A business has issued ordinary shares 30 million $0.10 shares. On June 10 the Stock Exchange closing price of the shares was $1.50. Early on the morning of June 11, the business publicly announced that it had just secured a new contract to build some hotels in the Middle East. The new contract requires an initial investment of $10 million and is expected to generate the following cash flows over the next 5 years: Year 1 2 3 4 5 CF 2.00 3.00 5.00 5.60 6.64 On 12 June, the business announced its intention to raise the necessary money to finance the work, through a rights issue priced at $1.00 per share. Required: A. Calculate the net present value of the new contract. Assume a required rate of return of 10%. determine the theoretical value of the right to buy one new share assume that the events described above were the only influence on the share price
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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