Running head: FINANCE MANAGEMENT 1

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 a) Assets in place are the securities, real estates, and the other property that a compony
already owns, and therefore does not need to buy in order to execute a particular
investment strategy.

Growth -option refers to growth abandonment swapping option structure at the firm level, with the
three variables such asa the dividends, borrowings and estimated abandonment proceeds.

While non-operating assets refer to class of assets that are not so essential to the ongoing
operations of a business but still may generate incomes or provide a return on the investment.

B) Net operating working capital is a financial metric that measure a company’s operating liquidity
by comparing operating assets to operating liabilities.

Operating Capital is the cash used for daily operations in a company while (NOPAT) is a company’s
after-tax operating profit for all investors, including shareholders and debt holders. Finally, Free cash
flow (FCF) refers to the cash a company generates after accounting for cash outflows to support
operations and maintain its capital assets.

There are different types of financial management decisions in marketing, however, in this case I
would recommend that the company should open up another place a far distance from the main
branch. This would give the company more chances and better ways of budgeting for their inflows
and outflows. Additionally, the company’s firm’s capital structure and capital budgeting would
gradually improve since there will be more capital inflows in the form of incomes from another
source. This will reduce the risks of the company from operating at the break even point during un
busy days. All in all, this happens to be the best recommendation for most young companies with
high debt holders who are not willing to pay in time. This method also gives you a full view of the
assets and liabilities a company has.

a) common definitions are;

V = Value of the firm

FCF = Free Cash Flow

WACC = Weighted Average Cost of Capital

Rs and Rd are the costs of stock and debt

Finally, We and Wd are percentages of the firm that are financed with stock and debt.

The free cash flow valuation model states that the impact of the capital structure on the value
depends upon the effect of the debt on the WACC and also on the FCF. Debt holders have a prior
claim on the cash flows relative to stockholders. And when that happens, the debt holders fixed
claims increase the risk of stockholders’ residual claims. In this case the cost of stock goes up and the
value of the company is seen to reduce. However, companies can decide to deduct the interest
expense which in turn reduces the taxes paid. Cash payments for investors rises up and this reduces
the after-tax cost of debt and even the value reduces in the long run.

According ………, debts increase the risks of bankruptcy causing pre tax cost of debt to increase. This
has a major effect on the value since company’s value assets are seen to depreciate at a high speed
so raise the income to pay the increased taxes. Once the debts accumulate, the percentage at which
the firm’s finance with high cost equity decreases and increases the percent of the firm financed
with low cost debt (Wd). Additionally, capital structures can also affect the behaviors of managers
with in the company. This causes the reductions in the agency costs. Hence managers are less likely
to waste the FCF on non-value adding acquisitions. To sum up all, the free cash flow evaluation
model suggests that the capital structure of the company could be adjusted so as to prevent it from
affecting the its value.

B. 1.) Business risk refers to a situation where the company is uncertain about its EBIT. There are
quite various factors that influence the business risk in the country and some of them are as follows;
uncertainty about the output prices, uncertainty about the demand, degree of the operating
leverage, and product and other types of liability.

2. Operating leverage is defined as the change in EBIT caused by a change in the quantity solid. This
affects the firm’s business risk in the way that the higher the proportion of the fixed costs within a
firm’s overall cost structure, the greater the operating leverage. And also, the higher the operating
leverage leads to more business risks since a decline in small sales causes a larger EBIT decline
(Eugene And Michael, 2018).

From the given variables, Qs is the quantity solid, Fc is the fixed cost, Vc is the variable cost, Tc is the
total cost, and P is the price per unit. Therefore;

Operating Breakeven = QBE

QBE = Fc / (P – Vc)

From the given variables above, then,

Fc = $200, P = $15, Vc = $10, then this gives

QBE = $200/ ($15 – $10) = 40.

Therefore, the operating break-even point of this company is $40

References

Eugene F. Brigham And Michael C. Ehrhardt, (2018). Financial Management: Theory And
Practice, University Of Florida, University Of Tennessee, Thomson Southwestern, Retrieved
From File:///C:/Users/Kape/Desktop/Asinguza%20peter%20work/Financial
%20management-%20theory%20&%20practice%20(%20pdfdrive.Com%20).Pdf July, 2020