Corporate Finance Study Material with Solved Assignments

This document contains study material for Corporate Finance with solved assignments, essays, dissertations, and more. It covers topics such as leasing vs buying, dividends, marginal tax rate, free cash flow, WACC estimation, and more. The document also includes subject-specific information such as course code, course name, and college/university.

Corporate Finance
1

Contents
2)......................................................................................................................................................3
Which of the following statements are true?...............................................................................3
3)......................................................................................................................................................3
A. Analysis of whether the company should buy it or lease it....................................................3
B. Evaluation on buying the machine or leasing it given the new terms of Leasing...................4
C. Calculation of Highest maintenance cost?..............................................................................5
4.......................................................................................................................................................6
a), b), c) Expected dividends Pay out per share in t=1, t-2 price of share. Calculation of fall in
price of share if investors are not taxed, discussion on amount of share price if investors are
not taxed on capital gains but taxed on dividend income............................................................6
5.......................................................................................................................................................6
Calculation of Marginal tax rate for the year of the Ultimate joy...............................................6
6.......................................................................................................................................................7
1. Free cash flow from the year 2018 to 2022.............................................................................7
2. Estimation of appropriate WACC for DowDuPont.................................................................8
3. Estimate of the Enterprise Value of DWDP? What about the price per share?.......................8
4. Direction in which the assumption and how it would change the answer?.............................9
7.......................................................................................................................................................9
1. Calculation of the enterprise value and the share price using SOTP valuation approach.......9
2. Calculation of the enterprise value and the share price using conglomerate approach.........10
3. Comparison of the Enterprise Value......................................................................................10
4. If consider synergies, how would the numbers change.........................................................10
8.....................................................................................................................................................11
1. Annual change of cash for the year 2018 to year 2022.........................................................11
2. Analysis of the new payout policy that is proposed by the CEO?.........................................11
2

2)
Which of the following statements are true?
I. On average, firms that do a large amount of leasing will not borrow as much as firms that don’t
do much leasing.
II. Leasing is likely to involve a lessee with a high marginal tax rate and a lessor with a low
marginal tax rate.
III. A good reason for leasing is to exploit potential economies of scale in maintenance by the
lessor.
IV. You must decide whether to buy a new technology, which will go obsolete in either 3 years
or 6 years. You will find out in t=3 whether the latest technology has a 3 or 6 year life, and
you can decide in t=3 whether to continue the project. If the technology has a 6-year life, its
NPV is +150. If it has a 3 year life, its NPV is -100 for each 3 year period (-100 NPV for the
first three years; -100 NPV for years 4 to 6). Your discount rate is 10%.
V. In the Modigliani and Miller perfect world (no taxes, no bankruptcy costs, etc.), repurchasing
shares does not increase EPS.
Answer to the question
I. True
II. False
III. True
IV. False
V. False
3)
A. Analysis of whether the company should buy it or lease it.
Buy option
0 1 2 3
Cost of machine -120000
Tax shield on dep
{120000/3=40,00(.30)} 12000 12000 12000
Cash flow from resale 7000
Maintenance cost 0 0 0 0
Cash Flow (CFb) -120000 12000 12000 19000
3

Lease Option
0 1 2 3
Lease payment -50000 -50000 -50000
Tax saving
{50,000*.30} 15000 15000 15000
Maintenance cost 0 0 0 0
Cash Flow (CFl) 0 -35000 -35000 -35000
Lease Option Minus Buy Option
0 1 2 3
Cash Flow (CFl) 0 -35000 -35,000 -35,000
Cash Flow (CFb) -120,000 12,000 12,000 19,000
Net cash flow (CFl - CFb) 120,000 -47,000 -47,000 -54,000
The after tax discount rate is calculated as,
Rd (1-tc) i.e. (1-.30)*100= 7%
Hence,
PV 120000 -43925.2 -41051.6 -44080.09
NPV {120,000 –
(43925.2+41051.6+44080.09)} -9056.94
So, it is concluded that the Since the NPV is less than 0 so buying the Machine is better
option for the company.
B. Evaluation on buying the machine or leasing it given the new terms of Leasing.
BUY Option
0 1 2 3
Cost of machine -120000
Tax shield due to Depreciation
{120,000/3= 40000*(.30)} 12000 12000 12000
Cash flow from resale 7000
Maintenance cost of the
Machine 0 -7000 -7000 -7000
Cash Flow (CFb) -120000 5000 5000 12000
Lease Option
0 1 2 3
4

Lease payment -50000 -50000 -50000
Tax saving (50,000*.30) 15000 15000 15000
Maintenance cost 0 0 0 0
Cash Flow (CFl) 0 -35000 -35000 -35000
Lease option minus buy option
0 1 2 3
Cash Flow (CFl) 0 -35000 -35000 -35000
Cash Flow (CFb) -120000 5000 5000 12000
Net cash flow (CFl - CFb) 120000 -40000 -40000 -47000
The after tax discount rate is calculated as,
Rd (1-tc) i.e. (1-.30)*100= 7%
Hence,
PV 120000 -37383.2 -34937.5 -38366.00
NPV {120,000-
(37383.2+3937.5+38366)} 9313.273
So it is seen that the NPV is greater than 0 therefore leasing the Machine is better Option.
C. Calculation of Highest maintenance cost?
Lessor's Perspective
0 1 2 3
Cost of machine -120000
Tax shield due to depreciation
{120,000/3=40000(.30)} 12000 12000 12000
Cash flow from resale 7000
Lease payment 50000 50000 50000
Tax saving -15000 -15000 -15000
Maintenance cost 0 X X X
Net cash flow -120000 47000-X 47000-X 54000-X
PV -120000 47000-X/ 1.07^1 47000-X/ 1.07^2 54000-X/ 1.07^3
NPV at 7% would be= 2.62 for 3 years.
NPV will be = 129,056.94
By solving the equation X would give 3451.16 i.e. (9056.94/2.62)
5

4.
a), b), c) Expected dividends Pay out per share in t=1, t-2 price of share. Calculation of fall in
price of share if investors are not taxed, discussion on amount of share price if investors
are not taxed on capital gains but taxed on dividend income.
0 1 2 3 4
After tax income (Growth @4%) 100000 104000 108160 112486.4
Dividend (@30%) 30000 31200 32448 33745.92
Shares 10000 10000 10000 10000 10000
Dividend/share 3 3.12 3.2448 3.374592
Valuation (Growth@4%) 2000000 2080000 2163200 2249728 2339717
The given share price is = 200.
Hence the calculated,
Pre-dividend for the year 1 = 20, 80,000/10000= 208
Ex-dividend for the share price (w/o tax) = 2080000-30000/10000= 205
Post dividend share price @30% tax gives= 208-(.7*3) = 205.9
Expected fall in price on excluding dividend = 30000/10000*(1-.30) = 4.28.
Also, it is seen that with 30% tax rate on dividends, Share price would remain same as
the amount of tax would affect the investor’s income and not the share price of the company.
Jeff’s should pay the dividend to the investor on the basis of special dividends or out of
share repurchase. It is not evident for him to pay the dividend on the regular basis. As if these are
stopped or reduced in future due some reason then it will give the investors a reason to disinvest
from the company.
5.
Calculation of Marginal tax rate for the year of the Ultimate joy.
If firm carry forwards all the losses then the taxable income and taxes are as
follow
-5 -4 -3 -2 -1 0 1 2 3 4
Taxable
income -100 -100 -100 -100 -100 200 100 100 100
10
0
Taxes (Ta) 0 0 0 0 0 0 0 0 0 30
In this case the firm would be liable to pay the tax @30% on $100, which would give 30.
6

If the firm generates an extra dollar today then income tax and taxes would be
as follow
-5 -4 -3 -2 -1 0 1 2 3 4
Taxable
income -100 -100 -100 -100 -100 201 100 100 100
10
0
Taxes (Tb) 0 0 0 0 0 0 0 0 0.3 30
Here also the firm would be liable to pay the tax @ 30% whereas at the end of 4th year
and for extra dollar that they earn they would be liable to pat .3 extra as tax. After settling all the
past year losses.
The difference is taxes would be:
-5 -4 -3 -2 -1 0 1 2 3 4
Tb-Ta 0 0 0 0 0 0 0 0 0.3 0
The difference that has been arose due to the extra dollar describes a marginal tax rate of,
MTR= .30/(1.1^3)= 22.54%, which would be based on the present value of extra money earned.
As it is seen that the losses if carry back in the past year will lower the Marginal rate of
tax as computed in the part above. As the company would be able to settle the losses in early
year given the option to save the tax.
6.
1. Free cash flow from the year 2018 to 2022.
2018 2019 2020 2021 2022
Net Income 9,314 10,664 11,853 12,378 12,923
Depreciation 5,273 5,319 5,690 5,830 5,973
Capex (5,000) (5,000) (5,000) (5,000) (5,000)
Change
NWC
(78) (189) (218) (890) (927)
FCF 9,509 10,794 12,325 12,317 12,969
NWC 21,314 21,503 21,721 22,612 23,538
The Formula for NWC is= Current assets- Current liabilities
CAPEX = Net PPE End of Year + Depreciation Expense – Net PPE Beginning of Year
7

2. Estimation of appropriate WACC for DowDuPont
DowDuPont Conglomerate
Comparable Information
βe (vs
SPX)
Tax
Rate
Debt-to-
Value
Debt-
Equity
Beta A
Eastman Chemical Company
(NYSE:EMN)
2.54 28.0% 59% 144% 1.247484
Ashland Global Holdings Inc.
(NYSE:ASH)
2.34 28.0% 56.0% 127% 1.221063
3M Company (NYSE:MMM) 3.56 28.0% 84.0% 525% 0.74477
Celanese Corporation
(NYSE:CE)
3.21 28.0% 71.0% 245% 1.161882
Monsanto Company
(NYSE:MON)
3.54 28.0% 81.0% 426% 0.869891
LyondellBasell Industries N.V.
(NYSE:LYB)
2.83 28.0% 78.0% 355% 0.796571
Honeywell International Inc.
(NYSE:HON)
2.95 28.0% 85.0% 567% 0.580709
DowDuPont Inc. (NYSE:DWDP) 2.21 28.0% 88.3% 751%
Comps Average 73.429% 276% 0.946053
D/E = (D/V) / (1-D/V)
Average βA of Companies =0.946053
Average D/V of Companies = 73.429%
Average D/E = (Average D/V)/ (1-avd D/V) =276%
rA = 3% + 0.946053 *6.5% = 9.149%
WACC= (1-t * D/V)* rA = (1 - 28% * 73.429%) * 9.149% = 7.27%
3. Estimate of the Enterprise Value of DWDP? What about the price per share?
2018 2019 2020 2021 2022
Net Income 9,314 10,664 11,853 12,378 12,923
Depreciation 5,273 5,319 5,690 5,830 5,973
Capex (5,000) (5,000) (5,000) (5,000) (5,000)
Change NWC (78) (189) (218) (890) (927)
FCF 9,509 10,794 12,325 12,317 12,969
Terminal Value 251092.
8

7
PV 8864.618375 9380.735598 9985.543
9
9303.228
4
1,85,930
Total Enterprise value 223464.0591
Total Net Debt Value 49,765
Intrinsic Equity Value 1,73,699
Per Share Basis 74.54895241 (number of shares =2330)
As per the above calculation the computed share value is derived as $74.548. Which is
trading at $4.548 above current price of $70. Hence it is advised to invest
4. Direction in which the assumption and how it would change the answer?
2018 2019 2020 2021 2022
FCF 9,509 10,794 12,325 12,317 12,969
Growth 13.51% 14.18% -0.06% 5.29%
Valuation is sensitive to growth rate. We have assumed 2% FCF growth rate post 2022.
A difference in g would hugely impact the terminal value, and therefore the PV of Enterprise
value.
Given that the FCF growth is approaching 5.29% in 2022 I would probably assume
growth to be above 4% (closer to 5%) going forward (Probably a little aggressive)
This would lead to a higher g, higher terminal value, and a higher enterprise value (PV).
7.
1. Calculation of the enterprise value and the share price using SOTP valuation approach.
EV/
EBITDA'18
EBITDA
2018
EV
Agriculture 14.0x 3,522 49303.33333
Material Science 8.5x 9,818 83450.16667
Specialty Products 14.0x 6,195 86725.33333
=219478.833
3
Total EV = $219478.8333 (in Millions)
9

Total Net Debt Value = 49,765
Intrinsic Equity Value = Total EV – Net Debt value = 169,713.833
Price per share = 169,713.833 / 2330 = $72.8385
2. Calculation of the enterprise value and the share price using conglomerate approach.
All the multiples are based on projected data in 2018 P/E'18 EV/EBITDA'18
3M Company (NYSE:MMM) 20.8x 13.1x
Ashland Global Holdings Inc. (NYSE:ASH) 18.7x 9.8x
Celanese Corporation (NYSE:CE) 12.0x 10.4x
Eastman Chemical Company (NYSE:EMN) 11.3x 8.3x
Honeywell International Inc. (NYSE:HON) 14.1x 11.5x
LyondellBasell Industries N.V. (NYSE:LYB) 11.4x 7.0x
Monsanto Company (NYSE:MON) 21.6x 7.1x
Comp Mean 15.7x 9.6x
EBITDA 2018 = $19,534
Enterprise Value = 19,534 * 9.6 = $187,526.40
Total New Debt Value = 49,765
Intrinsic Equity Value = $137,761.4
Price per share = $137,761.4/2330 = $59.125
3. Comparison of the Enterprise Value.
It is seen that the enterprise value is considered as higher in the STOP valuation rather than
Conglomerate valuation approach. In the approach of SOTP different approach vertical are taken
into consideration. As they have a multiple factors such as scalability, growth potential, asset
light and also Capex heavy as the variable. Hence due to this different benchmark are compared
differently leading to more accurate valuation and giving precise comparison over other form.
10

4. If consider synergies, how would the numbers change.
If synergies were to be considered, the Enterprise value would be higher. Synergies lead to
economies of scale, higher efficiency, thereby resulting in a higher earnings figure. Increasing
EBITDA would lead to a higher enterprise value which in turn would mean a higher share price.
8.
1. Annual change of cash for the year 2018 to year 2022
2018E 2019E 2020E 2021E 2022E
FCF 9509 10794 12325 12317 12969
(-) Dividends (1,047) (1,211) (1,386) (1,541) (1,609)
(-)Repurchases – – – (200) (200)
(-) Contributions to 401(k) (1,089) (1,074) (1,083) (1,033) (1,075)
(-) Debt Repayment (3,036) (8,439) (4,836) (3,066) (1,500)
(-) Acquisitions (3,944) (4,104) (4,272) (4,447) (4,630)
(+) Debt Issuance 559 9,636 6,084 4,365 2,852
Additional Adjustments (8,557) (5,191) (5,494) (5,922) (6,162)
Total Change in cash 952 5,603 6,831 6,395 6,807
2. Analysis of the new payout policy that is proposed by the CEO?
It is seen that the given trend in the annual changes in the cash payout policy depicts the
correct. The change is cash has become 5 times in the year 2019 as compared to the year 2018. It
is also seen that the change in cash is stable in the year 2020, 2021 and the year 2022.
However, it is seen that the company has used debt aggressively after year 2019 due to
this it is recommended that company should not use the debt level so increasingly and stop doing
leveraging through debt.
11