Duke Company: Calculations for the Project - Assignment Example

?Calculations for the Project Cash Flow Period Cash Flows NPV $35,366.48 Dec-09 556,000.00 Dec-10 128,000.00 Dec-11 440,000.00 Dec-12 550,000.00 NPV at 15% rate for a period of three years is $ 35, 366.48 Cost of Capital = Dividend per Share + Expected Future Earnings Market Price Share 313.38 + 0.16 21.56 14.72 = 15% Project Cost Flow Project cash flow PVIF@ 15% P.V Years 1 2 3 556000 128000 440000 0.8696 0.7561 0.6575 483497 96781 289300 Less initial capital 372000 +NPV 497578 IRR using 15% Years Cash flow PVIF@ 15% P.V 1 2 3 556000 128000 440000 0.8696 0.7561 0.6575 483497 96781 289300 869578 Using 10% Years Cash flow PVIF@ 15% P.V 1 2 3 556000 128000 440000 0.8696 0.7561 0.6575 505459.6 105779.2 330572 941810.8 Therefore IRR = z = w – r + r x - c x -7 = z = 15% - 10% + 10% 569810.8 72232.8 72232.8 z = 2849054 z = 2849054 72232.8 = 39.44 + 10% IRR = 49.44 Asset categorization We will have assets of varied types in our company. The assets will either be purchased through cash or through leasing (Harris and Hazzard, 1997). This means that our assets will be exposed to varied amounts of risk. Among them will be credit risk. There are assets which will not be fully paid for but will be still be under operations in the business. This means they will be exposed to credit risks. Of importance will be exposure of these assets to operational risks. The assets will still be used for operations in the business. This means there will be various operational risks to be encountered in the company. There will be market risks to be encountered. This would be reflected by the dangers of our assets being declared obsolete. The market is ever changing and the expectations of our customers are also changing (Clyde and Roman, 2007). This would be a challenge to be encountered. Depreciation will also be put into consideration as it will be a mandatory activity to counter all the above mentioned risks. Cost of assets. The cost of total current assets will be estimated at $6,289,666. This is an average for a three year period. The total fixed assets will be calculated in the same way and a figure of $59,552,000 will be the total estimates taken over a three year figures shows that this is a viable project to be undertaken. The figures do not vary much with the initial project hence a show of signs of profitability. Short term investments will be present in the third year of operation with an estimated figure of $185,000. This is an indication that things will be slowly picking up. According to our projected figures, inventory will be on the rise for the three consecutive years. This is a vivid sign that business will be on the rise. Also for the first three years we expect no accumulation on amortization. Other assets will also be on the increase hence the business will be growing. This is a clear justification that the business will be viable project to be undertaken. Accounting net income and cash flows Net income represents income less expenses incurred by a business for a given accounting period (Harris and Hazzard, 1997). Cash flow represents the circulation of money into and out of a business. All these two statements are usually prepared during a given accounting period. Cash flows are used to calculate parameters such as internal rate of return and net present value of any business (Harris and Hazzard, 1997). This means it is a statement that can be used to determine the problems affecting a company’s liquidity position. Cash flows represent a company’s concepts in accrual accounting. This will be used to determine the quality of net income generated by a business. Finally, cash flow statements generally show the risks associated with any business net income shows the profitability of a company in a given period. It can also be referred to as an increase in the stock holders’ equity. Net income is seen to be inseparable with profit and loss hence it is an important aspect in any business (Clyde and Roman, 2007). At times net income is distributed among common stock holders in the form of dividends; other firms hold it in the form of retained earnings (Harris and Hazzard, 1997). Financing strategy For this project, I will use a two loan constriction method. This will go on for the period of construction and will be repaid as the project goes on. I will also take a permanent loan from an identified lender different from the first lender. This second load is what will be used to pay off the first construction loan. I will be the one to pay off the first construction loan through the permanent loan; it will not be left to the builder. The main advantage of taking the two loans is that it will be able to shop for different loans from two different institutions (Clyde and Roman, 2007). This will enable me to try and get a cheaper lending rate. It also means I will incur two different sets of closing costs. I will try to shop for the construction loan and the permanent loan at the same time. This will be done through effective reviewing of all the existing interest rates. Most of the construction loans usually run for around six months to one year. These usually carry’s with itself interest rates that are adjustable and can be reset on monthly or even quarterly basis. There are closing costs and at times additional charges charged by construction companies to cover costs in loan administration. There are lenders who accept to offer both sets of loans; the construction and permanent loan. Theses lenders credit a set amount of the construction loan to the permanent loan account. At given cases, a lender may charge certain costs for construction loans (Clyde and Roman, 2007) . An example is, certain institutions offer three points for the permanent loan. If one chooses to take the permanent loan in another instruction, the institution lending the construction loan retains the initial three points. This in essence means that the credit plus and the set of closing costs remain the major persuasion points for loan officers trying to market their products. Long term financing can be said to be a combination of tools and methodologies an organization may put in place to fulfill its financial obligations for a period exceeding one year (Harris and Hazzard, 1997). This involves getting the cash needed to run the organization for a period of twelve months outside the starting period of a given financial year. Long-term financing is directly related to long-term debt, this is an obligation which matures in a period of one year. Among the long-term financing alternatives available to me include notes and bonds payable. We will also seek to raise cash through selling of stock and bonds in financial marketers. An example in the sale of stocks and bonds at the New York stocks exchange (Peckinpaugh, 2005) . We will also have an option of borrowing from lending and financial institutions. This includes banks and insurance complains. We will also consider seeking cash from our business partners and customers. Traditional portfolio financing For our business we will prefer a traditional portfolio financing model. This will include us taking a list of all financial assets. This one will be better than the asset backed financing. One reason for this choice is that in this system, different progressions will be involved. The traditional portfolios may be held and managed by investors, financial progression, banks or other financial institutions (Clyde and Roman, 2007). Another reason is that it will be designed according to the investors risk tolerance. The value of each asset will affect the portfolio ratio. This is the portfolio asset allocation. We will strive to maximize the returns from each asset and minimize the risk involves. Financial structure This is referred to as the capital structure. This is a mixture of both equity and long term debt in a company and how it uses them to provide finance to its operations (Clyde and Roman, 2007) . The company`s treasure is taxed to decide how much money will be borrowed and to check on the best combination of equity and debts to be obtained. The bottom line for the company treasurer is to find the least expensive institutions, to provide funds for the company to use financial structure has a portion of funds that goes into the credit account and another portion that is given into the shareholders (Clyde and Roman, 2007). The business will decide of this mixture depending on the nature of its expenses. Our company will issue bonds, the resultant proceedings will be used to buy stock. Risk reduction strategies Our first and easy risk reduction strategy would be to maintain a well documented filing system. We will ensure all our files have date and time. All the meetings and phone conversations will be recorded properly. We will strive to have emails and faxes recorded in both hard and soft copies. Records of all verified document contracts, waivers, disclosures and verification of the appropriate signature will be done (Atkinson and Berry, 1995). No file will be destroyed unless over an expiry period of one year. We will also try at our level best to control errors and omissions. All our claims and any incident will be reported to our insurance companies promptly. We realize that late reporting of such will jeopardize our E&O coverage; hence all attempts will be made to do early and prompt reporting. Our company will seek to engage other stakeholder in making decisions that we are not sure of. It is better for us to take time and seek for facts. We will also try to do regular revision of our code of ethics. These are among the various risk reduction strategies. We will strive to put in place. As the environment changes we will see what other forms of business risk reduction strategies we can adapt. Leasing of assets Leasing of financial assets is increasingly becoming a method of financial management in many organizations (Peckinpaugh, 2005). This is a method whereby on organization can acquire its own personal property. The method involves purchase of assets via periodic payments. The payments have both interest and principal components. This method acts as an alternative to purchasing assets through cash (Peckinpaugh, 2005). In this method, we will acquire assets and use them for a period of time before we issue bonds. Before we decide on what items to lease-purchase, we will consider the availability of cash at that particular moment. Also to consider will be various competing wants on the capital resources. We will consider the profitable life period of the proposed asset to be purchased. Heavy equipment and machinery will be purchased on this method. This will involve vender negotiations. These bargaining will try and seek favourable payment modes. Light office equipment will be purchased at cash terms so that we may minimize on expenses through enjoying cash discounts. Proper care will be taken at all times to ensure the correct method is followed. In this strategy, we will try to identify a package with the lowest cost. This will be on both the stated transaction costs and interest rates when you add costs incurred in transactions to financing it increases the total cost on top of what is indicated on the interest rate (Peckinpaugh, 2005). We will establish a legal-authority to perform the lease-purchase functions. References Atkinson. H. Berry, A., & J, R. (1995). Business Accounting. London: Chapman and Hall. Carl, S., & James, M. (2007). Financial and Managerial Accounting. Minnesota: South-western College. Clyde, P., & Roman, L. (2007). Financial Accounting: An Introduction to Concepts, Methods and Uses. Minnesota: South-Western College. Harris, P., & Hazzard, R. (1997). Revenue Management. Atlas, Tilburg. Peckinpaugh, G. (2005). Maximum Yield Approach: A strategic Perspective. Blackwell: Oxford. Read More