This can be done through preparation of the net previous and cash flow which are used in the estimation of the capital cost that is best estimated by the WACC method (Weighted Average Cost of Capital). This can be determined as indicated below:
Debt cost is stated in our case and is given as 6%, and the Equity coast is taken as 10%. The shareholders have an option of either using the equity for financing or debt financing depending on their appropriateness. The debt ratio: Equity ratio is taken as 0.6:04 as given in our case. This means that 60% is used to raise funds from the public through IPO and 40% from debt-financing. The financial leverage of the company is 60%. We, therefore, need to calculate the WACC that is given as indicated below.
We get the WACC as 0.1128 or 11.28% given from the above calculation. After computation of the capital cost the statement of cash flow statement. The flow for the year 0 and year 1 is taken as -€ 1,200,000.00 and -€ 800,000.00 respectively as it is mentioned that the flow in the form of investment. A percentage of 15.00% has raised this cash flow annually. The business cost of operating will be deducted from the inflow of cash. There is no requirement for the deduction of the operating expenses from the inflow of cash. Additionally, the incurred depreciation is adjusted. Operating expenses will increase by a rate of 2.5%, and the inflation of 2.5% is also considered
It is crucial to note that the sterling pound is used in conversion to the Euros. This is purposeful for calculation of the net cash flows for the period. The spot rate which is given as £0.7320/€ has been considered for conversion. It is assumed that the rate of conversion for the time remains unchanged over the studied period, which is four years.
This corporation has a vast capitalization of the market with at least 2.5 B Euros and sales turnover of 60 M Euros annually globally and gains over the last 5 considered.