Corporate Finance Assignment /AN

BCO315 Corporate Finance Task brief & rubrics
Task: Final Assignment (50% of course grade)
You are asked to answer all the questions in the proposed four cases.
This task assesses the following learning outcomes:
• Discuss and analyze the benefits of leasing versus ownership of assets.
• Analyze the concepts underlying the firm’s cost of capital.
• Demonstrate a deep understanding of the theory and practices of mergers and acquisitions.
• Critically evaluate financial distress.
LAUNCH: Thursday January 14th, 2021 / DELIVERY: WEEK 8 Sunday January 17th, 2021, 23:59hrs ON MOODLE
Submission file format: Word document with all the answers, clearly identifying each case separately.
CASE 1 (20 points)
You work for a medical research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment).
The scanner costs €4,000,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, the scanner will be worthless
in four years. You can lease the scanner for €900,000 per year for four years. You can borrow at 5 percent before taxes. Assume that the tax rate is 20 percent.
Instructions:
a. Create a lease-versus-buy analysis. Calculate the NPV of leasing. Should you lease or buy? (10 points)
b. Explain the impact of leasing on the balance sheet. (10 points)
CASE 2 (35 points)
Suppose stock in William Corporation has a beta of 0.80. The market return is 12 percent, and the Treasury Bill rate is 6 percent. William’s last dividend was €1.20
per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for €45 per share. William’s target capital structure is 1/3 debt
and 2/3 equity. Its cost of debt is 9 percent before taxes. Its tax rate is 21 percent.
Instructions:
a. What is William’s cost of equity capital? Assume that you equally believe in the CAPM approach and the dividend growth model. (10 points)
b. What is William’s WACC? (5 points)
c. William is seeking €30 million for a new project. The necessary funds will have to be raised externally. William’s flotation costs for selling debt and equity
are 2 percent and 16 percent, respectively. If flotation costs are considered, what is the true cost of the new project? (10 points)
d. Under what circumstances would it be appropriate for William Corporation to use different costs of capital for its different operating divisions? What are
two techniques you could use to develop a rough estimate for each division’s cost of capital? (10 points)
CASE 3 (25 points)
Firm Alpha is analysing the possible acquisition of Firm Beta. There are two alternatives for Firm Alpha: to use cash or stock as payment. Both firms have no debt.
You have the following premerger information (all figures are in millions):
Firm Alpha Firm Beta
Price per share €40 €20
Number of shares 50 20
Total market value €2,000 €400
You estimate that the incremental value of the acquisition is €200.
The board of Firm Beta has indicated that it will agree to a sale if the price is €300, payable in cash or stock.
Instructions:
a. What is the cost of each alternative? (5 points)
b. What is the NPV of each alternative? (5 points)
c. Which alternative should Firm Alpha choose? (5 points)
d. What are some important factors in deciding whether to use stock or cash in an acquisition? (5 points)
e. Explain what defensive tactics the managers of Firm Beta could use to resist acquisition. (5 points)
CASE 4 (20 points)
Westland Industries was suffering from cash flow insolvency in terms of its earnings before interest, taxes, and depreciation (EBITDA).
Two scenarios are possible for Westland in Year 3:
Scenario 1 suggests that the results from operations for Year 2 are expected to be repeated in Year 3 and thereafter.
In scenario 2, Westland is expected to have a breakout year in terms of sales of $400,000 and operating expenses before depreciation of 60 percent of sales.
Interest is expected to remain at $40,000 because of the need to finance the venture’s growth.
Instructions:
a. Prepare basic income statements (from sales to EBIT) under both scenarios. Comment on your findings. (10 points)
b. Many people believe that when a firm goes into financial distress, it is finished. Is this true? Explain what options are available in resolving financial distress
situations. (5 points)
c. There are various methods of restructuring that firms can follow in the process of turning around a venture in financial distress. Which do you think are
most effective? Explain why. (5 points)
Rubrics
Descriptor
9-10 The student demonstrates an excellent understanding of the
concepts.
8-8.9 The student demonstrates a good understanding of the concepts.
7-7.9 The student demonstrates a fair understanding of the concepts.
6-6.9 The student demonstrates some, but insufficient understanding of the
concepts.
3-5.9 The student demonstrates insufficient understanding of the concepts.
They may mention some relevant ideas or concepts, although it is
clear that the relationship between them is not understood by the
student.
1-2.9 The student demonstrates insufficient understanding of the concepts
and does not mention any relevant ideas or concepts.
0 The student leaves the question blank or cheats.
Points are stated at the end of each question.