INDEPENDENT UNIVERSITY, BANGLADESH

School of Business
MBA Program

SPRING– 2021
Course: MBA 511 (Financial Management)

ASSIGNMENT

Submitted By

Rahi Mun Farque

ID: 2021686

Submitted To
Dr. Samiul Parvez Ahmed

6th May, 2021

1
Part A
Comprehensive Final Analytical Problem
1. Calculation of WACC
The weighted average cost of capital (WACC) is a term used to describe the cost of capital for a
business. The weighted average cost of capital is calculated by multiplying and summing the weights
of each capital form in the optimal capital structure. To calculate the WACC, you must first calculate
the cost of each capital separately.
Cost of bond:

Cost Of Bond
Current Price 1,300.00৳
Coupon rate 12%
Maturity(Years) 5
Par Value 1,000.00৳
   
Year Cash Flows
0 1,300.00৳
1 - 120.00৳
2 - 120.00৳
3 - 120.00৳
4 - 120.00৳
5 - 1,120.00৳
   
Cost Of Bond 5.06%
Cost of Bond

A bond is a debt insurance in which money is earned by selling it at market price and then paid at
par value. Furthermore, the offer is billed once a year. So, the sale price of the bond is the only cash
inflow, while the coupon payment and par value at maturity are the only cash outflows. The cost of
the bond is the IRR of these cash flows. As a result, the bond's payment is 5.06 percent.
Cost of Preferred Stock:
Cost Of Preferred Stock
Current Selling Price
115.00৳
Preferred Stock Dividend 12.00৳
Selling Costs 2.00৳
   
Actual Cash flow
Received

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 113.00৳
Cost of Preferred Stock 10.62%
Cost of Preferred Stock

Preferred Stock dividend

Cost of Preferred Stock =
Selling Price of Preferred Stock−Selling Cost
= 12.00৳/113.00৳
= 10.62%
Cost of Common Stock:

Cost of Common Stock

Current Selling Price
95.00
৳
Dividend In next Year
5.00৳
Annual Growth Rate 8%
Flotation Cost(per Issue)
3.50৳
   
Actual Cash Receipt After flotation cost
91.50
৳
Cost of Common Stock 13.46
%
Cost of Common Stock

D1
Cost of Common Stock= +g
SP−F
Here,
SP= Selling Price
D1= Dividend in next year
F= Flotation Cost
G= Growth rate
So, cost of common stock is 13.46%

Weight of Debt(Bond) 35%

Weight of Preferred Stock 20%
Weight of Common Stock 45%
Applicable Tax Rate 35%
WACC 9.33%
WACC

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WACC= Weight of Debt* Cost of debt (1-Tax) + Weight of Preferred Stock* Cost of Preferred Stock +
Weight of Common Stock* Cost of common Stock
Using this formula and given information WACC is 9.33% which will be used as discount rate. As the
debt has tax benefit tax shield has been adjusted while calculating WACC.

2. Payback Period and NPV

Two projects have been proposed, one in Chittagong and the other in Sylhet. Cash inflows and
outflows vary from the two. The amount of money coming in is determined by the student's ID. The
Chittagong and Sylhet projects have an initial cash outflow of 6,000,000.00 and 5,500,000.00,
respectively. 2021686 is my ID number. The following cash flows are calculated using my id:
Year Cash Flows of Project - Cash Flows of Project-
Chittagong Sylhet

0 - 6,000,000.00৳ - 5,500,000.00৳
1 2,021,686.00৳ 2,021,686.00৳
2 2,821,686.00৳ 2,421,686.00৳
3 2,771,686.00৳ 2,371,686.00৳
4 2,746,686.00৳ 2,546,686.00৳
5 2,521,686.00৳ 2,171,686.00৳
Project of the Cash-flows

Payback Period:
The payback period is the amount of time it takes to recover the money we've invested into the
business in absolute terms. Investors of all types of investments want to know when they should
expect to get their money back. The pay-back period is used to calculate this time period. It is a very
easy but powerful method for making decisions when time is a major consideration for investors.
However, the payback period's key flaw is that it ignores the time value of capital.
Year Cash Flows of Project- Cash Flows of Cumulative Cash Cumulative Cash
Chittagong Project-Sylhet Flows of Project - Flows of Project-
Chittagong Sylhet
0 - 6,000,000.00৳ - 5,500,000.00৳ - 6,000,000.00৳ - 5,500,000.00৳
1 2,021,68 2,021 - 3,978,314.00৳ - 3,478,314.00৳
6.00৳ ,686.00৳
2 2,821,68 2,421 - 1,156,628.00৳ - 1,056,628.00৳
6.00৳ ,686.00৳
3 2,771,68 2,371 1,61 1,31
6.00৳ ,686.00৳ 5,058.00৳ 5,058.00৳
4 2,746,68 2,546 4,36 3,86
6.00৳ ,686.00৳ 1,744.00৳ 1,744.00৳
5 2,521,68 2,171 6,88 6,03
6.00৳ ,686.00৳ 3,430.00৳ 3,430.00৳
Payback     2.417 2.484
period
Pay-back period

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The accumulated cash-flows are used to measure the payback period. There is a negative cash flow
at first (cash outflows). Cash inflows and outflows are applied together. The payback period is the
amount of time it takes to transform a negative accumulated cash flow into a positive one. After the
second year, both projects had a net positive cash flow .
So, payback period of Project Chittagong= 2+ negative cash flows at end of year 2/ Cash flows of year 3
= (2+1,156,628.00৳/2,771,686.00৳) years
=2.417 years
Payback Period of Project Sylhet = 2+ negative cash flows at end of year 2 / Cash flows of year 3
= (2+1,056,628.00৳/2,371,686.00৳) Years
= 2.484 Years
Net Present Value (NPV):
The difference between capital outflows and cash inflows is the project's net value. However, both
cash inflows and a project do not happen at the same time. Two separate inter-temporal cash flows
are not equivalent because cash flows have a time value of money. In order to compare, cash flows
are discounted to the present using a fixed discount rate. So, after subtracting cash outflow from the
current value of all cash flows, net present value is the net value of investment. NPV= -initial
investment+ PV of all the CFs
Year Cash Flows of Cash Flows of PV of CF of PV of CF of
Project - Project- Sylhet Project - Project- Sylhet
Chittagong Chittagong
0 - 6,000,000.00৳ - 5,500,000.00৳    
1 2,021, 2,021,68 1,849 1,849,
686.00৳ 6.00৳ ,093.15৳ 093.15৳
2 2,821, 2,421,68 2,360 2,025,
686.00৳ 6.00৳ ,472.01৳ 853.34৳
3 2,771, 2,371,68 2,120 1,814,
686.00৳ 6.00৳ ,700.23৳ 648.22৳
4 2,746, 2,546,68 1,922 1,782,
686.00৳ 6.00৳ ,159.20৳ 197.14৳
5 2,521, 2,171,68 1,614 1,390,
686.00৳ 6.00৳ ,047.96৳ 024.51৳
WACC 9.33%
Present Value of     9,866 8,861,
Cash Inflows ,472.55৳ 816.36৳
NPV     3,866 3,361,
,472.55৳ 816.36৳
NPV

The total present value of all cash inflows for the Chittagong project is 9,866,472.55৳ and initial
outflow is 6,000,000.00৳.
So, NPV of Project Chittagong = (9,866,472.55৳- 6,000,000.00৳)
= 3,866,472.55৳
By the same way-
NPV of Project Sylhet = (8,861,816.36৳-5,500,000.00৳)
=3,361,816.36৳

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3. Net Present Value Profile

Net Present Value Profile

8,000,000.00৳
7,000,000.00৳
6,000,000.00৳
5,000,000.00৳
4,000,000.00৳
NPV

3,000,000.00৳
Cross Over Rate

2,000,000.00৳
1,000,000.00৳
-৳

0%
-1,000,000.00৳ 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39%
-2,000,000.00৳

Discount Rate
NPV Grah

The NPV profile is a graphical representation of a project's net present value (NPV) as a function of
the discount rate. This graph aids in comprehending the NPV pattern. The discount rate is on the
horizontal axis, and the net present value is on the vertical axis.
Project Chittagong's line graph is steeper than Project Sylhet’s, indicating that Project Chittagong has
a higher slope in the graph. A higher slope indicates that the discount rate is more sensitive. As a
result, an improvement in the discount rate would have a greater impact on the NPV of the
Chittagong project. Chittagong has higher discount rate risks because its NPV is more volatile when
the discount rate is changed, whereas project Sylhet has lower discount rate risks.
The cross over rate is just the rate at which these two line graphs cross at a discount rate of 36.80%.
Both projects have the same NPV at this discount rate of 36.80%, and project Chittagong would have
a higher NPV at this rate. The IRR is calculated where the two project lines cross the horizontal line,
and the discount rate NVP is zero. In the Appendix, there are details of the NPV profile.

6
4. Taking Decisions
Both projects have a positive net present value (NPV) and a payback period of less than 5
years. As a result, both projects are profitable to invest in. They are, however, mutually
exclusive projects. As a result, only one project must be chosen. The NPV and payback
period will be used in this case.
Lower payback period indicates a successful project when it relates to having money back in a
shorter period of time. The payback period for the Chittagong project is 2.417 years, while the
payback period for the Sylhet project is 2.484 years. As a result, the Chittagong project is superior to
the Sylhet project. Since higher NPV is associated with higher profitability and cash flows, a higher
NPV indicates a better project. Project Chittagong has a net present value of 3,866,472.55 and
project Sylhet has a net present value of 3,361,816.36. As a result, Project Chittagong is superior.
As a result, the Chittagong region's NPV and payback project are the strongest.

5. Entry of New Competitor in the Chittagong Region

The most important element in the study is that threat of new entrants. When making an
investment decision, it is extremely critical. The cost of new entrants is very high because it increases
market rivalry, and if the competition is not well handled, cash flow may be greatly reduced. As a
result, the potential cost of new entry threats is extremely high. Both projects are profitable. This
project's NPV and payback duration are not substantially different. As a result, in order to avoid high
risks, I will pursue a project in the Sylhet area. Furthermore, taking on high risks involves a high
required rate of return. As a result, the Chittagong project's discount rate will rise. The NPV of the
Chittagong project would be reduced as a result. So, given the threat of new entrants, I may decide
for the Sylhet region project.

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 Appendix
Net Present Value

Discount Rate NPV- Chittagong NPV- Sylhet

0% 6,883,430.00৳ 6,033,430.00৳
1% 6,496,737.03৳ 5,691,173.49৳
2% 6,127,465.21৳ 5,364,293.90৳
3% 5,774,620.38৳ 5,051,914.87৳
4% 5,437,275.71৳ 4,753,219.36৳
5% 5,114,566.53৳ 4,467,445.05৳
6% 4,805,685.50৳ 4,193,880.12৳
7% 4,509,878.26৳ 3,931,859.41৳
8% 4,226,439.46৳ 3,680,760.95৳
9% 3,954,709.08৳ 3,440,002.66৳
10% 3,694,069.08৳ 3,209,039.50৳
11% 3,443,940.36৳ 2,987,360.68৳
12% 3,203,779.90৳ 2,774,487.24৳
13% 2,973,078.21৳ 2,569,969.75৳
14% 2,751,356.92৳ 2,373,386.22৳
15% 2,538,166.61৳ 2,184,340.14৳
16% 2,333,084.77৳ 2,002,458.76৳
17% 2,135,713.97৳ 1,827,391.41৳
18% 1,945,680.11৳ 1,658,807.99৳
19% 1,762,630.90৳ 1,496,397.61৳
20% 1,586,234.30৳ 1,339,867.27৳
21% 1,416,177.28৳ 1,188,940.69৳
22% 1,252,164.47৳ 1,043,357.20৳
23% 1,093,917.08৳ 902,870.70৳
24% 941,171.78৳ 767,248.76৳
25% 793,679.73৳ 636,271.73৳
26% 651,205.65৳ 509,731.89৳
27% 513,526.96৳ 387,432.75৳
28% 380,433.01৳ 269,188.31৳
29% 251,724.31৳ 154,822.44৳
30% 127,211.84৳ 44,168.26৳
31% 6,716.47৳ - 62,932.44৳
32% - 109,931.72৳ - 166,629.69৳
33% - 222,893.93৳ - 267,065.86৳
34% - 332,323.18৳ - 364,376.10৳
35% - 438,364.80৳ - 458,688.75৳
36% - 541,156.86৳ - 550,125.78৳
37% - 640,830.60৳ - 638,803.11৳
38% - 737,510.84৳ - 724,831.00৳
39% - 831,316.32৳ - 808,314.34৳

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40% - 922,360.05৳ - 889,352.97৳