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Introduction To Corporate Finance

Corporate finance refers to the area of finance which deals with the capital structure of the organization and with the source of funding and also includes the actions taken by the management. This helps in increasing the value of the firm to the shareholders and they try to allocate the financial resources which are needed by the organization.

To maximize, the value of shareholders is the main objective of corporate finance. The important concept for the study of corporate finance is applicable to solve the financial problems of various kinds of firms. In finance, the net present value (NPV) means that it consists of the time series of the cash flows both outgoing and incoming (Bertoneche, 2001).

NPV means the sum of the present values of the individual cash flows of the company. In this, the future price is the outflow of the cash and incomings are future cash flows.

The present report is based on the study of the Katbuddys confectioners Company who wants to diversify its activities by making an investment in the theme park business through the construction of the same. The objective of the study is to analyse whether or not Katbuddys should undertake the investment in the theme park.

The report is divided into 4 tasks. In the first task, the net present value of the company is calculated. The second task comprises of the calculation of weighted average cost of capital. The next task is the suggestion for the financial and non-financial issues and the last task explains the real options used in the project appraisal for management.

Net Present Value

There are several techniques that can help financial analysts in analysing their effectiveness of their investment but out of them all, net present value is the best one. By using this technique investigator can identify the present value of expected cash flow of a project.

In order to calculate the present value of future cash flow, all expenses and incomes are multiplied by the present value of the discount rate (Ulliana, Flynn, Correia and Wormald, 2007). This method is based on the time value of money and thus, it believes that the value of money changes with time.

Weighted Average Cost of Capital

It is used to measure the cost of capital of the firm. In the WACC it consists of cost of equity, cost of debt and cost of preference capital. WACC is the average tax cost of all the sources of finance namely retained earnings, debt, common stock and preferred stock (Stubben, 2009).

In Weighted average cost of capital it is calculated with the help of multiplying the cost of each source of the finance by their relevant weights and then all the data will be summed up to know the its actual WACC.

Cost of Debt

Cost of debt refers to when the companies borrowed from outside source or other resources or from any other financial institutions; the interest paid on these amount of source is called cost of debt.

Cost of debt is part of the capital structure of the company. Cost of debt is one of the useful tools which give the idea about the overall interest being paid by the company since company is using several debts like loans, bonds.

Conclusion

From the above study, it has been concluded that the Katbuddys Confectionaries idea of diversification to theme park business by constructing a theme based park. The present report is based on the study of Katbuddys confectionaries Company. It is the company who wants to diversify its activities by doing investment in the theme parks business through the construction of the theme park.

It involves huge costs of investment due to which the net present value is negative and does not brings enough inflow of cash to the company and due to which by accepting this project they will suffer loss. Weighted average cost of capital of the company’s investment is also calculated which is also not satisfactory and this investment will not favourable for the company in future.

As the net present value of the company is negative this states that Katttttbuddys will face the financial issues in the future, as the project will not bring a good amount of cash flows. With the help of the project Appraisal Company knows about the future of its theme park business and knows that it is not correct time to invest in this project.

References

  1. Bertoneche, M., 2001. 2 – Review of financial statements 2: The income statement and the statement of cash flows. Financial Performance. 46-73.
  2. Capital Budgeting & Project Appraisal. N.d. [Pdf]. Available through: Website: <http://www.finaticsonline.com/Freebies/IRR_vs_MIRR_vs_NPV_[Finatics].pdf>. [Accessed on 10th July, 2013].
  3. Graham, J.R. and Harvey, C.R. 2001. The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics. 60 (2-3), pp. 187-243.
  4. Grier C.I. and Nagalingam, S.V. 2000. CIM justification and optimisation. London: Taylor & Francis.
  5. Grubbstrom, R.W. 1967. On the Application of the Laplace Transform to Certain Economic Problems. Management Science. 13, pp. 558–567.
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