Corporate Finance for Theory and Practice- myassignmenthelp.com

Question: Discuss about theCorporate Finance for Theory and Practice. Answer: Introduction to Corporate governance Corporate governance has been defined as the is the act of providing accountability on the part the management to the shareholders. This tells us how the management undertakes various activities keeping in mind the best interest of the shareholders and to increase the benefits that accrues to the providers of the capital. Its a combination of systemic governance which ensures that the business in run by the management on behalf of the principal stakeholders of a business concerned which might include the shareholders, bankers and suppliers etc(Luenberger, 2012). Why do you believe the value has changed and what impact this might have on the corporate governance policies of Volkswagen going forward? How can Volkswagen mitigate the risk of events such as this one occurring in the future? There is a saying in the corporate world that managements goal is to maximize shareholders wealth and concentrate on the same. However what is often misunderstood is the fact that shareholders do care about social responsibility and in the modern world more so about environmental concerns. So when the management of the Volkswagen company ran the emission scandal they compromised the corporate social of the firm and that harmed the goal of wealth maximization simply because the goodwill of the firm suffered and prospective customers of the company became suspicious of the companys products worldwide. The companys products came under review in a few market other than US as well. Customers thought twice before either purchasing or recommending the products of the company(Gruber, 2014). In the short term, the emission scandal would hit the revenue and demand of the products in certain market. However, in the long-term the company should be able to mitigate the demand slump through renewed measures and making sure the consumers do feel secure about the new product offerings. However, in the future the companys would do well to ensure there is enough research by the company as bring out the technology to actually reduce the level of emissions(Pascal Quiry, 2015). In the recent past the management believed that reducing the expenditures on RD would make sure short term profitability goals are achieved but it wont bring in wealth maximization in the long term because of problems which are faced by the shareholders of Volkswagen. Thus, the management of the company would need to ensure they invest in the best technology and technology creating RD so that wealth maximization occurs in the long term even if they miss the profit targets in the short term(Kane, 2015). Volkswagen board of directors should have invested in technology and strengthened their product portfolio instead of indulging in a scandal. The scandal has eroded significant value of the company from the market and the same mistake must not be repeated for the company to recover its image and goodwill in the medium to long term(ROSS and Westerfield, 2012). Evaluation of the new project proposal for the management of Berry Gold Mining company Estimation of the Payback period (PBP) Year Cash Flows(CF) Cum CF 0 -500,000,000 -500,000,000 1 60,000,000 -440,000,000 2 90,000,000 -350,000,000 3 170,000,000 -180,000,000 4 230,000,000 50,000,000 5 205,000,000 255,000,000 6 140,000,000 395,000,000 7 110,000,000 505,000,000 8 70,000,000 575,000,000 9 -80,000,000 495,000,000 Payback period for the gold mining project = 3 years + (180,000,000/230,000,000) = 3 + .782 = 3.782 years. Estimation of the NPV Year Cash Flows(CF) PVF (12%) PV 0 -500,000,000 1.0000 -500,000,000.00 1 60,000,000 0.8929 53,571,428.57 2 90,000,000 0.7972 71,747,448.98 3 170,000,000 0.7118 121,002,642.13 4 230,000,000 0.6355 146,169,158.03 5 205,000,000 0.5674 116,322,505.42 6 140,000,000 0.5066 70,928,356.96 7 110,000,000 0.4523 49,758,413.69 8 70,000,000 0.4039 28,271,825.96 9 -80,000,000 0.3606 -28,848,802.00 128,922,977.75 At the rate of discounting of 12% for the company the NPV is estimated to be 128,922,977.75 (128.923 million approx.). Thus the project would be economically beneficial for the Berry Gold Mining and must be accepted as the same would add value for the company(Vernimmen, 2011). Estimation of the IRR Year Cash Flows(CF) PVF (19%) PV 0 -500,000,000 1.0000 -500,000,000.00 1 60,000,000 0.8403 50,420,168.07 2 90,000,000 0.7062 63,554,833.70 3 170,000,000 0.5934 100,880,688.41 4 230,000,000 0.4987 114,693,812.82 5 205,000,000 0.4190 85,905,121.04 6 140,000,000 0.3521 49,299,925.99 7 110,000,000 0.2959 32,550,971.54 8 70,000,000 0.2487 17,406,936.65 9 -80,000,000 0.2090 -16,717,346.13 - 2,004,887.90 As the net present value of the project is negative at a discount rate of 19%, the IRR of the project is between the initial discount rate of 12% and 19%. IRR = 12% + [ 128,922,977.75 / (128,922,977.75+2,004,887.90)]*(19-12) = 12% + [ 902,460,844.2/130,927,865.64] = 12% + 6.892% = 18.892% The IRR of the project is 18.892% and the same is higher than the hurdle rate (12%) used by the company(Pascal Quiry, 2015). Analysis of the Evaluation of the proposal: Should this project be accepted? The payback period of the mining project is found to be 3.782 years. The Berry Gold Mining company would recover all the capital invested in the new project within 3.782 years where as the project itself has a life term of 8 years. Thus, the project do have a good cash inflow stream and the same would be beneficial for the company. The net present value of the project is estimated at 128,922,977.75 At the rate of discounting of 12% for the company the NPV is estimated to be 128,922,977.75 (128.923 million approx.). Thus the project would be economically beneficial for the Berry Gold Mining and must be accepted as the same would add significant amount of market value for the Berry Gold Mining company(Damodaran, 2012). The IRR of the gold mining project is found to be 18.892%. The irr of the project is much higher than the required rate of return. While the expected rate of return or the IRR is 18.892 % for the new gold mining project the hurdle rate is lower at 12% and thus the project shall be accepted because of the IRR being higher than the projects hurdle rate (irr r). All the three methods evaluated above suggests that the project must be accepted as it is making lot of economic sense right now. It not only has a positive NPV but also the project has a much better rate of return than what is expected in general(Gruber, 2014). Analysis of the possible higher discount rate because of higher risk involved. If the management considers the project to be more risky than other projects the same means the rate of discounting would be higher than 12%. As the rate of discounting is increased beyond 12%, the net present would be lower than the current 128,922,977.75 but would remain positive. The NPV would become zero only when the discount rate is 18.892%. Thus, at any rate below the IRR the new gold mining project would remain attractive for the company(Vernimmen, 2011). Bibliography Damodaran, A., 2012. APPLIED CORPORATE FINANCE. FOURTH EDITION ed. Chicago: Wiley Publishers. Damodaran, A., 2014. Corporate Finance - Theory and Practice. 2nd ed. NewYork: Wiley Educaitonal Publishers. Gruber, E. J. E. . M. J., 2014. Modern Portfolio Theory and Investment Analysis. 9th ed. Chicago: Wiley Edicational publishers. Kane, Z. B. . A., 2015. Investments. 10th ed. NewYork: McGrawhill Education . Luenberger, D. G., 2012. Investment Science. 1st ed. London: Oxford University Press. Pascal Quiry, M. D., 2015. Corporate Finance - Theory and practice. 8th ed. Chicago: Wiley Publishers. ROSS and Westerfield, 2012. fundamentals of corporate finance. 9th ed. s.l.:cengage learning . Vernimmen, P., 2011. Corporate Finance: Theory and Practice. 3rd ed. Chichester, West Sussex: John Wiley Sons, Inc..