Financial structure mandates

Suppose the TIC= I = $329,994

We have the following variables pertaining to the financial structure of the project: I = total investment cost (TIC), r = return on investment, L = loan, R = repayment of the loan, ib = interest rate on borrowings, s = number of installments.

The following are the assumptions used to compute the optimal capital structure. The rate of return, r, is estimated by taking the average rate of return on investment of two similar assets from the Toronto Stock Exchange (TSX); namely, MTY Food Group Inc. and Recipe Unlimited Corp. The return on investment of MTY and Recipe are 9.75% and 9.89% respectively. Therefore, the return on investment for our business is estimated to be r = 9:8%. Because our business is eligible to participate in the Canada Small Business Financing Program, the maximum interest rate on borrowing is the banks prime rate plus 3% (Government of Canada, 2017). Currently, as per the Bank of Canada statistics, the average prime rate is 3.95%. Therefore, the interest on borrowing can be anywhere in the range of 3.95% to 6.95%. Taking the geometric mean of these bounds, we estimate ib = 5:24%. We assume that the total investment cost, I, will be financed via debt (loan) and equity. The loan is assumed to be paid over 5 installments.

Questions

1.4 Financial evaluation mandates The following are the mandates used to compute the net cash flow (NCF): The project's operations is assumed to continue after the 5th year and, thus, no residual value will be estimated There will not be any change in investments over the life time of the project. The corporate tax for small businesses in BC is 11% (Government of Canada, 2019). Revenues are expected to grow by 2.7% per year (Statistics Canada, 2020) Purchases and indirect costs are expected to grow by the inflation rate in Canada, which, according to the Bank of Canada's recent statistics, is 1.9%. Again, according to the Bank of Canada's forecasts, wages are expected to grow by 2.8%. Thus, we will assume that direct costs will grow by the same rate. 5. [3] Use the financial structure mandates to compute the optimal amount of capital raised via loan, L, and the amount raised via equity, E. Use your findings to find the optimal capital structure, i.e., the optimal debt and equity ratios. 6. [2] Use the financial evaluation mandates to project the net cash flows of this project over its expected life time. Report your findings in a table. 7. [1] Compute the payback period of this project and comment on your finding. 1.4 Financial evaluation mandates The following are the mandates used to compute the net cash flow (NCF): The project's operations is assumed to continue after the 5th year and, thus, no residual value will be estimated There will not be any change in investments over the life time of the project. The corporate tax for small businesses in BC is 11% (Government of Canada, 2019). Revenues are expected to grow by 2.7% per year (Statistics Canada, 2020) Purchases and indirect costs are expected to grow by the inflation rate in Canada, which, according to the Bank of Canada's recent statistics, is 1.9%. Again, according to the Bank of Canada's forecasts, wages are expected to grow by 2.8%. Thus, we will assume that direct costs will grow by the same rate. 5. [3] Use the financial structure mandates to compute the optimal amount of capital raised via loan, L, and the amount raised via equity, E. Use your findings to find the optimal capital structure, i.e., the optimal debt and equity ratios. 6. [2] Use the financial evaluation mandates to project the net cash flows of this project over its expected life time. Report your findings in a table. 7. [1] Compute the payback period of this project and comment on your finding