cost of capital can be computed using the weighted average cost of capital (WACC)
approach. The WACC method can be applied after calculating both the cost of debt and cost of
equity. Therefore, the following report will illustrate an example of computing the cost of capital
using the WACC equation for the EnCana Corporation and find the best financing strategies that
will maximize the retained earnings of EnCana Company.
Objective and Problem Identification
A company relies on debt and equity to raise funds that maintain its operating cash flow and
finance its projects. Usually, the company borrows money in the form of debt capital for short-
term and long-term periods and tries to find lenders that offer low interest rate. It is important for
a company to find affordable debts with low interest rate to be able to pay them in the present and
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