MBA5903 Assignment 2 Due 23 September 2024 (Detailed Answers)
40 views 1 purchase
Module
Strategic Financial Management
Institution
University Of South Africa
Book
Strategic Financial Management
Question 1 25 Marks Genius Innovators Company (GIC) has just designed a new
product manufacturing system. GIC Management must now choose from the
following three alternative options: • Sell the design outright to another company with
2 years payment, or • License the design to another man...
MBA5903 Assignment 2 (COMPLETE ANSWERS) 2024 - DUE 23 September 2024
Solution Manual For Strategic Financial Management Application Of Corporate Finance 1st Edition
All for this textbook (3)
Written for
University of South Africa
Strategic Financial Management
All documents for this subject (2)
Seller
Follow
GeniusGears
Reviews received
Content preview
MBA5903
Assignment 2
DUE 23 September 2024
, 1.1 The Cost of Capital That GIC Should Use in Evaluating the Options
Cost of Capital Overview: The cost of capital is the return that a company needs to
achieve to satisfy its investors or creditors. It's an essential metric for evaluating
investment opportunities, as it reflects the opportunity cost of investing capital in a
specific project compared to alternative investments with similar risk profiles.
Components of Cost of Capital:
• Cost of Debt (Kd): The interest rate GIC pays on its borrowed funds. It should
be adjusted for tax savings because interest payments are tax-deductible.
• Cost of Equity (Ke): The return required by equity investors. It can be
estimated using models like the Capital Asset Pricing Model (CAPM).
• Weighted Average Cost of Capital (WACC): If GIC uses both debt and equity
to finance its projects, the WACC is the most appropriate measure. It's
calculated by weighting the cost of debt and the cost of equity by their
respective proportions in the company's capital structure.
Factors Influencing GIC's Cost of Capital:
Risk Profile of the New Product Manufacturing System: The higher the perceived
risk, the higher the required return by investors.
Market Conditions: Interest rates, market volatility, and economic outlook will
influence the cost of capital.
GIC's Capital Structure: The proportion of debt and equity used by GIC will affect the
WACC.
Recommended Approach for GIC: GIC should calculate its WACC if the project is to
be financed using a mix of debt and equity. The formula for WACC is:
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller GeniusGears. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £2.31. You're not tied to anything after your purchase.
