Unit 3 Individual Project
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Unit 3 IP 1
Petra Husnajova
Unit 3 Individual Project
Colorado Technical University
April 20th, 2023
Unit 3 IP 2
Introduction
It is time to do some calculations for Apix Printing so that we can determine what type of
health the company is in. I was able to use the assumptions given, and you will be able to see all the calculations to finding the weighted average cost of capital and the cost of equity. I hope everyone will be able to understand this better after seeing the excel spreadsheet results and reading my explanation. We will discuss the capital structure, the weighted average cost of capital (WACC), cost of equity and the marginal cost of capital. Capital Structure
A company’s capital structure is its mixture of debt and equity, and it is used to fund the operations of the business (Loth, 2022). Businesses can build an ideal capital structure to support
their efforts by starting with a firm foundation that contains liabilities, maximizes cash flow, and keeps an eye on the ratio of debt to retained earnings. This should be a priority of every company. It helps to type it up into excel so it can be easily read. By looking at the capital structure, we can see the debt, equity, and how the firm is being financed in general. For example, we can see how much of the company is financed by creditors, or owners. WACC and CAPM
The average interest rate a business expects paying to finance its assets is known as
WACC. The purpose of WACC is to conclude how much each of the company’s capital structure
will cost, based on the proportion of equity, debt, and preferred stock it has. I used the following
formula: WACC = (Weight of Common Equity * Cost of Equity) + (Cost of Debt * Weight of
Debt * (1-Tax Rate)). Comparing the assumptions that we were given and this equation, the only
thing missing was the cost of equity. To calculate the WACC correctly with this formula, we
Unit 3 IP 3
need to find the cost of equity first. We were able to use the following formula: CAPM = ERi =
Rf + Bi(Erm-Rf). For Apix Printing, the equation looked as follows: = 2% + 1.5 (11%-2%) =
15.5% and that is our cost of equity. Now that we have this, we can plug in our numbers for the
WACC equation. WACC = (60% * 15.5%) + (40% * 8% * ( 1 – 35%)). The WACC came out to be 11.38% which means that Apix will have to pay its investors
an average of $0.11 in return for every $1 in extra funding. The higher the WACC percentage,
the lower a company's net profit will be. The WACC will be extremely helpful for you to use.
For example, when the percentage is lower than the WACC, a project's breakeven point becomes
apparent. This indicates that Apix will lose money, the project is not feasible, and as a result, it
should not be approved. The project should be approved, however, if the percentage is higher
than the WACC because Apix can expect to see a greater return on their investment. As a result,
Apix would be permitted to move on with the project.
Marginal Cost of Capital
The cost of generating an additional dollar of a fund through equity, loans, etc. is known
as the marginal cost of capital (Kenton, 2021). It is the overall rate of return needed by
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Unit 3 IP 4
shareholders and debt holders to finance more capital for the business. If the new investment or
project's projected returns are less than the marginal cost of capital, it may not be a good idea, or
some adjustments may be necessary within the capital structure. The preferred project or
investment is always one that has a larger expected return than the marginal cost of capital.
Conclusion
In conclusion, we discussed the capital structure, the weighted average cost of capital (WACC), cost of equity and the marginal cost of capital. We calculated the cost of equity because we were missing this information and we needed it for the WACC equation. We have done the calculations and arrived at the CAPM being 15.50% and the WACC resulted in 11.38%.
Any potential project that is higher than the WACC 11.38%, Apix is safe to approve it because Apix would have a greater return on the investment. I hope that these explanations and calculations help you see the health of Apix Printing. With this information, you should be able to make future decisions with ease. If you have any questions, feel free to reach out and we can discuss further.
Unit 3 IP 5
References
Kenton, W. (2021, June 29). Marginal Cost Of Funds
. Investopedia. https://www.investopedia.com/terms/m/marginal-cost-of-funds.asp
Loth, R. (2022, June 7). Analyzing a Company’s Capital Structure
. Investopedia. https://www.investopedia.com/articles/basics/06/capitalstructure.asp
Unit 3 IP 6
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