Financial Analysis

2143 Words May 11th, 2013 9 Pages
Task: 3
A. Prepare a summary report in which you do the following:
A1. Recommend a capital structure approach that maximizes shareholder return.
Capital Structure: “Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm debt, preferred stock, and common equity.” (Capital Structure Decision, 2002)
Capital structure is a mix of debt, preferred stock, and common stock to which
Competitive Bikes will plan to finance its company. The recommendation for Competition Bikes pertaining to their capital structure is the alternative of 50% Preferred and 50% Common Stock. With
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It is compounded annual rate of return that the company will earn if it invests in the project and receives the given cash inflows.” (Gitman, 2008)
Criteria for IRR:
Ø If the IRR is greater than cost of capital, accept the project
Ø If the IRR is less than cost of capital, reject the project
Scenario one (low demand):
1. Total investment in the capital structure is $600,000
2. Depreciation based on 10 year life
Building is expected to have $250,000 value at the end of ten years
3. Sales projections:
Year 9 – 500 CarbonLite models
Year 10 Year 11 – 1% growth year over year
Year 12 and Year 13 – 2% growth year over year
Cost of goods sold will increase proportionately
4. Selling and administrative anticipated expenses for Canadian operations:
Year 9 : $250,000
Year 10 : $240,000
Year 11 : $230,000
Year 12 : $220,000
Year 15 : $210,000
Stabilization after year 5.
5. Competition Bikes requires a 10% hurdle rate to purse a capital investment.
Based on NPV: I recommend declining this project of low demand with the NPV as a negative and according to the recommended criteria. My concern with scenario one is the NPV (net present value) after five year has a negative amount of - $39,281. With the slow growth of 1% in year 10 and year 11 and then increased by only 2% growth the last two years, has proven that these sales are not aggressive enough to help

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