The company capital structure consists of equity and debt, which is the method of financing the company operation. The current capital is made up of the debt that contributes $193,437, leases of 7,627, the common stock of 31,251, common stock add in the capital of $25,000, and retained earnings of $96,364 in which the capital structure add up to $353,679.The WACC, which shows the percentage that investors receive from risking to investors, is 12.6%.this, shows the cost of capital used in calculating the cost of borrowing.
Through classification of the component of capital structure, you get total debt, which consists of preferred stock and leases that add up to $201,064, representing 56.8% and total equity add up to $152,615.0, which represents 43.2%. The ratio between debt and equity is 3.1, which shows that company assets are mostly financed by external borrowing. The ratio between debt and capital is 0.6, which shows the company has a high borrowing capacity and high financial leverage.
The company has always been paying dividends to its investors. The dividends policy shows that the company has always made sure it keeps a certain amount of retained earnings to the investors as dividends. The ratio for the dividends has always been constant throughout the years, .but through this dividend policy, the investors have seen an increase in their dividends because of the increase in net income of the company and vice versa received a decrease in dividends when it retains earnings reduce.
The company exists a direct relationship between the capital structure and the Cost of Capital and the relationship between the cost of capital and risk level. The company enjoys a higher percentage of debt than equity. Since debt is charged a small percentage of tax compared to equity, this leads to a lower cost of capital to 12.6%, which means the higher the amount of debt in the capital structure, the lower the cost of capital. This shows a company is at low risk and enjoys a good credit score and can borrow more money to finance its operation. With low risk, the company enjoys more investment returns, resulting in its growth and expansion.
Valuation
Most companies’ objective is to maximize the wealth of the shareholder and minimize cost. To achieve this objective, the company should consider using a low cost of capital and high equity in its capital structure. This company will reduce its financial leverage, which increases its rate of return for its investors, an,d in return, shareholders receive an increase in their various wealth.
The company market value is approximately $2,193,403. The high market value is a result of the high expectation that the company’s net income will increase in the future, and the company is experiencing high cash flow.
Assumptions
The revenue of the company is assumed to increase at a rate of 15%
per year will be a result of an increase in the production level .the increase in sales will increase production levels.
The operating income is assumed to be at 27.8%, which is the result of expenses involved in the production and distribution of company products and services. It is assumed that company sales and its operating income will remain constant in ten years.the NPV was calculated by discounting various cash flow at a discount rate of 10%. This rate is relevant since it shows the average rate of discount to medium risk Companies.
The economic value addition of the company sum up to $2,193,409 and the NPV discounted at 5% is $1, 069, 401, 10% add up to is $755,291 and rate of 18% is $457, 833.this arrive at a conclusion that the higher the risk level, the lower the NPV. The company’s internal rate of return is 8.5%, and the modified one is at 8.549 %
.