Knowledge of Capital Structuring of the Private Investment – Finance Assignment Help

Assignment Task

The purpose of this part of the assessment is to put at work your knowledge of capital structuring of the private investment undertaken in Assessment part 1. In particular consider using an equal portion of debt and equity (i.e. 50-50) to fund the investment discussed in your Assessment part 1.

1. Explain whether you expect the valuation you came up with in Assessment part 1 to change as a result of using debt (a cheaper source of funding) than equity, and why. Assume that interest paid on debt is tax-deductable;

2. Discuss the additional risks to you as investor if the investment in partly funded by debt. Assume that you need to pay an interest of 3% per annum on debt;

3. Explain whether the discount rate applied to the investment (wholly financed by equity in Assessment part 1) should change as a result of using a mix of debt and equity. In case of a change, explain how the appropriate discount rate should be obtained and provide your calculation showing both the 3% cost of debt and the cost of equity;

4. Focus on the equity used to buy the property and the equity you get at the end of the 10 years period, when the property is sold: what return did you make? Compare it with the return you got in Assignment 1, when the investment was entirely financed by equity: any difference? Explain.

5. Would your calculation and conclusions differ if you used ‘economic’ rather than ‘accounting’ benefits and costs, and if so how? Discuss