Corporate Finance Study Material with Solved Assignments

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