Capital Budget Capital Structure Decisions -Myassignmenthelp.Com

Question: Discuss About The Capital Budget Capital Structure Decisions? Answer: Introduction: In the present case the firm Antena 3 Televisin is considering an opportunity in a new studio by replacing the old one. For the purpose of setting up a new studio, the firm will have to invest in some of the fixed assets. It is to be evaluated whether to invest in new studio by replacing the old one or not. The capital budgeting technique named as Net Present Value will be applied here to reach at the appropriate decision. Analysis of the case: The cost of each of such fixed will have to be adjusted for the depreciation every year and the firm will be entitled to the tax savings on such depreciation. However, land is an asset on which deprecation is not charged. Also, depreciation is a non-cash expense and hence it will be deducted from the cash inflows of the year only for the purpose of availing tax benefits and afterwards it will be added back to the respective cash flows to find the present value of cash flows (Drake, 2006). The discounting rate used to determine the present values of the cash flows will be calculated on the weighted average cost of capital. WACC represents the blend of companys capital and debt structure on the basis of their individual proportions. To calculate Cost of equity, the capital asset pricing model will be applied and the cost of debt, for the purpose of WACC calculation, will be taken as after tax cost of debt. The tax benefit will not be received on capital investments such as acquisition of various assets. Effect of inflation is not to be given on depreciation as depreciation is a non-cash item (Graham Harvey, 2002). Capital loss will arise at the end of last year i.e. 11th year at the time of sale of new studio because the written down value of the total assets is less than the amount realised on sale of the entire unit. Tax savings will be available on such capital loss. In case of working capital investment, the recovery of 50% of amount of working capital will be made and it will be given impact of inflation @ 3% and the capital gain on sale of old studio will also be taxed at the end of year 1. Decision on the basis of Net present value: In part the net present value of the free cash flows from the new studio is positive hence it will be profitable to invest in this proposal (Refer excel sheet) In this part working capital investment is required to be made and hence it is giving negative net present value, therefore in such case capital investment must not be made as it will not be profitable (Refer excel sheet). Conclusion: Therefore, it can be said that the firm must not go for additional working capital if it is considering to invest in the new studio. References: Drake, P.P., Capital budgeting techniques.Online (datum posledn revize: 29.6. 2006): www. fau. edu/~ ppeter/fin3403/module6/capbudtech. pdf. Graham, J. and Harvey, C., 2002. How do CFOs make capital budgeting and capital structure decisions?.Journal of applied corporate finance,15(1), pp.8-23.