Finance Assignment Essay Example | Topics and Well Written Essays - 1500 words - 1

Finance Assignment - Essay Example However, the best practise to calculate the cost of capital is to consider the market value of the assets, in which case, the difference can be significant. The WACC is calculated using only the cost of debt and the cost of equity. It is important to note that raising capital via. Debt increases the beta value of the company, i.e., the risk of investing is increased, as the company is obligated to pay the debt. Hence the cost of equity is also increased due to this change in capital structure. The debt ratio of Boral limited is computed as the ratio of total debt to total assets which is equal to (1518/5816.60) 26.1%. This is lesser when compared to the Commonwealth bank which has a higher debt ratio. Also, the Commonwealth bank of Australia has lesser short term money and in order to compute the liquidity position of the bank, the cash as well as the loans and deposits are to be considered. The gearing ratio of the bank has to be much higher, as the entire operation of the bank involves taking deposits and lending loans. However the gearing ratio of Boral cannot go much higher as it will affect the debt rating of the company. From the balance sheets, it is evident that Boral Limited has a number of non-tangible assets whereas all the assets and liabilities are monetary in nature. The banks normally seek and increase liabilities in order to build the assets. However manufacturing companies tend to build assets and thrive to increase the value. As there are opportunities for business development with the additional capital raised by making the company public, it is essential to estimate the business growth. This will give an estimate on the earnings per share. Based on the earnings, the plowback rate can be computed for continuous growth. Hence from the earnings per share and the plowback rate, the dividend payments can be forecast during the growth period. Case 1: Assuming that the business can expand for the next 6 years and